Question 5

B Limited is a highly successful co. and wishes to expand by acquiring other firms. Its expected high growth in earning and dividends is reflected in its PE Ratio of 17. The Board of Directors of B Ltd. has been advised that if it were to take over other firms with a lower PE ratio than its own, using share for share exchange, then it could increase its reported earning per share. C Limited has been suggested as a possible target for a takeover, which has a PE ratio of 10 and 1,00,000 shares in issue with a share price of Rs. 15. B limited has 5,00,000 shares in issue with a share price of Rs. 12 Calculate the change in earnings per share of B Limited, if it acquires the whole of C Limited by issuing shares at its market price of Rs. 12. Assume the price of B Limited remains constant.

Solution: PE Ratio No. of shares Market Price PE Ratio 10 EPS Earning Total Earning

C Limited 10 100000 15 MPS / EPS 15/EPS 1.5 EPS * No. of shares 1.5 * 100000 150000 PE Ratio No. of shares Market Price PE Ratio 17 EPS Earning Total Earning

B Limited

No. of shares to be issued Total No. of shares after merger EPS after merger

125000 625000

based on market price

Total Earnings / No. of shares 150000+352941 / 625000

EPS after merger Change in EPS Increase in EPS 0.8 - 0.7

0.8

0.1

Question 7

MK Limited is considering acquiring NN Limited. The following information is available: Company MK Ltd NN Ltd EAT 6000000 1800000 No. of Equity Shares 1200000 300000 Market value of shares 200 160

Exchange of equity shares for acquisition is based on current market value as above There is no synergy advantage available. (1) Find the EPS for company MK Limited after merger and (2) Find the exchange ratio so that shareholders of NN Limited would not be at a loss.

Solution: 1 No. of shares to be issued to the shareholders of NN Limited based on the market price Total no. of shares after merger Total Earnings EPS after merger 240000 1440000 7800000 5.416666667

2 To find out the exchange ratio so that shareholders of NN Limited would not be at a loss: It should be premerger EPS ratio. Present EPS of MK Limited 5

Present EPS of NN Limited

Exchange ratio should be 6 shares of MK Limited for every 5 shares of NN Limited. Shares to be issued to NN Limited Total no. of shares of MK Ltd and NN Ltd EPS after merger Total earning availavle to shareholders of NN Limited after merger This is equal to the earnings prior merger for NN Limited Exchange ratio on the basis of Earnings per share is recommended. 360000 1560000 5 1800000

Question 8

A Limited wants to acquire T Limited and has offered a swap ratio of 1:2 (0.5 shares for every one share of T Limited) Following information is provided: A Limited 1800000 600000 3 10 times 30 T Limited 360000 180000 2 7 times 14

PAT No. of equity shares EPS PE Ratio Market price per share

(i) (ii) (iii) (iv) (v)

Required: No. of equity shares to be issued by A Limited for acquisition of T Limited What is the EPS of A Ltd. after acquisition? Determine the equivalent earnnings per share of T Limited? What is the expected market price per share of A Limited after acquisition, assuming its PE multiple remains unchanged? Determine the market value of the merged firm.

Solution (i) No. of equity shares to be issued by A Limited for acquisition of T Limited Swap ratio 0.5 shares for every share of T Limited

No. of shares to be issued to the shareholders of T Limited 900000

(ii) What is the EPS of A Ltd. after acquisition? Total no. of shares Total earnings EPS after merger (iii) Determine the equivalent earnnings per share of T Limited? No. of shares issued to T Limited EPS Equivalent EPS 0.5 3.13 1.565 1500000 2160000 1.44

(iv) What is the expected market price per share of A Limited after acquisition, assuming its PE multiple remains unchanged? PE Ratio 10 Market Price Per share MPS/EPS MPS/3.13 31.3

(v) Determine the market value of the merged firm. Total number of shares 690000

Market Price Per share Market Values

31.3 21597000

Question 9

ABS Ltd is intending to acquire XYZ Limited by merger and the following information is available in respect of the companies:

No. of equity shares EAT Market price per share

ABC Limited 1000000 5000000 42

XYZ Limited 600000 1800000 28

Required: (i) What is the present EPS of both the companies? (ii) If the proposed merger takes place, what would be the new earning per share for ABC Ltd.? Assume that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market price. (iii) What should be the exchange ratio, if XYZ Ltd. wants to ensure the earnings to members are as before the merger takes place.

Solution: (i) What is the present EPS of both the companies? EPS ABC XYZ Earning / No. of shares 5 3

(ii) If the proposed merger takes place, what would be the new earning per share for ABC Ltd.? Assume that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market price. No. of shares issued to XYZ Limited (based on the current market price) 400000

Total no. of shares Total Earnings EPS

1400000 6800000 4.857142857

(iii) What should be the exchange ratio, if XYZ Ltd. wants to ensure the earnings to members are as before the merger takes place. Shares to be exchanged based on the pre merger EPS ratio: XYZ ABC 3 5 360000

No of shares to be issued to shareholders of XYZ Limited to ensure the same earnings EPS after merger Total No. of shares Total Earnings EPS Total earnings available to shareholders of XYZ Limited Thus to insure the earnings of the shareholders of XYZ Limited, the ratio of exchange should be 3/5

1360000 6800000 5 1800000

Question 10

XYZ Limited is considering a merger with ABC Limited. XYZ Limited's shares are currently traded at Rs. 20. It has 250000 shares outstanding and its EAT amount to Rs. 5,00,000. ABC Ltd has 1,25,000 shares outstanding and its current market price is Rs. 10 and its EAT is Rs. 1250 The merger will be effected by means of stock swap. ABC Limited has agreed to a plan under which XYZ Limited will offer the current market value of ABC Ltd shares:

Required: (i) What is the peremerger EPS and PE Ratio of both the companies? (ii) If ABC Limited PE Ratio is 6.4, what is the current market price? What is the exchange ratio? What will be XYZ Limited's post merger EPS be? (iii) What should be the exchange ratio, if XYZ Ltd. premerger and post merger EPS are to be the same.

(i) What is the peremerger EPS and PE Ratio of both the companies? XYZ Market Price No. of share EAT EPS 20 250000 500000 Earning / No. of shares 2 PE Ratio MP/EPS 10 PE Ratio ABC Market Price No. of share EAT EPS

(ii) If ABC Limited PE Ratio is 6.4, what is the current market price? What is the exchange ratio? What will be XYZ Limited's post merger EPS be? PE Ratio 6.4 Market Price New exchange ratio No. of share to be issued to ABC Total no. of shares Earning EPS MP/EPS MP/1 6.4 6.4/20
based on new market price

40000 290000 625000 Earning/Total no. of shares

2.155172414

(iii) What should be the exchange ratio, if XYZ Ltd. premerger and post merger EPS are to be the same. Desired Exchange Ratio Total No. of shares in the post merged company Post merged earnings / Premerger EPS of XYZ Ltd. 312500 No. of shares to be issued The exchange ratio is 62500/125000 62500

Ignore the typing error

and dividends ms with a lower PE ratio n suggested as a possible target 000 shares in issue with a share price of Rs. 12

arket price of Rs. 12.

B Limited 17 500000 12 MPS / EPS 12/EPS 0.71 EPS * No. of shares 0.705882352 * 500000 352941

s current market price is Rs. 10 and its EAT is Rs. 125000 ffer the current market value of ABC Ltd shares:

's post merger EPS be?

10 125000 125000 Earning / No. of shares 1 MP/EPS 10

's post merger EPS be?