Sharman Ltd is considering acquiring Elpheus Ltd. The two companies have agreed the purchase consideration at...

  

Transcribed Image Text:

Sharman Ltd is considering acquiring Elpheus Ltd. The two companies have agreed the purchase consideration at 20 million shillings. Sharman Ltd is also to take-over the debt of ELPHEUS LTD amounting to 5million shillings. Using the financial past information, expected future profits from ELPHEUS LTD have been projected as follows in million shillings: Sales Cost of sales Other expenses Depreciation Profit before tax ii. *** 111. 1 60 30 15 5 10 iv. 2 70 V. 35 15 4 16 3 78 39 15 4 20 4 86 The following should be noted: i. To be conservative the financial analyst has restricted forecast of profit to five years. All sales are for cash 43 15 4 24 Elpheus Ltd has some existing assets with a book value of 2 million shillings that will be sold in year 1 for 1 million shillings. The expected loss on the sale of these assets has been included in the depreciation for year 1. These assets currently have a tax written down value of 3 million. Capital allowances on other assets have been fully claimed. Elpheus Ltd currently has a tax liability of 4.5 million due to for payment in year 1. The interest charges of 1 million of Elpheus Ltd have been included in other expenses vi. To be able to maintain the future earnings forecast of Elpheus Ltd, Sharman Ltd needs to invest in capital expenditures as follows: 5 94 47 15 4 28 Year 1 2 3 4 5 Amount 5 million vii. 6 million 8 million 9 million 10 million Corporate tax rate is currently 35% and the tax delay is 1 year. viii. The after weighted average cost of capital of Elpheus Ltd has been calculated at 22%. Required: Advise Sharman Ltd on whether or not the acquisition is worthwhile. Sharman Ltd is considering acquiring Elpheus Ltd. The two companies have agreed the purchase consideration at 20 million shillings. Sharman Ltd is also to take-over the debt of ELPHEUS LTD amounting to 5million shillings. Using the financial past information, expected future profits from ELPHEUS LTD have been projected as follows in million shillings: Sales Cost of sales Other expenses Depreciation Profit before tax ii. *** 111. 1 60 30 15 5 10 iv. 2 70 V. 35 15 4 16 3 78 39 15 4 20 4 86 The following should be noted: i. To be conservative the financial analyst has restricted forecast of profit to five years. All sales are for cash 43 15 4 24 Elpheus Ltd has some existing assets with a book value of 2 million shillings that will be sold in year 1 for 1 million shillings. The expected loss on the sale of these assets has been included in the depreciation for year 1. These assets currently have a tax written down value of 3 million. Capital allowances on other assets have been fully claimed. Elpheus Ltd currently has a tax liability of 4.5 million due to for payment in year 1. The interest charges of 1 million of Elpheus Ltd have been included in other expenses vi. To be able to maintain the future earnings forecast of Elpheus Ltd, Sharman Ltd needs to invest in capital expenditures as follows: 5 94 47 15 4 28 Year 1 2 3 4 5 Amount 5 million vii. 6 million 8 million 9 million 10 million Corporate tax rate is currently 35% and the tax delay is 1 year. viii. The after weighted average cost of capital of Elpheus Ltd has been calculated at 22%. Required: Advise Sharman Ltd on whether or not the acquisition is worthwhile.

Answer rating: 100% (QA)

To evaluate the acquisition of Elpheus Ltd by Sharman Ltd we need to calculate the following financi... View the full answer