Question 21

Saudi Aramco and Reliance Industries entered into a joint venture where Saudi Aramco invested 20 billion dollars and Reliance Industries invested 30 billion dollars. The ownership ratio is always equal to the investment ratio. After 1 year, the venture made a profit of 6 billion dollars which they reinvested. Now Reliance Industries wants to increase its ownership to 75%, how much it should pay to Saudi Aramco in billion dollars ?

Solution

The starting net worth of the venture is 50 billion dollars. After the first year profit of 6 billion dollars is reinvested, the net worth of the venture becomes 56 billion dollars. This is held in the ratio of 2:3 by Saudi Aramco and Reliance respectively.

Of this 56 billion dollars, Reliance has a claim to 3/5 th of it i.e. 33.6 billion dollars and Aramco has a claim to 2/5 th of it i.e. 22.4 billion dollars.
Now, Reliance wants to own 75% of this i.e. 3/4th of 56 billion dollars = 42 billion dollars. 
To increase its stake from 33.6 to 42 billion dollars, it should pay the difference amount to Aramco i.e. 8.4 billion dollars. 


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