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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 1: Exchange Ratio
Saviruchi Ltd (has 200000 shares outstanding) wants to acquire Durgabhavan Ltd(has 100000
shares outstanding), by exchanging its 1.6 shares for every share of Durgabhavan Ltd.
Calculate the post-merger number of shares
Solution:
New Shares to be issued to Target = Exchange Ratio X Existing No. of shares of Target
New shares to be issued to Durgabhavan = 1.6 X 100000 = 160000
Existing Shares of Saviruchi = 200000
Post-Merger Number of Shares = 200000 + 160000 = 360000

Exercise 2: Exchange Ratio
Kelloggs Ltd is taking over Corn Flakes Ltd. The shareholders of Corn Flakes Ltd would receive
0.8 share of Kelloggs Ltd for each share held by them. No. of shares of Kelloggs Ltd before
Merger is 250000 and No. of shares of Corn Flakes Ltd pre-merger is 175000. Calculate the
post-merger no. of shares
Solution:
New shares to be issued to Corn Flakes = 0.8 X 175000 = 140000
Existing Shares of Kelloggs = 250000
Post-Merger Number of Shares = 250000 + 140000 = 390000

Exercise 3: Exchange Ratio
Mylari Company is acquiring Harihara Company. Mylari will pay 0.5 of its shares to the
shareholders of Harihara for each share held by them. Existing no. of Shares of Mylari is 500
Million and that of Harihara Co. is 250 Million. Calculate the post-merger number of shares
Solution:
New shares to be issued to Harihara = 0.5 X 250 = 125 Mn
Existing Shares of Mylari = 500 Mn
Post-Merger Number of Shares = 500 + 125 = 625 Mn

Exercise 4: Exchange Ratio
Rice Ltd acquires Wheat Ltd by exchanging one share for every two shares of Wheat Ltd.
Calculate the post-merger number of shares of Rice Ltd. Outstanding, if pre-merger number of
shares were as below: Rice Ltd – 1000 Wheat Ltd – 400
Solution:
New shares to be issued to Wheat = 0.5 X 400 = 200
Existing Shares of Rice = 1000
Post-Merger Number of Shares = 1000 + 200 = 1200
KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 5: Exchange Ratio
Based on the information given below ascertain the exchange ratio based on Net Assets Value:
Slice Ltd (Acquirer) Maaza Ltd (Target)
Total Assets 1000 Lacs 500 Lacs
External Liabilities 400 Lacs 200 Lacs
Solution:
Net Assets = Total Assets – Liabilities
Net Assets of Slice Ltd = 1000 – 400 = 600 Lacs
Net Assets of Maaza Ltd = 500 – 200 = 300 Lacs
Net Assets Ratio = Net Assets of Target Co./Net Assets of Acquiring Co.
= 300/600 = 0.5
Exchange Ratio = 0.5:1
i.e., Shareholders of Maaza Ltd will get 0.5 share of Slice Ltd for every share held in Maaza Ltd

Exercise 6: Exchange Ratio
Based on the information given below determine the exchange ratio based on Net Assets Value:
Torino Ltd (Acquirer) Citra Ltd (Target)
Fixed Assets 150 100
Current Assets 100 50
13% Debentures 100 40
Creditors 100 10
Solution:
Net Assets = Total Assets – Liabilities
Net Assets of Torino Ltd = (150+100) – (100+100) = 50 Lacs
Net Assets of Maaza Ltd = (100+50) – (40+10) = 100 Lacs
Net Assets Ratio = Net Assets of Target Co./Net Assets of Acquiring Co. = 100/50 = 2
Exchange Ratio = 2:1
i.e., Shareholders of Citra Ltd will get 2 shares of Torino Ltd for every share held in Citra Ltd

Exercise 7: Exchange Ratio
Determine the exchange ratio in case of below Merger, based on EPS proportion:
Fanta Ltd(Acquirer) Sprite Ltd(Target)
EPS Rs. 100 Rs.50
Solution
Exchange Ratio based on EPS proportion = EPS of Target Co / EPS of Acquiring Co
Exchange Ratio based on EPS proportion = 50 / 100 = 0.5
Shareholders of Sprite will get 0.5 share of Fanta Ltd for every share held in Sprite
KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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109 Exchange Ratio based on EPS proportion = 109 / 67 = 1.Mergers. 6700000 Rs. 67 EPS of Mountaindew Ltd = 5450000 / 50000 = Rs. of Shares EPS of Thumsup Ltd = 6700000 / 100000 = Rs. of Shares 100000 50000 Solution Market Price = P/E Ratio X EPS Market Price = P/E Ratio X (Profit after Tax/No. Professor. 44 Solution Exchange Ratio based on Market Price = Market Price of Target / Market Price of Acquiring Exchange Ratio based on Market Price = 44 / 83 = 0.5 share of Dosa Ltd for every share held in Idli KIRAN KUMAR. of shares 100000 50000 Solution EPS = Profit after Tax / No. 5450000 No. of Shares) Market Price of Dosa Ltd (Acquiring Co) – 5 X (2000000/100000) = 5 X 20 = 100 Market Price of Pizza Hut Ltd (Target Co) – 10 X (1250000/50000) = 10 X 25 = 250 Exchange Ratio based on Market Price = 250 / 100 = 2. Asst. Mysore 3 .5 Shareholders of Idli will get 2.53 share of Dominos Ltd for every share held in Pizza Hut Exercise 10: Exchange Ratio Determine the Exchange Ratio in case of below takeover based on Market price Dosa Ltd(Acquirer) Idli Ltd(Target) P/E Ratio 5 Times 10 Times Profit after Tax Rs. VVCE.63 Shareholders of Mountaindew will get 1. based on EPS proportion: Thumsup Ltd(Acquirer) Mountaindew Ltd(Target) PAT Rs.53 Shareholders of Pizza Hut will get 0. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 8: Exchange Ratio Determine the exchange ratio in case of below Merger. 20 Lacs Rs. 83 Market Price of Pizza Hut Ltd (Target Co) – Rs.63 share of Thumsup for every share held in Mountaindew Exercise 9: Exchange Ratio Determine the Exchange Ratio in case of below takeover based on Market price Market Price of Dominos Ltd (Acquiring Co) – Rs. 1250000 No.

Asst.25 iii) Exchange Ratio based on Market Price per share Market Price 24 27 Exchange Ratio based on MPS = 27/24 = 1. June-2010.Mergers.8 11. 10 Marks) Shanthisagar Ltd wishes to takeover Maheshprasad Ltd.4 3 Exchange Ratio based on EPS = 3/2. Professor. based on (i)Net Assets Value (ii)Earnings Per Share (iii) Market Price? Which method would you prefer from Shanthisagar Ltd’s point of view? Solution i) Exchange Ratio based on Net Assets Value Shanthisagar Maheshprasad Fixed Assets 122000 35000 Net Current Assets 51000 26000 Total Assets 173000 61000 Less: 10% Debentures 15000 5000 Less: Preference Shares 20000 Net Assets 138000 56000 No.8 = 0.81 ii) Exchange Ratio based on EPS Profit 24000 15000 No. 10 per share) 100000 50000 Share Premium Account 2000 Profit and Loss Account 38000 4000 Preference Shares 20000 10% Debentures 15000 5000 Total 173000 61000 Fixed Assets 122000 35000 Net Current Assets 51000 26000 Maintainable Annual Profit After Tax 24000 15000 For Equity Shareholders Market Price per Equity Share 24 27 Price Earnings Ratio 10 9 What offer do you think Shanthisagar Ltd could make to Maheshprasad Ltd in terms of exchange ratio. The financial details of the two companies are as under: Particulars Shanthisagar Maheshprasad Equity Shares (Rs. VVCE.125 KIRAN KUMAR. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise – 11: Exchange Ratio (VTU. MBA. of Shares 10000 5000 Net Assets per share 13. Mysore 4 .2/13.4 = 1. of Shares 10000 5000 Earnings per share 2.2 Exchange Ratio based on Net Assets = 11.

of outstanding equity shares of SLV Ltd – 180000 Solution EPS = PAT / No. VVCE.5 No.Mergers. 1000 Common Shares (in thousands) 2000 800 Earnings Per Share Rs. 3 Marks) Nandini Ltd is considering the acquisition of Heritage Ltd with stock. MBA. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 12: Exchange Ratio (VTU. i) What is the ratio of exchange of stock? ii) How many new shares will be issued? Solution Nandini Heritage No. we get Market Price as 24 10 Exchange Ratio = (10 X 1. Mysore 5 . Of shares Pre-Merger EPS of Iyangars Ltd = 2500000 / 250000 = Rs. 2500000 Profit after Tax of SLV Ltd – Rs.5 shares of acquiring company – Iyangars Ltd to be given to shareholders of Target Company – SLV Ltd for every one share of SLV Ltd held by them Profit after Tax of Iyangars – Rs.58 KIRAN KUMAR.5) = 250000 + 90000 = 340000 Post-Merger EPS = 7000000/340000 = Rs. 1. of new shares to be issued = 1.5 X 800 = 1200 Exercise 13: EPS Management Based on the below data. Jul-2009. of Shares = 250000 + (180000 X 0. 4500000 No. calculate Pre-Merger EPS for both companies and Post-Merger EPS of Acquiring Company Exchange Ratio – 0. 2 Rs.25 Price/Earnings Ratio 12 8 Nandini Ltd plans to offer a premium of 20% over the market price of Heritage Ltd.25 Solving for x.2) / 24 = 12/24 = 1. of outstanding equity shares of Iyangars Ltd – 250000 No. Relevant financial information is as below: Particulars Nandini Ltd Heritage Ltd Present Earnings (in thousands) Rs. 10 Pre-Merger EPS of SLV Ltd 4500000/180000 = Rs. of shares (using EPS) 2000 800 Finding out Market Price through P/E ratio formula P/E Ratio = Market Price / EPS 12 = x/2 8 = x/1. Professor. 25 Post-Merger PAT = (2500000+4500000) = 7000000 Post-Merger No. 20. Asst. 4000 Rs.

5 Crores Post-Merger EPS = 1800/150 = Rs. 16 Post-Merger PAT = (1000+800) = 1800 Lacs Post-Merger No. 20 Pre-Merger EPS of IndiaGates Ltd = 800/ (100/2) = 800/50 = Rs. Professor. of Shares = 50 Lacs + (50 Lacs X 2) = 50 lacs + 100 Lacs = 150 Lacs or 1. The following information is available in respect of the companies: Particulars Maggi Ltd Knorr Ltd No. MBA. 21 Rs. 10 Marks) Maggi Ltd is intending to acquire Knorr Ltd (by merger). 2500000 Rs. 900000 Market Value per Share Rs. if Knorr Ltd wants to ensure the same earnings to members as before the merger? Solution i) Pre-Merger EPS Maggi Knorr PAT 2500000 900000 No. Of shares = PAT / (Share Capital/Par Value) Pre-Merger EPS of Kohinoor Ltd = 1000 / (500/10) = 1000/50 = Rs. 14 i) What is the present EPS of both companies? ii) If the proposal merger takes place. of shares 500000 300000 EPS 5 3 KIRAN KUMAR. 2 each) Solution EPS = PAT / No. 800 Lacs Share Capital Rs. 12 Exercise 15: EPS Management (VTU. VVCE. Asst. calculate Pre-Merger EPS for both companies and Post-Merger EPS of Acquiring Company Kohinoor Ltd(Acquirer) IndiaGates Ltd(Target) Exchange Ratio 2:1 PAT Rs. Mysore 6 . 1000 Lacs Rs. 1 Crore (Par Value Re. of Equity Shares 500000 300000 Earnings after Tax Rs. 5 Crores (Par Value Rs. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 14: EPS Management Based on the below data. Jun-2010. what would be the new earnings per share for Maggi Ltd? (assuming that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market prices) iii) What should be the exchange ratio. 10 Each) Rs.Mergers.

18.85 iii) Exchange Ratio to maintain Current EPS 5 = 3400000 / Post-Merger No.00.) 50.000/10.86 KIRAN KUMAR. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio ii) Post-Merger EPS Post-Merger PAT = 2500000 + 900000 = 3400000 Exchange Ratio = 14/21 = 0. = Rs. of shares of Sankranthi = 10.00.000 = Rs.000 6.00.00. of shares Therefore. 28/ 42 X 6.000 18. of shares = 500000 + (300000 X .00.000 = Rs.000 shares Post-Merger Earnings per share = (Rs.00. Post-Merger No.667) = 500000 + 200000 = 700000 Post-Merger EPS = 3400000 / 700000 = 4. Professor. by merger and the following information is available in respect of the companies: Sankranthi Ltd. Number of equity shares 10.) 42 28 Required: (i) What is the present EPS of both the companies? (ii) If the proposed merger takes place. 50.00. Mysore 7 . Deepavali Ltd. of shares = 680000 Shares offered to Knorr = 680000 – 500000 = 180000 Exchange Ratio = 180000 / 300000 = 0.000 shares Post-Merger No.000 = 4.000 = Rs. 3 (ii) Number of Shares Deepavali limited’s shareholders will get in Sankranthi Ltd. what would be the new earning per share for Sankranthi Ltd. 50. = Rs. 4.00.00. is intending to acquire Deepavali Ltd.6667 Post-Merger No.00.000 = 14. based on market value per share = Rs. Solution (i) Pre-Merger EPS Sankranthi Ltd.Mergers.00. 5 Deepavali Ltd.00. VVCE.000 + 4.00.000) / 14.00.? Assume that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market price.00.000 Market value per share (Rs.000 Earnings after tax (Rs.000 + 18.00.6 Exercise 16: EPS Management Sankranthi Ltd.000 / 6. Asst.

6 = 77/No. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 17: EPS Management (VTU.Mergers.50 Pre-Merger Market Value per share = 70 = 18. of equity shares in lacs 10 8. Solution Dhara Trupti Pre-Merger Market Value per share 12. Lacs 56 21 No.40 Lacs Maximum Exchange Ratio without diluting EPS and MV = 3. of shares 5.6 Post-Merger No.50 X 5. no.75 Lacs Existing Shares of Dhara = 10 Lacs New shares to be issued to Kohinoor Shareholders = 13. Professor. VVCE. Mysore 8 ./share 5.40 Lacs = 0. Jan-2010. of Shares = 77/5. Relevant financial data are as follows: Particulars Dhara Ltd Trupti Ltd PAT Rs.45 KIRAN KUMAR. of times 12.6 = 13.40 EPS Rs.75 – 10 = 3.50 X 2.75 Lacs/8. of Shares Post-Merger No.75 Lacs Existing Shares of Kohinoor = 8.75 Desired Exchange Ratio Post-Merger PAT = 56 + 21 = 77 Lacs Desired Post-Merger EPS = 5. on a share exchange basis.50 Determine premerger market value/share of each company and maximum exchange ratio Dhara Ltd can offer without dilution of its EPS and MV/share.50 7.50 PER. 10 Marks) Trupti Ltd is being absorbed by Dhara Ltd.60 2. MBA.60 7. of shares = ? EPS = PAT/No. Asst.

of shares 6 = 260000 / (40000 + shares issued to Bourneville shareholders) Shares issued to Bourneville Ltd = (260000/6) – 40000 = 3333 Exchange Ratio = 3333/10000 = 0.6 Post-Merger EPS = Post-Merger PAT / Post-Merger No. 15 12 EPS Rs. 200000 60000 No.8 Post-Merger No.33 KIRAN KUMAR. what will be the new EPS for Cadburys Ltd? ii) Bourneville Ltd wants to make sure that earnings available to its shareholders will not be diluted due to merger. MBA. of shares = 40000 + (0. of equity shares 40000 10000 MV/share Rs. Mysore 9 . Jan-2010.Mergers./share 5 i) If merger goes through by way of exchange of equity shares when exchange ratio is based on current market value of equity.8 X 10000) = 48000 Post-Merger Profits = 200000 + 60000 = 260000 Post-Merger EPS = 260000/48000 = 5.42 Pre-Merger EPS of Bourneville Shareholders = 60000/10000 = Rs. What should be the exchange ratio in this case? Solution Exchange Ratio = MV of Target Co/MV of Acquiring Co = 12/15 = 0. Professor. Following data are available for both: Particulars Cadburys Ltd Bourneville Ltd PAT Rs. 10 Marks) Cadburys Ltd is considering acquisition of Bourneville Ltd. Asst. VVCE. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 18: EPS Management (VTU.

12.5 =12.8 X 100000 = 800000 No. of shares to be issued = Rs.1 Pre-Merger PER =25/2 = 12.5/1 = 12. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 19: EPS Management (VTU. Biskfarm has 1 lac shares outstanding. 400000 100000 i) Pre-Merger EPS =400000/200000 =100000/100000 Pre-Merger EPS =Rs.Mergers. Jan-2010. its current market value is Rs.50 Outstanding No of shares 200000 100000 PAT Rs. MBA.15 iii) Pre-Merger EPS of Sunfeast = Rs. 1 lac. 10 Marks) Sunfeast Ltd is considering a merger with Biskfarm Ltd. so that its pre merger and post merger EPS will be the same? Solution Sunfeast Ltd Biskfarm Ltd Market Price Rs. Mysore 10 .8 Sunfeast will pay Biskfarm its current market value of shares. 25 each. i) What are the pre-merger EPS and PER of both companies? ii) If Biskfarm’s PER is 8 times.5 ii) PER = 8 times Current Market Price = PER X EPS = 8 X 1 = Rs. which would be Rs. 25 Rs. Shares of Sunfeast are currently traded at Rs. has 2 lacs shares outstanding and a PAT of Rs. 25 = 32000 Exchange Ratio = 32000/100000 = 0. 4 lacs.5 KIRAN KUMAR.12.2 =Re.50 per share and PAT of Rs.32 * 100000)) = 500000/232000 = 2. Merger will be effected through a stock swap. Professor.32 Post-Merger EPS = (400000+100000)/(200000 X (0. of shares 2 = (400000+100000)/post-merger no of share Post-merger no of shares = 500000/2 = 250000 New shares to be issued to Biskfarm = 250000 – existing shares of Sunfeast = 250000 – 200000 = 50000 Desired Exchange Ratio = 50000/100000 = 0. VVCE. Asst. what is its current market price? What is the exchange ratio? What will be the post merger EPS of Sunfeast? iii) What must be the exchange ratio for Sunfeast.800000/Rs. Biskfarm has agreed to a plan where Sunfeast will offer current market value of Biskfarm’s shares. 2 Post-Merger EPS = Post-Merger PAT / Post-Merger No.

1650000 Post-Merger No. of Shares = 300000 + (200000 X 0.5 Post-Merger Profit = Rs. 4125 Impact on EPS: Coke Ltd Pepsi Ltd EPS before Merger 4 2.5625) = 300000 + 112500 = 412500 Post-Merger EPS (Alt 1) = Rs. EPS are Rs.375 Increase in EPS Decrease in EPS KIRAN KUMAR. Coke Ltd has 3 lac shares outstanding with a market price of Rs.4 Impact on EPS: Coke Ltd Pepsi Ltd EPS before Merger 4 2. both alternative (b) Share impact on EPS for shareholders of two companies under both alternatives Solution Alternative 1: ER in EPS proportion Exchange Ratio = EPS of Target Company / EPS of Acquiring Company = 2.Mergers. Asst. 2. 4 and Rs.5 = 4. Mysore 11 . Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 20: EPS Management (VTU. Professor.125 4. 30 per share whereas Pepsi Ltd has 2 lacs shares outstanding each selling at Rs.25/.25/4 = 0.5:1).25 per share (Coke Ltd and Pepsi Ltd respectively). MBA.5625 Pre-Merger Profit of Coke Ltd = No.5 Coke Ltd : 1 Pepsi Ltd (0. 1200000 Pre-Merger Profit of Pepsi Ltd = 200000 X Rs. of Shares = 300000 + (200000 X 0.5625 = 4 EPS after Merger 4 4 Impact (Alt 1) 0 0 Alternative 2: ER at 0.125 . post-merger.125 Impact (Alt 2) + 0. 1650000 Post-Merger No.5:1 Exchange Ratio = 0. of Shares X EPS = 300000 X Rs. You are required to compute: (a) EPS.1650000/400000 = Rs. 15 Marks) Coke Ltd is considering purchase of Pepsi Ltd. 2. 20 per share. 4 = Rs.0.5 EPS after Merger 4.5) = 300000 + 100000 = 400000 Post-Merger EPS (Alt 2) = Rs.25/. Jan-2010.1650000/412500 = Rs. VVCE. Managements of both companies are discussing two proposals for exchanging shares as (i) in proportion to relative EPS for these companies (ii) 0.25 = Rs. 450000 Post-Merger Profit = 1200000 + 450000 = Rs.

Find out the impact of merger on the EPS of merged firm.125 2.125 = 0.5 for Parle.9 KIRAN KUMAR.5 X 100000 = 625000 = 250000 Alternative 1 : Exchange Ratio based on EPS Post-Merger Profit = 625000 + 250000 = 875000 Exchange Ratio = 2.08 = 675000 Earnings growth of Parle 14% Post-Merger Earnings of Parle = 250000 X 1. Asst. Solution Britannia Parle Outstanding Shares 200000 100000 Market Value per share 25 18.8 Post-Merger No of shares = 200000 + (100000 X 0. Mysore 12 . Professor.5 Profit 3.125 Pre-Merger EPS of Britannia = 3.75. 2.14 = 285000 Post-Merger Profit = 675000 + 285000 = 960000 Post-Merger No of shares = 280000 (as calculated above) Post-Merger EPS (Alt 1) = 960000/280000 = 3.125 = 0 [No impact on EPS] Post-Merger EPS when earnings grow: Earnings growth of Britannia 8% Post-Merger Earnings of Britannia = 625000 X 1. Britannia has 200000 shares outstanding with Rs.125 X 200000 2. VVCE.125 for Britannia and Rs. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 21: EPS Management Britannia Ltd is contemplating the purchase of Parle.43 Alternative 2 : Exchange Ratio 0.5/3. The EPS are Rs. 3. 18.8) = 200000 + 80000 = 280000 Post-Merger EPS = 875000/280000 = 3.Mergers.9 share of Britannia for one share of Parle.125 – 3. Assuming that the two managements have agreed that the shareholders of Parle will receive Britannia’s shares in exchange for their shares: (i) In proportion to the relative earnings per share of the two firms or (ii) 0.75 EPS 3.125 Impact of Merger on EPS (Alt 1)= 3. Also compute the EPS after merger on the assumption that the anticipated growth rate in earnings is 8% for Britannia and 14% for Parle. 25 market value per share while Parle has 100000 shares selling at Rs.

Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Post-Merger Profit = 625000 + 250000 = 875000 Exchange Ratio = 0.11] Post-Merger EPS when earnings grow: Earnings growth of Britannia 8% Post-Merger Earnings of Britannia = 625000 X 1. 0.11 [EPS diluted by Re.017 – 3. Professor.14 = 285000 Post-Merger Profit = 675000 + 285000 = 960000 Post-Merger No of shares = 290000 (as calculated above) Post-Merger EPS (Alt 2) = 960000/290000 = 3.125 = -0.Mergers.125 Impact of Merger on EPS (Alt 2) = 3. Mysore 13 . VVCE.08 = 675000 Earnings growth of Parle 14% Post-Merger Earnings of Parle = 250000 X 1.31 KIRAN KUMAR.9 Post-Merger No of shares = 200000 + (100000 X 0.9) = 200000 + 90000 = 290000 Post-Merger EPS = 875000/290000 = 3.017 Pre-Merger EPS of Britannia = 3. Asst.

58 = 1.Mergers.7 Post-Merger EPS 108/59. Solution (i) Calculation of PER Curry Top Ramen Foodles Earnings 90 18 18 No.3 X 9) = 56. The exchange ratio would be based on the P/E Ratio. which is 2 KIRAN KUMAR. after the acquisition of Top Ramen and Foodles separately.81 X 18) = 59. of shares 45 18 9 EPS 2 1 2 Market Price 60 37 46 P/E Ratio 60/2 = 30 37/1 = 37 46/2 = 23 (ii) Calculation of Post-Merger EPS Takeover of Top Ramen Takeover of Foodles Exchange Ratio 30/37 = 0. Final. Dec-1995) Curry Ltd.90 Neither of the Takeovers is recommended to Curry. Lacs) 450 180 90 Earnings (Rs. Mysore 14 . as the post-merger EPS of either 1. Will you recommend the Merger of either/both of the companies? Justify your answer.7 = 1.81 108/56.58 45 + (1.81 30/23 = 1. Si considering takeover of Top Ramen Ltd and Foodles Ltd. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 22: EPS Management (CS. The financial data for the three companies are as follows: Curry Top Ramen Foodles Equity Share Capital of Rs.30 Post-Merger Earnings 90+18 = 108 90+18 = 108 Post-Merger Number of Shares 45 + (0.81 or 1.9 is lower than Pre-Merger EPS of Curry. Professor. 10 each (Rs. Lacs) 90 18 18 Market Price of each share (Rs. VVCE.) 60 37 46 Calculate (i) P/E Ratio (ii) EPS of Curry Ltd. Asst.

Dec-2000) Bread Co. of shares Solving for No. Bun Co.8 X 10000) = 40000 + 8000 = 48000 Post-Merger PAT = 200000 + 60000 = 260000 Post-Merger EPS = 260000/48000 = Rs. Asst.8:1 Post-Merger No. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 23: EPS Management (CS.33 KIRAN KUMAR. 200000 60000 No. wants to be sure that the earnings available to its shareholders will not be diminished by the merger. Professor.Mergers.42 EPS = Profit after Tax / No. Earnings after Tax Rs. VVCE. Bread Co. of shares = 40000 + (0. of Shares of Post-Merger Company = 43333 Existing shares of Bread Ltd = 40000 Additional Shares to be issued = 3333 Existing Shares of Bun Ltd = 10000 Shares to be offered at the ratio 3333/10000 = 0. What should be the exchange ratio in that case? Solution Exchange Ratio = 12/15 = 0. by way of a merger. No. what is new EPS for Bread Co? (ii) Bun Co. of Equity shares 40000 10000 Market Value per Share Rs. Final. Mysore 15 . 5. 15 12 (i) If the merger goes through exchange of equity shares and exchange ratio is based on the current market price. of shares 6 = 260000 / No. The following data are available in respect of the companies. is studying the possible acquisition of Bun Co. of shares.

000 Post-Merger EPS = Rs. is studying the possible acquisition of Easyday.00.000 = 20.00. VVCE.00.00.00.000 + 4.000/4.) 200 160 (i) If the merger goes through by exchange of equity and the exchange ratio is based on the current market price.Mergers.000/19.000 + 3.000 = Rs.00.80.20. The following data are available in respect of the companies: Particulars More Ltd.000 Post-Merger EPS = Rs. Mysore 16 . 5 = Rs.80.00.) 80.000 + 24.00. 6 Exchange ratio = 6/5 = 1. 5 Easyday Ltd.00.000 = 19.? (ii) Easyday Ltd.80. of Shares = 16. Ltd.6/Rs. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 24: EPS Management More Ltd.000/16.000 24.000 = 1. Ltd. available to new shareholders of N Co. what is the new earning per share for More Ltd.20 = 4. Asst.000 Post-Merger Profits = 80.000 shares × (Rs.000/20.80.000 Recommendation: The exchange ratio (6 for 5) based on market shares is beneficial to shareholders of 'N' Co. 24.20.00.00.00.04.00..20 No.000 = Rs. 1.000 Market value per share (Rs.000 4. by way of merger. No.20. = 4. What should be the exchange ratio in that case? Solution (i) Calculation of new EPS of More Ltd.80. Ltd. of shares to be issued to Easyday = 4.00. of equity shares 16. Ltd. 5.000 No. Professor.24. Easyday Ltd.00. = Rs.000 × 1.000 = Rs. of new shares to be issued to Easyday = 4.42 (ii) Desired Exchange Ratio Current EPS: More Ltd.000 = Rs.000 shares Post-Merger No of shares = 16.04.00. Earnings after tax (Rs.1.04.00.1. 2) = 3.000 × Rs. wants to be sure that the earnings available to its shareholders will not be diminished by the merger.20.. = Rs.00.000 Post-Merger No. KIRAN KUMAR.80. 5 Total earnings in M Co.

Professor. Horlicks Ltd.40 = 3.00.2.25. if Horlicks Ltd.000 1. Complan Ltd.90.25. Particulars Horlicks Ltd.’s post-merger EPS be? iii) What should be the exchange ratio. Complan Ltd.000)/[Rs.000 + (Rs.25. 10 and its EAT are Rs.Mergers. 6.40 Exchange ratio = Rs.125 Post merger EPS = (Rs.25.25.’s shares are currently traded at Rs.000 Number of shares outstanding 2. has agreed to a plan under which Horlicks Ltd. Earnings after taxes 5. will offer the current market value of Complan Ltd. its current market price is Rs.5.000 + Rs. 5..2.50.25.6.000 shares outstanding.1.500/1.6. is considering merger with Complan Ltd.500 – 2. Mysore 17 . if P/E ratio is 6.’s P/E ratio is 6.4 = Rs.000/3. Complan Ltd.. the exchange ratio is = 62.500 Therefore. 20.50.500 Number of shares required to be issued = 3. Asst.12.12.000.000 1.1.000 Pre-Merger EPS 2 1 Market Price per share 20 10 P/E Ratio (times) 10 10 (ii) Current Market Price of Complan Ltd.20/6..50 KIRAN KUMAR. The merger will be effected by means of a stock swap (exchange).’s pre-merger and post-merger EPS are to be the same? Solution (i) Pre-merger EPS and P/E ratios of Horlicks Ltd. VVCE..000/Rs.16 (iii) Desired exchange ratio Total number of shares in post-merged company = Post -merger earnings / Pre -merger EPS of XYZ Ltd = Rs.50.25. 1. what is its current market price? What is the exchange ratio? What will Horlicks Ltd.50.000.00. 1 × 6. and Complan Ltd.000 = 62.’s shares: i) What is the pre-merger earnings per share (EPS) and P/E ratios of both the companies? ii) If Complan Ltd.25.000 = 2.4.125)] = Rs.000 shares outstanding and its earnings after taxes (EAT) amount to Rs.00. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 25: EPS Management Horlicks Ltd.000 = 0.000 / 2 = 3.4 = Rs.25. It has 2. has 1.

00.00.00.000 + (0. Mysore 18 .00. Asst.00.000 = 50.00.000 Exchange Ratio (1:4) or 0. The particulars of two companies are given below: Particulars RIL SIL Earnings After Tax (EAT) Rs. of equity shares o/s (10. Post-Merger Market Value of the Firm 3.00.10. If there are no synergic effects.000 10.00.25 X 1000000)) = 12.000 Gains From Merger: Rs.000 Less: Pre-Merger Market Value KIRAN KUMAR. VVCE. what is the market value of the Post-merger RIL? What is the new price per share? Are the shareholders of RIL better or worse off than they were before the merger? (iii) Due to synergic effects.000 = 2.000 x 24) = 3.000 Equity shares O/s 10.00.00.00 Post-Merger Market Price per share 10 x 2.4 PER 10.000 Pre-Merger Market Value =1000000 X 20 =1000000 X 5 = 2.20.4 = 24 Post-Merger Market Value (12. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 26: EPS Management Gemini Industries Ltd.000 (ii) Post Merger Effects on RIL Post merger earnings (2 X 1000000) + (1 X 1000000) =30.000 10. the management of RIL estimates that the earnings will increase by 20%.25 No.000 Earnings per share (EPS) 2 1 PE Ratio (Times) 10 5 Required: (i) What is the market value of each Company before merger? (ii) Assume that the management of RIL estimates that the shareholders of SIL will accept an offer of one share of RIL for four shares of SIL.00. What is the new post-merger EPS and Price per share? Will the shareholders be better off or worse off than before the merger? Solution (i) Market value of Companies before Merger RIL SIL EPS 2 1 P/E Ratio 10 5 Market Price Per Share 20 5 Equity Shares 10. (SIL).00.50.50.000 Post-Merger EPS 30.00.00.000/12.000 Rs.00. (GIL) is considering a takeover of Sunrich Industries Ltd.Mergers.00. Professor.50.

30.00.00.50.000 10.88 x 10 = Rs.00.00.000 SIL 50. Professor.000 50.40.36. Rs.00. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio RIL 2.00.00.000 Post-Merger EPS: Rs.000 Apportionment of Gains between the Shareholders: Particulars RIL SIL Post Merger Market Value: Rs.2. Asst.00.50. 60.50. the shareholders of both the companies (RIL + SIL) are better off than before (iii) Post-Merger Earnings: Increase in Earnings by 20% New Earnings: Rs.00.2. Mysore 19 . 10.000 Less:Pre-Merger Market Value 2.28. VVCE. Shareholders will be better-off than before the merger situation. 36.88 PE Ratio = 10 Post-Merger Market Price Per Share = Rs.000 Gains from Merger: 40.00.80 So.000 2.Mergers.000 x 20% = Rs.00.000 No.50.000 -- 2.000 Thus.000 x 24 -.00.000 = Rs. of equity shares outstanding: 12.000/12.000 x 24 2.00. KIRAN KUMAR.00.00.00.000 Total gains from Merger 50.

20/Rs. 10. MBA. 240. EPS Rs. Metropole Ltd. 10 Marks)(Figures Changed) The following information is provided related to the acquiring Firm Regaalis Limited and the target Firm Metropole Limited: Regaalis Limited Metropole Limited Earnings after tax (Rs. 100 Lakhs X Rs. 100 Rs. (v) Calculate gain/loss for shareholders of the two independent companies after acquisition. 400 lakhs / 100 lakhs = Rs. Professor. (ii) EPS after merger = (Rs.000 lakhs 400 lakhs Number of shares outstanding 200 lakhs 100 lakhs P/E ratio (times) 10 5 Required: (i) What is the Swap Ratio based on current market prices? (ii) What is the EPS of Regaalis Limited after acquisition? (iii) What is the expected market price per share of Regaalis Limited after acquisition. 200 Lakhs X Rs.82 crores KIRAN KUMAR. 10 X 10 = Rs.91 X 10 = Rs. 10 = Rs. Post merger value 218. Mysore 20 . Solution Regaalis Ltd.00 crores Gain to Shareholders 18.2 No. 10. 109. of shares to be issued = Rs.02 crores (v) Gain from the merger Post merger market value of the merged firm Rs. Jul-2011. 100 lakh X 0.82 crores Less: Pre-merger market value 200. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 27: Market Value of Merged Firm (VTU. 4 Market Price Rs. Asst. 2. assuming P/E ratio of Regaalis Limited remains unchanged? (iv) Determine the market value of the merged firm.2 = Rs. 20 = 20 crores Rs. 20 lakhs.20 crores 21. 4 X 5 = Rs.20 crores 1.10 (iv) Market value of merged firm = Rs.02 crores Less: Pre-merger market value Regaalis Ltd. 400 lakhs)/(200 lakhs + 20 lakhs) = Rs. 20.000 Lakhs/ 200 lakhs Rs.00 crores 20. Metropole Ltd. 109.) 2.Mergers.2. 220 crores Gain from merger Rs. 100 = 0.91 (iii) Expected market price after merger assuming P / E 10 times = Rs.02 crores Appropriation of gains from the merger among shareholders: Regaalis Ltd.000 lakhs + Rs. VVCE. 100 = 200 crores Metropole Ltd.10 market price X 220 lakhs shares = 240. 20 (i) The Swap ratio based on current market price = Rs.

6) = 420000 Total Profit of Merged Company = 1500000 + 450000 = 1950000 EPS post-merger = 1950000 / 420000 = 4. VVCE.4 ii) Pre-Merger EPS and P/E Ratio Pillsbury Ltd Ashirvad Ltd Pre-Merger EPS 1500000/300000 = 5 450000/75000 = 6 P/E Ratio 35/5 = 7 40/6 = 6. The relevant financial data are furnished below: Particulars Pillsbury Ltd Ashirvad Ltd Earnings After Tax (Rs.) 1500000 450000 Number of equity shares outstanding 300000 75000 Market Price per Share (Rs.6 X 35) / 6 = 9.6 X 35)/40 = 1.6 shares for every share of Ashirvad Ltd.Mergers.64 v) Post-Merger Market Price = P/E ratio X EPS = 7 X 4.64 = 32. Jul-2011. by exchanging its 1.67 iii) Implied P/E Ratio = Market price of shares offered/Current EPS = (1.) 35 40 i) What is the exchange ratio based on market price? ii) What is pre-merger EPS and P/E ratio for each company? iii) What is the P/E ratio used in acquiring Ashirvad Ltd? iv) What will be EPS of Pillsbury Ltd after the acquisition? v) What is the expected market price per share of the merged company? Solution i) Exchange Ratio based on MP =(1. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 28: Market Value of Merged Firm (VTU. Professor.33 iv) EPS of Pillsbury after acquisition Number of shares after merger = 300000 + (75000 X 1. 10 Marks) Pillsbury Ltd wants to acquire Ashirvad Ltd. It anticipates to maintain the existing P/E Ratio subsequent to the merger also. Mysore 21 . MBA. Asst.48 KIRAN KUMAR.

The relevant data for two companies are as below: Sunpure Ltd Saffola Ltd Net Sales (Rs.8 * 3) = 12 + 2. 4. 24 = Rs. 345. of shares (Crore) 12 3 EPS (Rs. In Crores) 58 12 No.4 = Rs. of shares = 12 + (0. 7 Marks) Sunpure Ltd is taking over Saffola Ltd.Mergers.8 * 3) = 12 + 2. VVCE.21 5 For the combined company (after merger) you are required to calculate (i) EPS (ii) P/E Ratio (iii) market value per share (iv) number of shares (v) Total Market Capitalization Solution i) Post-Merger EPS Post-Merger Profit = 58 + 12 = Rs.86 Implied P/E Ratio = 30 X 0.86 = Rs. of shares = 12 + (0. The shareholders of Saffola Ltd would receive 0. Mysore 22 .4 Crore v) Post-Merger Total Market Capitalization TMC = Rs. Jul-2009.8 / 4 = 6 iii) Post-Merger Market Value per Share P = 6 X 4.4 Crores X Rs. In crores) 335 118 Profit after Tax (Rs.86 ii) Post-Merger or Implied P/E Ratio Post-Merger EPS = 70 / 14.83 4 Market Value per Share (Rs.4 = Rs. MBA.4 = 14. Asst. 70 Crores Post-Merger No. 4.6 Crores KIRAN KUMAR. 14.4 = 14.8 of Sunpure Ltd for each share held by them.) 4.) 30 20 Price Earnings Ratio 6. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 29: Market Value of Merged Firm (VTU. 24 iv) Post-Merger number of shares Post-Merger No.4 Crore Post-Merger EPS = 70 / 14. Professor.

of shares = 25 + (0.Mergers. MBA.92 lacs (Or Rs. Merger is not beneficial to MTR Ltd. 180 Lacs Post-Merger No.5 of its shares to the shareholders of Ruchi for each share held by them.) 78 33.92 Lacs 8 X 33. 6.75 Market Price per Share (Rs.3.49 per share of Ruchi Ltd they held before merger) If P/E falls to 12 after Merger. If the P/E ratio falls to 12 after the merger.48 = 1862 Lacs 25 X Rs. Asst. as the gain to shareholders is negative 88 Lacs. if P/E falls to 12 after Merger. of shares (in lacs) 25 8 EPS (Rs. In lacs) 150 30 No. Jul-2009. 10 Marks) MTR Company is acquiring Ruchi Company.48 Gain Apportionment among shareholders Post-Merger Value Pre-Merger Value Difference MTR Ltd 25 X 74. Professor. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 30: Market Value of Merged Firm (VTU.) 6 3. The data for two companies are as below: Particulars MTR Ruchi Profit after Tax (Rs. Ruchi Ltd’s shareholders receive a premium of Rs.21 If P/E Ratio falls to 12 after Merger.21 = Rs. Post-Merger market price of MTR shares = 12 X 6. Mysore 23 . MTR will pay 0. 27. KIRAN KUMAR.75 = 270 Lacs 27.75 P/E Ratio 13 9 Calculate the earnings per share of the surviving firm after merger. 78 = 1950 Lacs Minus 88 Lacs Ruchi Ltd 4 X 74.5 X 8) = 25 + 4 = 29 Lacs Post-Merger EPS = 180 / 29 = Rs. what is the premium received by the shareholders of Ruchi (using the surviving firm’s new price)? Is the merger beneficial for MTR shareholders? Solution Post-Merger EPS of MTR Post-Merger Profit = 150 + 30 = Rs. 74.92 Lacs Therefore.48 = 297. VVCE.

3 1 DPS Rs. Required: i) Calculate pre-merger market value per share for both the companies ii) Calculate post-merger EPS.24 X 20. Professor.83 KIRAN KUMAR. 20 ii) Calculation of Post-Merger EPS. Asst. In lakhs) 25 3 Net Sales (Rs. market value per share and price earnings ratio if shareholders of Maharaja Ltd are offered a share of Rs.5 60/3 = Rs.83 = 46.66 Post-Merger P/E = 46.Mergers. 12 Marks) Everest Ltd and Maharaja Ltd provide the following financial data: Everest Ltd Maharaja Ltd EAT (Rs. 40 in a share exchange for merger Solution i) Pre-Merger Market Price Everest Maharaja Market Capitalization 500 60 Number of Shares 8 3 Market Price 500/8 = Rs.66/2. P/E Exchange Ratio = 3:2 Post-Merger Profit = 25 +3 = 28 Lacs Post-Merger Number of shares = 8 + (3 X 1. Jan-2010.5 = Rs. In lakhs) 400 60 Number of shares 800000 300000 EPS Rs.24 = 20.5) = 8 + 4.5 Lacs Post-Merger EPS = 28 / 12. Lakh) 500 60 Everest Ltd planned to acquire Maharaja Ltd. 2. 62.5 = 12. 2 1 Market Capitalization (Rs. Mysore 24 . MP. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 31: Market Value of Merged Firm (VTU. 60 for Rs. VVCE. MBA.24 Post-Merger Market Price = 2.

075 Total Value (18500 x 81. 40000 Equity shares outstanding 16000 5000 Market Price per share Rs. as they gain Rs.5 Post-Merger No. Assume that Prestige Ltd expects to have same earnings and P/E ratios after the merger as before (no synergy). KIRAN KUMAR.81 = 81.5 X 5000) = 16000 + 2500 = 18500 Post-Merger EPS 200000/18500 = 10.5 X 10.47313 Thus. 97200 from this Merger. VVCE. of Shares 16000 + (0. as they are losing Rs.075) = 1499887 Gains From Merger: Post-Merger Market Value of the Firm 1499887 Less: Pre-Merger Market Value Prestige 1200000 Pigeon 250000 1450000 Total gains from Merger 49887 Apportionment of Gains between the Shareholders: Particulars Prestige Pigeon Post Merger Market Value: 16000 x 81. 50 Prestige Ltd acquires Pigeon Ltd by exchanging one share for every two shares of Pigeon Ltd.075 1297200 -- 2500 x 81. MBA. 160000 Rs. shareholders of Pigeon Ltd (Target Co) are worse off from this Merger.81 Post-Merger P/E Ratio 7. 47313 from their market value because of this Merger. Mysore 25 .25 Pre-Merger Market Value of Firm 75 X 16000 = 1200000 50 X 5000 = 250000 Post-Merger EAT 160000+40000 = 200000 Exchange Ratio 1/2 = 0. Solution Prestige Pigeon Pre-Merger EPS 160000/16000 = 10 40000/5000 = 8 Pre-Merger PER 75/10 = 7. the shareholders of Prestige Ltd (Acquiring Co) are better off by this Merger. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 32: Market Value of Merged Firm (VTU.5 50/8 = 6. Whereas. 10 Marks) The following data concerns Prestige Ltd and Pigeon Ltd: Prestige Ltd Pigeon Ltd Earnings after taxes Rs. Apportion the gain among shareholders and comment.Mergers. 202687 Less:Pre-Merger Market Value 1200000 250000 Gains from Merger: 97200 . Dec-2011. Professor. 75 Rs. Show extent of gain accruing to the shareholders of two companies as a result of merger.075 -.5 Post-Merger Market Price per Share 7. Asst.

18.90.30) = Rs. Professor.90. of new Shares for every one share 0.5 So.80. of Shares = (6.14 Required: (i) The number of equity shares to be issued by Mango Ltd.000) = 6.000 KIRAN KUMAR.31.97.60.2 PE Ratio 10 times 7 times Market price per share Rs. (P/E Remaining unchanged): Present P/E Ratio of Mango Ltd.2.5 = 90.) 6.5 shares for every one share of Apple Ltd.15.000 1. Profit after tax Rs.90. for acquisition of Apple Ltd.000+3. after the acquisition? (iii) Determine the equivalent earnings per share of Apple Ltd.60.00. new Shares = 1. assuming its PE multiple remains unchanged? (v) Determine the market value of the merged firm.31.5 EPS Rs.000 x .000 + 90.000 No.13 x 10) = Rs.1.21. Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio Exercise 33: Market Value of Merged Firm Mango Ltd.3.13 Post-Merger Market Price = (3.Mergers. wants to acquire Apple Ltd.000) = Rs.3.).000 shares.30 Total value = (6.000 Equity shares outstanding (Nos.30 (v) Market Value of merged firm: Total number of Shares 6.00.3 Rs. (ii) EPS of Mango Ltd.000 EPS Rs. 10 times Expected EPS after merger Rs. and has offered a swap ratio of 1:2 (0.57 (iv) New Market Price of Mango Ltd. (iv) What is the expected market price per share of Mango Ltd. after the acquisition.: The Exchange ratio is 0.3.000 Post-Merger EPS = (21.000 Expected Market Price Rs.000 x 31.60.13 (iii) Equivalent EPS of Apple Ltd.000) = Rs. VVCE.3.000)/6.13 x .000 Rs.60.5) = Rs.90. Following information is provided: Mango Ltd.: No.80.00. Solution (i) The number of shares to be issued by Mango Ltd.30 Rs. Mysore 26 . Apple Ltd.13 Equivalent EPS = (3. After acquisition: Total Earnings = (18. (ii) What is the EPS of Mango Ltd.00. Asst.