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Q1 Calculate the maximum offer price that Household would be justified in making for better solution works, while using the free cash flow method.Using the formula for free cash flow, explain the various reasons why firms undertake mergers and acquisitions? Which of these reasons are most likely to apply to the acquisition that Household Electronics.Assume that Households shareholders have agreed to an exchange ratio of 1 share of Household for every 2 shares held in Better solution. Also assume that the combined net income of the two firms is the sum of their net incomes prior to the completion of the deal.Lets say that Household is able to close the deal at a price of 1000 million by paying cash by exchanging 1 of its shares for 2 of Better solution shares. Should it use cash or stock as the payment mechanism? Why? What are the pros and cons of each payment mechanism for the acquiring and the target firm respectively?. If the book value of the net fixed assets of Better Solution are at only 80% of their current market value, and Household decides to step up the basis of the assets for depreciation after the deal is closed, what would the balance sheet of the combined firm look like under the purchase method of accounting for mergers and acquisition? Assume that the deal is completed at an exchange ratio of 0.5(i.e.1 share of Household Electronics for 2 shares of Better solutions.

Household and electronic appliances company was formed in 2001 . The time of its inception there was no strong competition in this industry, as a result company enjoyed significant growth aver the vears and was able to have excellent employees. Over the past few years, however, due to strong competition, the chances of growth have dried up. The stock price had recently dropped to RS.45 per share. Considering this situation the firm started looking suitable acquisition candidates So as to better diversification of resources. After considerable work out and analysis, the committee had decided to conduct further valuation and analysis on- Better Solution work. The board members were curious about the low P/E ratio that the firm was trading at. Better solution work was Rs. 2 billion worth of company. Earnings per share had been gradually increasing each year and were currently Rs. 1.2 per share but still belaw the industrial average. The incremental net cash flows of the combined company were estimated to be at least Rs.45 million per vear for the estimated future. Moreower, there were significant chances of diversification as Better work solution is invalved in different line of business. Tables 1 to 4 have the financial statements of Household and electronic appliances and Better solution work respectively. The finance department of Household and Electronic appliances had recently estimated the firm's WACC to be 16% and the required rate of return on equity to be 20%. Table 2 Household and electronic appliances Balance sheet (Rs. Millian) \begin{tabular}{|c|c|} \hline Cash & 400 \\ \hline Marketable securities & 200 \\ \hline Accounts receivables & 400 \\ \hline Imventary & 1000 \\ \hline Total current Assets & 2000 \\ \hline Gross Fixed Assets & 6000 \\ \hline Accumulated depreciation & -2000 \\ \hline Net fixed assets & 4000 \\ \hline Total Assets & 6000 \\ \hline Accounts payables & 300 \\ \hline Accruals & 200 \\ \hline Notes payable & 500 \\ \hline Total current liabilities & 1000 \\ \hline Lang term debt & 2000 \\ \hline Common stock (par value=5 per share) & 500 \\ \hline Capital surplus & 1000 \\ \hline Retained earnings & 1500 \\ \hline Total shareholder's equity & 3000 \\ \hline Total liabilities and equity & 6000 \\ \hline \end{tabular} Table 3 Better solution works Income statement (million) Revenues 1500 CGS 1320 GP 180 Selling and admin exp. Depreciation Interest EBT Taxes (40\%) Net income Dividends Rs.0.8 per share on 50 million shares Addition to retained earnings Cash Marketable securities Accounts receivables Imventary Total current ssets Grass Fixed Assets Accumulated depreciation Net fixed assets Total Assets Accounts payables Accruals Notes payable Total current liabilities Long term debt Common stock (par value =2 per share) Capital surplus 50 15 15 100 40 60 40 20 Table 4 Better Solution works Balance Sheet (millions) 300 200 200 300 1000 1400 400 1000 2000 150 130 500 780 600 100 340 Retained earnings Total shareholder's equity Total liabilities and equity 180 620 2000