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38. Question and Answer
Small Ltd. and Little Ltd., two companies in the field of speciality chemicals, decided to go in for a follow on Public Offer after completion of an amalgamation of their businesses. As per agreed terms initially a new company Big Ltd. will be incorporated on 1st January, 2012 with an authorized capital of Rs 2 crore comprised of 20 lakh equity shares of Rs 10 each. The holding company would acquire the entire shareholding of Small Ltd. & Little Ltd. and in turn would issue its shares to the outside holders of these shares. It is also agreed that the consideration would be a multiple of the average P/E ratio for the period 1st January, 2011 to 31st March, 2011 times the rectified profits of each company, subject to necessary adjustments for complying with the terms of the share issue.   The following information is supplied to you:
Small Ltd. Little Ltd.
Ordinary Shares of Rs 10 each (Nos.) 40 lakhs 20 lakhs
10% Preference shares of Rs 100 each (Nos.) 2 lakh Nil
10% Preference shares of Rs 10 each (Nos.) Nil 2 lakh
5% debentures of Rs 10 each (Nos.) 4 lakh 4 lakh
Investments Held
(a) 4 lakh ordinary shares in Small Ltd. - Rs 40 lakhs
(b) 2 lakh ordinary shares in Little Ltd. Rs 20 lakhs -
Profit before Interest & Tax (PBIT) after considering impact of Rs 50 lakhs Rs 25 lakhs
Inter-company Transactions and Holdings.
Average P/E ratio January, 2011 to March, 2011 10 8
  The following additional information is also furnished to you in respect of adjustments required to the profit figure as given above:  
  1. The profits of the respective companies would be adjusted for half the value of contingent liabilities as on 31st March, 2011.
  2. Debtors of Small Ltd. include an irrecoverable amount of Rs 2 lakh against which Rs 1 lakh was recovered but kept in Advance account.
  3. Little Ltd. had omitted to provide for increased FOREX liability of US$10,000 on loan availed in financial year 2007-08 for purchase of Machinery. The machinery was acquired on 1st January, 2008 and put to use in financial year 2008-09. The additional liability arose due to change in exchange rates and is arrived at in conformity with prevailing provisions of AS 11. The exchange rate is US $ 1 = INR 50.
  4. Small Ltd. has omitted to invoice a sale that took place on 31st March, 2011 of goods costing Rs 2,50,000 at a mark up of 15 per cent instead the goods were considered as part of closing inventory.
  5. Closing Inventory of Rs 45 lakhs of Little Ltd. as on 31st March, 2011 stands undervalued by 10 per cent.
  6. Contingent liabilities of Small Ltd. and Little Ltd. as on 31st March, 2011 stands at Rs 5 lakhs and Rs 10 lakhs respectively.
  The terms of the share issue are as under: (i) Shares in Big Ltd. will be issued at a premium of Rs 13 per share for all external shareholders of Small Ltd. The Premium will be Rs 15 per share for shares in Big Ltd. issued to all external shareholders of Little Ltd. (ii) No shares in Big Ltd. will be issued in lieu of the investments (intercompany holdings) of both companies. Instead the shares so held shall be transferred to Big Ltd. at the close of the financial year ended 31st March, 2012 at Par Value consideration payable on date of transfer.
  • Big Ltd. would in addition to the issue of shares to outside shareholders of Small Ltd. and Little Ltd. make a preferential allotment on 31st March, 2012 of 2 lakhs ordinary shares at a premium of Rs 28 per share to Virgin Capital Ltd. (VCL). These shares will not be eligible for any dividends declared or paid till that date.
  • Big Ltd. will go in for a 18 per cent unsecured Bank overdraft facility to meet incorporation costs of Rs 16 lakhs and towards management expenses till 31st March, 2012 estimated at Rs 14 lakhs. The overdraft is expected to be availed on 1st February, 2012 and closed on 31st March, 2012 out of the proceeds of the preferential allotment.
  • It is agreed that interim dividends will be paid on 31.03.2012 for the period January, 2012 to March, 2012 by Big Ltd. at 2 per cent; Small Ltd. at 3 per cent and Little Ltd. at 2.5 per cent. Ignore Dividend Distribution tax.
  • The prevailing Income Tax Rate is 25 per cent.
  You are required to compute the number of shares to be issued to the shareholders of each of the companies and prepare the projected Profit and Loss Account for the period from 1st January, 2012 to 31.03.2012 of Big Ltd. and its Balance Sheet as on 31st March, 2012.
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