BMS - Fm Business restructuring revision problem

M Co. Ltd., is studying the possible acquisition of N Co. Ltd., by way of merger. The following
data are available in respect of the companies:
Particulars M Co. Ltd. N Co. Ltd.
Earnings after tax (Rs.) 80,00,000 24,00,000
No. of equity shares 16,00,000 4,00,000
Market value per share (Rs.) 200 160
(i) If the merger goes through by exchange of equity and the exchange ratio is based on the
current market price, what is the new earning per share for M Co. Ltd.?
(ii) N Co. Ltd. wants to be sure that the earnings available to its shareholders will not be
diminished by the merger. What should be the exchange ratio in that case?

(i) Calculation of new EPS of M Co. Ltd.

No. of equity shares to be issued by M Co. Ltd. to N Co. Ltd.

= 4,00,000 shares × Rs. 1.6/Rs. 2.0 = 3,20,000 shares

Total no. of shares in M Co. Ltd. after acquisition of N Co. Ltd.

= 16,00,000 + 3,20,000 = 19,20,000

Total earnings after tax [after acquisition]

= 80,00,000 + 24,00,000 = 1,04,00,000

EPS =

19,20,000 equity shares

Rs.1,04,00,000

= Rs. 5.42

(ii) Calculation of exchange ratio which would not diminish the EPS of N Co. Ltd. after

its merger with M Co. Ltd.

Current EPS:

M Co. Ltd. =

16,00,000 equity shares

Rs.80,00,000

N Co. Ltd. =

= Rs. 5

4,00,000 equity shares

Rs.24,00,000

Exchange ratio = 6/5 = 1.20

No. of new shares to be issued by M Co. Ltd. to N Co. Ltd.

= 4,00,000 × 1.20 = 4,80,000 shares

Total number of shares of M Co. Ltd. after acquisition

= 16,00,000 + 4,80,000 = 20,80,000 shares

EPS [after merger] =

= Rs. 6

20,80,000 shares

Rs.1,04,00,000

Total earnings in M Co. Ltd. available to new shareholders of N Co. Ltd.

= 4,80,000 × Rs. 5 = Rs. 24,00,000

A Ltd. wants to acquire T Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one

share of T Ltd.). Following information is provided:

A Ltd. T. Ltd.

Profit after tax Rs.18,00,000 Rs.3,60,000

Equity shares outstanding (Nos.) 6,00,000 1,80,000

EPS Rs.3 Rs.2

PE Ratio 10 times 7 times

Market price per share Rs.30 Rs.14

Required:

(i) The number of equity shares to be issued by A Ltd. for acquisition of T Ltd.

(ii) What is the EPS of A Ltd. after the acquisition?

(iii) Determine the equivalent earnings per share of T Ltd.

(iv) What is the expected market price per share of A Ltd. after the acquisition,

assuming its PE multiple remains unchanged?

(v) Determine t


(a) (i) The number of shares to be issued by A Ltd.:
The Exchange ratio is 0.5
So, new Shares = 1,80,000 x .5 =
90,000 shares.
(ii) EPS of A Ltd. After a cquisition:
Total Earnings (18,00,000+3,60,000) Rs.21,60,000
No. of Shares (6,00,000 + 90,000) 6,90,000
EPS (21,60,000)/6,90,000) Rs.3.13
(iii) Equivalent EPS of T Ltd.:
No. of new Shares 0.5
EPS Rs.3.13
Equivalent EPS (3.13 x .5) Rs.1.57
(iv) New Market Price of A Ltd. (P/E
remaining unchanged):
Present P/E Ratio of A Ltd. 10 times
Expected EPS after merger Rs.3.13
Expected Market Price (3.13 x 10) Rs.31.30
(v) Market Value of merged firm:
Total number of Shares 6,90,000
Expected Market Price Rs.31.30
Total value (6,90,000 x 31.30) Rs.2,15,97,000he market value of the merged firm.= Rs. 5