Example 1: The following are the Balance Sheets of Kay Ltd. and Jay Ltd.

as on 31
March, 2010.
Particulars Kay Ltd. Jay Ltd.
Liabilities
Equity Share Capital of Rs. 10 each 4,00,000 1,80,000
General Reserve 5,00,000 1,00,000
Profit and Loss Account 3,00,000 80,000
Debentures 3,50,000 NIL
Creditors 2,00,000 1,00,000
Bills Payable 50,000 40,000
18,00,000 5,00,000
Assets
Fixed assets 7,00,000 3,00,000
Investments 5,00,000 NIL
Current Assets 6,00,000 2,00,000
18,00,000 5,00,000

The Board of Directors of Kay Ltd. has approved to takeover Jay Ltd. as on 30
September 2010. Find out the share exchange ratio based on assets.

Example 2: Smart Ltd. wants to acquire Dull Ltd. The balance sheet of Dull Ltd. as
on 31st March 2010 is as follows:

Liabilities Assets
Eq. Shares (60,000 share) 6,00,000 Cash 20,000
Retained earning 2,00,000 Debtors 30,000
12% debentures 2,00,000 Inventories 1,70,000
Creditors & other liabilities 3,20,000 Plant & Machine 11,00,000
13, 20,000 13,20,000

Additional information:
1. Shareholders of Dull Ltd. will get one share in Smart Ltd. for every two
shares. External liabilities are expected to be settled at Rs. 3,00,000. Shares
of Smart Ltd. would be issued at its current market price of Rs. 15 per
share. Debenture holder will get 13% convertible debentures in the
 purchasing the company for the same amount. Debtors and inventories are
expected to be realized Rs. 1,80,000.
2. Smart Ltd. has decided to operate Dull Ltd. as a separate business division.
The division is likely to generate the after tax cash flow of Rs. 3,00,000 for
the next 6 years. Smart Ltd. has planned that after 6 years, the division
would be demerged and disposed off at Rs. 1,00,000.
3. Company’s cost of capital is 14%.
Decide the financial feasibility of the acquisition. (present value @ 14% for 6
years: 0.8772, 0.7695, 0.6750, 0.5921, 0.5194 and 0.4556.

Example 3: Balance Sheet of Hypothetical Company as on 31st March.

Liabilities Rs. (Lakh) Assets Rs. (Lakh)

Share capital 100 Land and building 40
(Rs. 10 face value) Plant & Machine 80
Reserve & surplus 40 Investments 10
Creditors 30 Stock 20
Debtors 15
Cash at bank 5

170 170

You are required to work out the value of company’s share on the basis of Net
Asset Method and Price – earning capacity method and arrive at the fair price of
the shares after considering the following information:
1. Profit of the current year Rs. 64 lakhs including Rs. 4 lakhs extraordinary
income and Rs. 1 lakhs from the investment of funds; and such income is
unlikely to occur.
2. In subsequent years, additional advertisement expense of Rs. 5 lakhs are
expected to be incurred every year.
3. Market value of land & building and plant & Machine are fixed at Rs. 96 and
Rs. 100 lakhs resp. This will entail additional depreciation of Rs. 6 lakhs per
year.
4. Effective income tax rate is 35%.
5. The capitalization rate of other similar businesses is 15%.
Example 4:

Example 5:
Example 6: An analysis is intended to value the IT company in term of future cash
flow generating capacity. He has projected the following after tax cash flow:
Year 1 2 3 4 5
Cash flow (Rs. In mn.) 166 45 60 81 110
th
It is further estimated that beyond the 5 year, cash flow will grow at the rate of
7% p.a. constantly mainly on account of inflation. The perpetual cash flow is
estimated at Rs. 968 million at the end of 5th year.

(i) What is the value of the company based on the expected future cash flow? You
may assume cost of capital at 20%.
(ii) The company has outstanding debt of Rs. 342 million and cash and bank
balance of Rs. 256 million. Calculate shareholder value if the outstanding shares
are 15.15 million.
(iii) The company has received takeover bid of Rs. 190 per share. Is it good offer?

Example 7: Ashoka Builders Ltd. has an issued and paid up capital of 5,00,000
shares of Rs. 10 each. The company declared a dividend of Rs. 12.50 lakhs during
the last 5 years and expect the same level to be maintained in future. The average
dividend yield for listed companies in the same line of business is 18%. Calculate
the value of 3000 shares.
Example 8: A company in operation for five years has tangible assets worth Rs.
20,00,000. Maintainable future profit is estimated at Rs. 4,00,000. The normal
rate of return expected from the company is 15%. It desires to capitalize the
super profit at 20%. Determine the value of the company.

Example 9: Assuming no taxes and given the Earning Before Interest and Taxes
(EBIT), interest (i) on debenture at 10% and equity capitalization rate (Ke) below:

Firms EBIT (Rs.) i (Rs.) (Ke) (%)

X 2,00,000 20,000 12
Y 3,00,000 60,000 16
Z 5,00,000 2,00,000 15
W 6,00,000 2,40,000 18

(i) Calculate the total market value of each firm.

(ii) Determine the weighted average cost of capital for each firm.

Example 10: ABC Ltd. has declared dividend during last 5 years as follows:
Year 2006 2007 2008 2009 2010
% of dividend 12 14 18 21 24
The average rate in the industry is 15%. Calculate the value per share based on
dividend yield method. The face value is Rs. 10.

Example 11: From the following date available from TBK Bearings Ltd., calculate
the value of equity shares based on RoR on capital employed. Face Value Rs. 10.
Year 2006 2007 2008 2009 2010
Capital employed 20 26 33 35 41
Profit 3 5 6 8 11
The market expectation is 16%.
Example 12: Sanjay holds 12,000 shares of Healthy Foods Ltd. the nominal and
paid-up capital of which consists of:
(i) 40,000 equity shares of Rs. 1 each
(ii) 10,000 preference share (8% non-participative) of Rs. 1 each.

It is ascertained that:
(a) The normal annual profit of such a company is Rs. 12,000.
(b) The normal rate of transfer to general reserve is 10%.
(c) The normal rate of dividend on the paid up value of equity shares for the types
of business carried on by such company is 15%.

Prepare the share valuation for Sanjay.

Example 13: XYZ Ltd. is intending to acquire ABC Ltd. (by merger) and the
following information is available in respect of following companies.
XYZ Ltd. ABC Ltd.
Number of eq. shares 5,00,000 3,00,000
Earnings after tax (Rs.) 25,00,000 9,00,000
Market value per share (Rs.) 21 14

(a) What is the present EPS of both the companies?

(b) If the proposed merger takes place, what would be the new EPS of XYZ Ltd.
(assuming that the merger takes place by exchange of equity shares and
the exchange ratio is based on current market price)
(c) What should be the exchange ratio, if XYZ Ltd. wants to ensure the same
earnings to members as before the merger takes place?

Example 14: X Ltd. wants to takeover Y Ltd. and the financial details are as
follows.
Particulars X Ltd. Y Ltd.
Pref. share capital 20,000 ---
Equity share of Rs. 10 each 1,00,000 50,000
Share premium --- 2,000
Profit and loss account 38,000 4,000
10% debentures 15,000 5,000
1,73,000 61,000
Fixed assets 1,22,000 35,000
Current assets 51,000 26,000
1,73,000 61,000
Profit after tax and pref. dividend 24,000 15,000
Market price 24 27

What should be the share exchange ratio to be offered to the shareholders of Y

Ltd. based on (1) net asset value, (2) EPS and (3) Market price.
What is preferred from the point of X Ltd.

Example 15: Sunny Ltd. is studying the possibility of acquisition of Rainy Ltd. with
the following information available:
Sunny Ltd. Rainy Ltd.
Profit after tax Rs. 3,00,000 Rs. 75,000
No. of equity shares 50,000 10,000
P/E multiple 3 2

If the merger takes place by share swap based on market price, what is the EPS of
the new firm?

Example 16: Jain Casting Ltd. agrees to acquire Nagarjuna Steel Ltd. based on the
capitalization of last three years profit at an earning yield of 21%.
Profit of Nagarjuna Steel Rs. Lakhs
2008 75
2009 89
2010 82

Calculate the value of business on earning yield basis.

Example 17: A Ltd. is considering takeover of B Ltd. and C Ltd. The financial data
for the three companies are as follows:
Particulars A B C
Eq. share of Rs. 10 each (Rs. mn.) 450 180 90
Earning (Rs. mn.) 90 18 18
Market price of each share 60 37 46

Calculate:
(i) Price earning ratio.
(ii) EPS of A Ltd. after acquisition of B Ltd. and C Ltd. separately.
Will you recommend the merger of either/ both of the companies? Justify.

Example 18: You have been provided the following financial data of 2 companies.
Particulars Krishna Ltd. Rama Ltd.
Earning After Tax Rs. 7,00,000 Rs. 10,00,000
No. of Eq. shares 2,00,000 4,00,000
EPS 3.5 2.5
P/E ratio 10 14
Market price per share 35 35

Rama Ltd. is acquiring Krishna Ltd. by exchanging its shares on a one-to-one basis
for company Krishna Ltd’s shares. The exchange ratio is based on market price.
You are required to calculate:
(i) The EPS subsequent to merger.
(ii) Change of EPS of shareholders of Krishna Ltd. and Rama Ltd.
(iii) The market value of post merger firm.
(iv) The profit occurring to the shareholders of both the companies.

Example 19: The free cash flow of a firm is projected to grow at a compound
annual average rate of 25% for the next 5 years. Growth is then expected to slow
down to a normal 10 % annual growth rate. The current year’s cash flow to the
firm is Rs.4 lakh. The firm’s cost of capital during high growth period is 18% and
12 % beyond the fifth year, as growth stabilizes. Compute the value of the firm.

Example 20: Gama Chemicals Ltd is taking over Theta Petrochemicals Ltd. The
shareholders of Theta would receive 0.8 shares of Gama Ltd for each share held
by them. The merger is not expected to yield in economies of scale and
operations synergy. The relevant data for two companies are as follows:
Particulars Gama Ltd. Theta Ltd.
Net sales (in Rs. Crore) 335 118
Profit after tax (in Rs. Crore) 58 12
No. of share (crore) 12 3
EPS (Rs.) 4.83 4
MPS (Rs.) 30 20
P/E Ratio 6.21 5

For the combined company (after merger), you are required to calculate: (a) no.
of shares paid to Theta’s shareholders (b) no. of shares of combined co. (c)
Combined EPS (d) combined PAT.

Example 21: True value Ltd. is planning to raise funds through issue of common
stock for the first time. However, the management of the company is not sure
about the value of the company and therefore it attempts to study similar
companies in the same line which are comparable to True value in most of the
aspects. From the following information, you are required to compute the value
of True value Ltd. using the comparable firms approach.
(` in crore)
Company True value Jewel value Real value Unique
Ltd. Ltd. Ltd. value Ltd.
Sales 250 190 210 270
Profit after tax 40 30 44 50
Book value 100 96 110 128
Market value 230 290 440

The valuer feels that 50% weightage should be given to earnings in the valuation
process; sales and book value may be given equal weightages.
Example 22: Calculate the value of Zee ltd. Based on comparable companies
approach. The following data is available with respect to Zee ltd.

Sales: Rs. 100 crore

Profit: 15 crore
Book Value: Rs. 60 crore

The Valuer feels that 50% weightage should be given to earnings in the valuation
process. Sales and book value may be given equal weightages. The valuer has
identified three firms which are comparable to the operations of Zee ltd.
Particulars Alpha Beta Gamma
Price / sales ratio 1.5 1.25 1.60
Price/ Earning 10 8.33 9.60
Price/ book value 3 1.66 2.40

Example 23: Paramount Ltd. is having an issued and subscribed capital of

5,00,000 eq. shares of Rs. 10 each fully paid up. The company’s after tax profit for
the year 2010 is Rs. 28 lakhs. The average present price of the share in the
exchange is Rs. 19. The P/E ratio of four listed company in the similar business of
Paramount Ltd. are:
Company 2008 2009 2010
A Ltd. 5.7 6.3 7.1
B Ltd. 6.5 5.9 6.8
C Ltd. 7.4 6.8 7.0
D Ltd. 5.0 5.9 6.1
Calculate the value of business and share based upon the P/E ratio.

Example 24: Ravi corporation plans to acquire Mohan Corporation. The following
information is available.
Ravi Corp. Mohan Corp.
Total Earnings (E) 25 mn. 10 mn.
no. of shares (S) 10 mn. 5 mn.
Market price per share (P) Rs. 15 Rs. 10
 1. What is the maximum exchange ratio acceptable to the shareholders of
Ravi Corp. if the PE ratio of combined entity is 6 and there is no synergy
gain?
2. Find out the minimum exchange ratio that would acceptable to the
shareholders of Mohan Corp. if the PE ratio of the combined entity is 11
and there is a synergy gain of 2.5%.
3. Assuming there is no synergy gain, at what level of PE multiple will the lines
ER1 and ER2 intersect?

Example 25: Anil Starch plans to acquire Jay Chemical. The following information
is available:
Particulars Anil Jay
Total Current earning Rs. 36 mn. Rs. 12 mn.
no. of shares 12 mn. 8 mn.
Market price per share Rs. 30 Rs. 9
EPS Rs. 3 Rs. 1.5
P/E ratio 10 6

(i) What is the maximum exchange ratio acceptable to the shareholders of Anil
Starch if the P/E Ratio of the combined entity is 8?
(ii) What is the minimum exchange ratio acceptable to the shareholders of Jay
Chemical if the P/E Ratio of the combined entity is 9?

Example 26: Calculate the value of Appu ltd. based on following data.
Earnings per share: Rs. 4
Capital Expenditure: Rs. 3
Depreciation per share: Rs. 2.50
Δ working capital: Rs. 0.5
Expected growth: 9%
Beta: 0.90
Risk free rate: 8%
Market risk premium: 6%
Calculate Value per share based on stable growth FCFE model.

Example 27: Firm A plans to acquire Firm B. The relevant financial information of
the two companies prior to merger announcement are:
Firm A firm B
Market price per share Rs. 50 Rs. 20
Number of shares 10,00,000 5,00,000
Market value of the firm 50 mn. 10 mn.
The merger is expected to bring gains which have a present value of Rs. 10 mn.
Firm A offers 2,50,000 shares in exchange for 5,00,000 shares to the shareholders
of firm B.

(i) What will be the true cost of acquiring firm B?

(ii) What will be the NPV of merger to firm A?
(iii) What will be the NPV of merger to firm B?

Example 28 (Sept 13): A Ltd. wishes to acquire T Ltd. on the basis of an exchange
ratio of 0.8
Other relevant financial data is as follows:
Particulars A Ltd. T Ltd.
Earnings After Taxes (EAT) Rs. 100,000 Rs. 20,000
Equity shares outstanding 50,000 20,000
Earnings per Share (EPS) Rs. 2 Rs. 1
Market Price per Share Rs. 20 Rs. 8

(i) Determine the number of shares required to be issued by A Ltd. for Acquisition
of T Ltd.
(ii) What would be the exchange ratio if it were based on the market price of
shares of A Ltd. and T Ltd.?
(iii) What is the current price-earnings ratio of the two companies?
(iv) If T Ltd. wants their EPS to be Rs. 1.20, calculate exchange ratio.
(v) If there is synergic gain of 5%, calculate EPS of merged firm when exchange
ratio is 0.8.

Example 29 (May 15): Large company is intending to acquire small company. The
following information is available.
Particulars large small
No. of equity shares 10,00,000 6,00,000
Earning after tax 50,00,000 18,00,000
Market value per share 42 28

1. What is present EPS of both the companies?

2. If proposed merger take place, what would be the new EPS of Large Company.
Assume that merger take place by exchange of equity shares and exchange
ratio is based on current market price.
3. What should be the exchange ratio if Large Company wants to ensure that EPS
before merger and EPS after merger remain same?

Example 30 (May 16): Black & Co. is planning to acquire White & co. The financial
details of both the companies before merger are as below:
Particulars black white
Market price per share 70 32
Number of shares 20 mn. 15 mn.

The merger is expected to bring the gain which has a present value Rs. 200 mn.
The exchange ratio agreed is 0.5. What is the true cost of merger to Black & Co?
Example 31 (May 17): Suchi Ltd. and Trusha Ltd. are discussing a merger deal in
which Suchi Ltd. will acquire Trusha Ltd. The relevant information about the firms
is given as follows:
Particulars Suchi Ltd. Trusha Ltd.
Total Earnings Rs. 36 million Rs. 12 million
Number of outstanding shares 12 million 8 million
Earnings Per Share Rs. 3 Rs. 1.5
Price-Earnings Ratio 10 6
Market price per share Rs. 30 Rs. 9

1. What is the maximum exchange ratio acceptable to the shareholders of Suchi

Ltd., if the PE Ratio of the combined firm is 8?
2. What is the minimum exchange ratio acceptable to the shareholders of Trusha
Ltd., if the PE Ratio of the combined firm is 9?
3. At what point do the lines ER1 and ER2 intersect?

Example 32 (May 17): Find the value of Viaan Ltd. on the base of comparable
companies approach, which is a prospective target, from the following
information:

Particulars A Ltd. B Ltd. C Ltd.

Market/ Net Income 30 35 40
Market/Book value 2.56 2.40 3.00
Market/Sales 2.46 2.32 2.92

The current sales of Viaan Ltd. are Rs. 300 Lakhs, Book value of equity Rs. 250
lakhs and Net Income is Rs. 50 lakhs.

Example 33 (May 17): Parth Company plans to acquire Videsh Company. The
relevant financial details of the two firms, prior to merger announcement, are
given below:
 Parth Company Videsh Company
No. of Shares 3,00,000 2,00,000
Market Price Per Share Rs. 60 Rs. 25

The merger is expected to bring gains which have a present value of Rs. 4 million.
Parth Company offers one share in exchange for every two shares of Videsh
Company.
(a) What is the true cost of Parth Company for acquiring Videsh Company?
(b) What is the net present value of the merger to Parth Company?
(c) What is the net present value of the merger to Videsh Company?