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Exchange Ratio Problems N Solutions PDF
Exchange Ratio Problems N Solutions PDF
Nandini Ltd plans to offer a premium of 20% over the market price of Heritage Ltd.
i) What is the ratio of exchange of stock?
ii) How many new shares will be issued?
Solution
Nandini Heritage
No. 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/1.25
Solving for x, we get Market Price as 24 10
Exchange Ratio = (10 X 1.2) / 24 = 12/24 = 1.5
No. of new shares to be issued = 1.5 X 800 = 1200
RIL 2,00,00,000
SIL 50,00,000 2,50,00,000
Total gains from Merger 50,00,000
Apportionment of Gains between the Shareholders:
Particulars RIL SIL
Post Merger Market Value: Rs. Rs.
10,00,000 x 24 2,40,00,000 --
2,50,000 x 24 -- 60,00,000
Less:Pre-Merger Market Value 2,00,00,000 50,00,000
Gains from Merger: 40,00,000 10,00,000
Thus, 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.30,00,000 x 20% = Rs.36,00,000
No. of equity shares outstanding: 12,50,000
Post-Merger EPS: Rs. 36,00,000/12,50,000 = Rs.2.88
PE Ratio = 10
Post-Merger Market Price Per Share = Rs.2.88 x 10 = Rs.28.80
So, Shareholders will be better-off than before the merger situation.
Exercise 27: Market Value of Merged Firm (VTU, MBA, Jul-2011, 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.) 2,000 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, assuming
P/E ratio of Regaalis Limited remains unchanged?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent companies after acquisition.
Solution
Regaalis Ltd. Metropole Ltd.
EPS Rs. 2,000 Lakhs/ 200 lakhs Rs. 400 lakhs / 100 lakhs
= Rs. 10 = Rs. 4
Market Price Rs. 10 X 10 = Rs. 100 Rs. 4 X 5 = Rs. 20
(i) The Swap ratio based on current market price = Rs. 20/Rs. 100 = 0.2
No. of shares to be issued = Rs. 100 lakh X 0.2 = Rs. 20 lakhs.
(ii) EPS after merger = (Rs.2,000 lakhs + Rs. 400 lakhs)/(200 lakhs + 20 lakhs) = Rs. 10.91
(iii) Expected market price after merger assuming P / E 10 times = Rs. 10.91 X 10 = Rs. 109.10
(iv) Market value of merged firm = Rs. 109.10 market price X 220 lakhs shares = 240.02 crores
(v) Gain from the merger
Post merger market value of the merged firm Rs. 240.02 crores
Less: Pre-merger market value
Regaalis Ltd. 200 Lakhs X Rs. 100 = 200 crores
Metropole Ltd. 100 Lakhs X Rs. 20 = 20 crores Rs. 220 crores
Gain from merger Rs. 20.02 crores
Appropriation of gains from the merger among shareholders:
Regaalis Ltd. Metropole Ltd.
Post merger value 218.20 crores 21.82 crores
Less: Pre-merger market value 200.00 crores 20.00 crores
Gain to Shareholders 18.20 crores 1.82 crores
Exercise 28: Market Value of Merged Firm (VTU, MBA, Jul-2011, 10 Marks)
Pillsbury Ltd wants to acquire Ashirvad Ltd, by exchanging its 1.6 shares for every share of
Ashirvad Ltd. It anticipates to maintain the existing P/E Ratio subsequent to the merger also.
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.) 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 =(1.6 X 35)/40 = 1.4
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 = 6.67
iii) Implied P/E Ratio = Market price of shares offered/Current EPS
= (1.6 X 35) / 6 = 9.33
iv) EPS of Pillsbury after acquisition
Number of shares after merger = 300000 + (75000 X 1.6) = 420000
Total Profit of Merged Company = 1500000 + 450000 = 1950000
EPS post-merger = 1950000 / 420000 = 4.64
v) Post-Merger Market Price = P/E ratio X EPS = 7 X 4.64 = 32.48
Exercise 29: Market Value of Merged Firm (VTU, MBA, Jul-2009, 7 Marks)
Sunpure Ltd is taking over Saffola Ltd. The shareholders of Saffola Ltd would receive 0.8 of
Sunpure Ltd for each share held by them. The relevant data for two companies are as below:
Sunpure Ltd Saffola Ltd
Net Sales (Rs. In crores) 335 118
Profit after Tax (Rs. In Crores) 58 12
No. of shares (Crore) 12 3
EPS (Rs.) 4.83 4
Market Value per Share (Rs.) 30 20
Price Earnings Ratio 6.21 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. 70 Crores
Post-Merger No. of shares = 12 + (0.8 * 3) = 12 + 2.4 = 14.4 Crore
Post-Merger EPS = 70 / 14.4 = Rs. 4.86
ii) Post-Merger or Implied P/E Ratio
Post-Merger EPS = 70 / 14.4 = Rs. 4.86
Implied P/E Ratio = 30 X 0.8 / 4 = 6
iii) Post-Merger Market Value per Share
P = 6 X 4.86 = Rs. 24
iv) Post-Merger number of shares
Post-Merger No. of shares = 12 + (0.8 * 3) = 12 + 2.4 = 14.4 Crore
v) Post-Merger Total Market Capitalization
TMC = Rs. 14.4 Crores X Rs. 24 = Rs. 345.6 Crores
Exercise 30: Market Value of Merged Firm (VTU, MBA, Jul-2009, 10 Marks)
MTR Company is acquiring Ruchi Company. MTR will pay 0.5 of its shares to the shareholders
of Ruchi for each share held by them. The data for two companies are as below:
Particulars MTR Ruchi
Profit after Tax (Rs. In lacs) 150 30
No. of shares (in lacs) 25 8
EPS (Rs.) 6 3.75
Market Price per Share (Rs.) 78 33.75
P/E Ratio 13 9
Calculate the earnings per share of the surviving firm after merger. If the P/E ratio falls to 12
after the merger, 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. 180 Lacs
Post-Merger No. of shares = 25 + (0.5 X 8) = 25 + 4 = 29 Lacs
Post-Merger EPS = 180 / 29 = Rs. 6.21
If P/E Ratio falls to 12 after Merger,
Post-Merger market price of MTR shares = 12 X 6.21 = Rs. 74.48
Gain Apportionment among shareholders
Post-Merger Value Pre-Merger Value Difference
MTR Ltd 25 X 74.48 = 1862 Lacs 25 X Rs. 78 = 1950 Lacs Minus 88 Lacs
Ruchi Ltd 4 X 74.48 = 297.92 Lacs 8 X 33.75 = 270 Lacs 27.92 Lacs
Therefore, if P/E falls to 12 after Merger, Ruchi Ltd’s shareholders receive a premium of Rs.
27.92 lacs (Or Rs.3.49 per share of Ruchi Ltd they held before merger)
If P/E falls to 12 after Merger, Merger is not beneficial to MTR Ltd, as the gain to shareholders
is negative 88 Lacs.
Exercise 31: Market Value of Merged Firm (VTU, MBA, Jan-2010, 12 Marks)
Everest Ltd and Maharaja Ltd provide the following financial data:
Everest Ltd Maharaja Ltd
EAT (Rs. In lakhs) 25 3
Net Sales (Rs. In lakhs) 400 60
Number of shares 800000 300000
EPS Rs. 3 1
DPS Rs. 2 1
Market Capitalization (Rs. Lakh) 500 60
Everest Ltd planned to acquire Maharaja Ltd.
Required:
i) Calculate pre-merger market value per share for both the companies
ii) Calculate post-merger EPS, market value per share and price earnings ratio if
shareholders of Maharaja Ltd are offered a share of Rs. 60 for 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. 62.5 60/3 = Rs. 20
ii) Calculation of Post-Merger EPS, MP, P/E
Exchange Ratio = 3:2
Post-Merger Profit = 25 +3 = 28 Lacs
Post-Merger Number of shares = 8 + (3 X 1.5) = 8 + 4.5 = 12.5 Lacs
Post-Merger EPS = 28 / 12.5 = Rs. 2.24
Post-Merger Market Price = 2.24 X 20.83 = 46.66
Post-Merger P/E = 46.66/2.24 = 20.83
Exercise 32: Market Value of Merged Firm (VTU, MBA, Dec-2011, 10 Marks)
The following data concerns Prestige Ltd and Pigeon Ltd:
Prestige Ltd Pigeon Ltd
Earnings after taxes Rs. 160000 Rs. 40000
Equity shares outstanding 16000 5000
Market Price per share Rs. 75 Rs. 50
Prestige Ltd acquires Pigeon Ltd by exchanging one share for every two shares of Pigeon Ltd.
Assume that Prestige Ltd expects to have same earnings and P/E ratios after the merger as
before (no synergy). Show extent of gain accruing to the shareholders of two companies as a
result of merger. Apportion the gain among shareholders and comment.
Solution
Prestige Pigeon
Pre-Merger EPS 160000/16000 = 10 40000/5000 = 8
Pre-Merger PER 75/10 = 7.5 50/8 = 6.25
Pre-Merger Market Value of Firm 75 X 16000 = 1200000 50 X 5000 = 250000
Post-Merger EAT 160000+40000 = 200000
Exchange Ratio 1/2 = 0.5
Post-Merger No. of Shares 16000 + (0.5 X 5000) = 16000 + 2500 = 18500
Post-Merger EPS 200000/18500 = 10.81
Post-Merger P/E Ratio 7.5
Post-Merger Market Price per Share 7.5 X 10.81 = 81.075
Total Value (18500 x 81.075) = 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 81.075 1297200 --
2500 x 81.075 -- 202687
Less:Pre-Merger Market Value 1200000 250000
Gains from Merger: 97200 - 47313
Thus, the shareholders of Prestige Ltd (Acquiring Co) are better off by this Merger, as they gain
Rs. 97200 from this Merger. Whereas, shareholders of Pigeon Ltd (Target Co) are worse off from
this Merger, as they are losing Rs. 47313 from their market value because of this Merger.