solution merger & acquisition, ca-final-sfm by ca pravinn mahajan

PRAVINN MAHAJAN CA CLASSES 9871255244

MERGER AND ACQUISITION

Q1 Sunny Rainy

PAT 3,00,000 75,000

No. of shares 50,000 10,000

PE Ratio 3 times 2 times

EPS 6 7.5

MP (PE x EPS) 18 15

Market capitalization

(MP x No. of shares) 9,00,000 1,50,000

a. Exchange ration, if merger is on the basis of MPS =

=

= 0.833 : 1

= i.e 0.833 share in Sunny for every 1 share in rainy

b. Statement of impact on EPS

Sunny Rainy

EPS before acquisition 6 7.5

EPS after acquisition

( ) 6.428 6.428 x 0.833 = 5.356

Thus after acquisition EPS of sunny Ltd increases and EPS of Rainy Ltd. decreases.

Q2 A B

No. of shares 80,000 20,000

Value of firm 8,00,000 1,00,000

MP per share 10 5

PE ratio 5 4

EPS 2 1.25

a. Exchange ratio if merger is on base of EPS =

= = 0.625 : 1

i.e 0.625 share in B for every 1 share in A

b. Impact on MP A B

MP before acquisition 10 5

MP after acquisition 9.72 9.72 x 0.625 = 6.08108

After merger MP of share of A ltd will decrease and wealth of shareholder of B ltd will increase

PRAVINN

MAHAJAN

CA CLASESS


Statement of wealth of shareholder of B

Wealth before acquisition 1,00,000

Wealth after acquisition 12,500 x 9.72 1,21,500

Or 20,000 x 6.08

Q3 Pick Dick

No. of shares 1,00,000 50,000

EPS 6 4

Market Price 54 20

PE ratio 9 5

a. i. If market price before merger and after merger is to remain same then, Exchange

ratio should be on basis of MP

= = = 0.37037 : 1

ii. EPS of new firm =

=

= 6.75

PE ratio of new firm =

=

= = 8 times

iii. Statement of impact on EPS

Pick Dick

EPS before acquisition 6 4

EPS after acquisition 6.75 6.75 x 0.37037 = 2.49

Due to merger EPS of Pick ltd increases and EPS of dick ltd decreases.

Statement of Impact on wealth

Pick Dick

MP before merger 54 20

MP after merger 54 20

MP of share of Pick ltd and dick Ltd remain same after merger. So there is no impact on

wealth of shareholder

PRAVINN

MAHAJAN

CA CLASESS


b. i. Exchange ratio for post merger price of Pick ltd to be Rs 60

MP after merger =

60 =

Shares to Dick ltd = - 1,00,000

= 6,667 shares

Ratio = = 0.1333 : 1

i.e 0.1333 share in Pick ltd for every 1 share in Dick ltd

ii. EPS of new firm =

=

= 7.50


=

= = 8 times


Pick Dick



or 1

Due to merger EPS of Pick ltd increases and EPS of Dick ltd decreases.


Pick Dick


MP after merger 60 60 x 0.1333 = 7.9998

MP of share of Pick ltd increases and dick Ltd to decrease after merger. So after

merger wealth of shareholders of dick ltd decreased.

PRAVINN

MAHAJAN

CA CLASESS


c. i. If EPS of Pick ltd and Dick ltd is to remain same after merger, Exchange ratio

should be on the basis of EPS.

Exchange Ratio =

=

= 0.67 : 1 i.e 0.67 share in Pick Ltd for every 1

share in Dick Ltd

ii. MPS of new firm =

=

= Rs 48


=

= = 8 times


Pick Dick


EPS after acquisition 6 6 x 0.67 = 4.02

Due to merger EPS of Pick ltd and EPS of dick ltd remain same.


Pick Dick


MP after merger 48 48 x 0.67 = 32.16

MP of share of Pick ltd decreases and dick Ltd increases after merger. Wealth of

shareholder of Pick Ltd decreases and wealth of shareholder of Dick Ltd

increased after merger

PRAVINN

MAHAJAN

CA CLASESS


d. i. Exchange ratio to maintain EPS Rs 4 per share after Merger

EPS of new firm =

6.4 =

No. of shares to Dick Ltd= - 1,00,000

= 25,000

Exchange ratio = = 1

ii. MP after Merger =

= = Rs 51.2


=

= = 8 times

iii. Statement of Impact on EPS

Pick Dick


EPS after acquisition = 6.4 6.4 x 0.5 = 3.2

EPS of Pick ltd is increasing and EPS of dick Ltd is decreasing

Statement of impact on wealth of Shareholder

Pick Dick


MP after acquisition = 51.2 51.2 x 0.5 = 25.6

Wealth of Shareholders of Pick ltd decreased and wealth of shareholder of

Dick ltd increased

PRAVINN

MAHAJAN

CA CLASESS


e. i. If Exchange ratio is on the basis of PE ratio =

= = 0.555 : 1

Since exchange ratio is on the basis of PE ratio, so PE ratio after acquisition will

remain same i.e 9

ii. post merger EPS =

=

= 6.26

If PE ratio is given in question, then MP after acquisition is calculated as follows

MP after acquisition = PE ratio after acquisition x EPS after acquisition

= 9 x 6.26 = 56.34

Iii Statement of Impact on EPS

Pick Dick



EPS of Pick ltd is increasing and EPS of dick Ltd is decreasing

Statement of impact on wealth of Shareholder

Pick Dick


MP after acquisition 56.34 56.34 x 0.555 = 31.268

Wealth of Shareholders of Pick ltd decreased and wealth of shareholder of

Dick ltd increased

f. i. If PE ratio of Dick ltd is 3., then MP of Dick Ltd is

MP = PE ratio x EPS

= 3 x 4

= Rs 12

ii. Exchange ratio = = = 0.222 : 1

post merger EPS =

=

= 7.2

PRAVINN

MAHAJAN

CA CLASESS


Q4 MLtd N Ltd

EAT 80,00,000 24,00,000

No. of equity shares 16,00,000 4,00,000

MP per share 200 160

i. Exchange ratio on the basis of MP =

=

= 0.8 : 1

post merger EPS =

=

= Rs 5.416

ii. Present EPS of N Ltd =

= 6

Present EPS of M Ltd = = 5

If N Ltd desires that EPS should not be diminished, then exchange ratio should be on the

basis of EPS

Exchange ratio =

= = 1.2 : 1

Statement of Impact EPS

M Ltd N Ltd


EPS after acquisition = 5 5 x 1.2 = 6

Thus EPS after merger remain same and not diminished

PRAVINN

MAHAJAN

CA CLASESS


Q5 ABC Ltd. XYZ Ltd.

No. of shares 10,00,000 6,00,000

EAT 50,00,000 18,00,000

MP 42 28

i. Present EPS of ABC Ltd = = 5

XYZ Ltd = = 3

ii. Exchange ratio = = = 0.67 : 1

post merger EPS =

=

= 4.850

iii. If XYZ ltd desires that EPS after merger remain same, then exchange ratio should be on

the basis of EPS.

Exchange ratio = = = 0.6 : 1

Statement of Impact on EPS

ABC XYZ


EPS after acquisition = 5 5 x 0.6 = 3

Q6 Mark Ltd Mask Ltd.

EAT 2000 lac 400 lac

Number of shares 200 lac 100 lac

P/E ratio 10 5

a. MP of Mark Ltd (PE x EPS) = 10 x = 100

MP of Mask Ltd = 5 x = 20

Exchange ratio based on MP =

= = 0.2 : 1

PRAVINN

MAHAJAN

CA CLASESS


b. post merger EPS =

=

= Rs 10.91

c. If PE ratio of Mark Ltd remains unchanged i.e after merger PE ratio is 10, then post

merger MP is

Post merger MP = Post Merger PE ratio x Post merger EPS

= 10 x 10.91

= 109.10

d. Market value of merged firm = Post merger MP x No. of shares after merger

= 109.10 x 220 lac

= Rs 24002 lac

e. Gain / loss to shareholders of 2 companies.

Statement of Impact on MP

Mark Mask


MP after merger 109.1 109.1 x 0.2 = 21.82

Wealth of shareholders of Mark ltd before merger was 100 x 200 lac = 20,000 lac

And after merger shareholders have wealth of 109.10 x 200 lac = 21,820 lac

Thus post merger wealth of shareholders increased by 1,820 lac

Wealth of shareholders of Mask Ltd before merger was 20 x 100 lac = 2000lac

And after merger wealth of shareholders was 21.82 x 100 lac = 2182 lac

Thus post merger gain in wealth is 182 lac

Q7 XYZ ABC

MP 25 12.50

No. of shares 2,00,000 1,00,000

Earnings 4,00,000 1,00,000

XYZ ABC

a. Pre merger EPS = = 2 = 1

Pre merger PE ratio = 12.5 = 12.5

b. If ABC ltd PE ratio is 8, its MP will be

MP = PE x EPS

= 8 x 1 = Rs 8

PRAVINN

MAHAJAN

CA CLASESS


Exchange ratio of the basis of MP = = = 0.32 : 1

post merger EPS =

=

= Rs 2.16

c. for XYZ ltd’s pre merger and post merger EPS to be same, Exchange ratio should be on the

basis of EPS


= i.e 0.5 share in XYZ for 1 share in ABC

Q8 i. Book value per share =

Efficient Ltd = = Rs 40

Healthy Ltd = = Rs 32

Exchange ratio on basis of BV = = 0.8 : 1

Market value per share =

Efficient Ltd = = Rs 50

Healthy Ltd = = Rs 100

Exchange ratio on the basis of MP = = 0.5 : 1

Earning per share =

Efficient ltd = = Rs 5 per share

Healthy Ltd = = Rs 20 per share

Exchange ratio on the basis of EPS = = 4:1

Swap ratio = 4 x 0.8 + 0.8 x 0.25 + 0.35 x 0.5 = 2.5 :1

= i.e 2.5 share in E ltd for every 1 share in H Ltd

Promoters holding = = 0.60 or 60%

PRAVINN

MAHAJAN

CA CLASESS



=

= Rs 6.956

iii. If PE ratio of E Ltd remain unchanged, i.e Post merger PE ratio is 10

Post Merger MP = Post merger EPS x Post merger PE ratio

= 10 x 6.956

= Rs 69.56

Market capitalization = Post merger MP x No. of shares

= 69.56 x 28.75 lac

= Rs 1,999.85 lac

iv. Free float market capitalization = 28,75,000 x 0.4 x 69.56

= Rs 799.4 lacs

Q9 X Y

No. of shares 3,00,000 2,00,000

MP 30 20

EPS 4 2.25

Exchange ratio on the basis of EPS =

= =0.5625 : 1

i. EPS after Merger =

- If exchange ratio is on basis of EPS =

= Rs 4

- If exchange ratio is 0.5 : 1 =

= Rs 4.125

ii. Statement of Impact on EPS

X Y

EPS before merger 4 2.25

EPS after merger 4 4 x 0.5625 =2.25

(If exchange ratio is on basis of EPS)

In this case Pre merger and post merger EPS will remain same

EPS after merger

(if exchange ratio is 0.5 : 1) 4.125 4.125 x 0.5 = 2.0625

In this case EPS of shareholder of X Ltd will increase and EPS of shareholder of

Y ltd will decrease

PRAVINN

MAHAJAN

CA CLASESS


Q10 i. If exchange ratio is 0.5 : 1, then number of shares to be issued by A ltd for acquisition of

T ltd are 1,80,000 x 0.5 = 90,000 shares


=

= Rs 3.13

iii. 0.5 share in A ltd is issued for every 1 share in T ltd

Equivalent EPS per share of T ltd = 0.5 x 3.13

= Rs 1.565

Iv If PE ratio of A ltd remain unchanged i.e Post merger PE ratio of A ltd is 10

Post merger MP = Post merger PE ratio x Post merger EPS

= 10 x 3.13

= Rs 31.30

iv. Market value of Merged firm = Post merger MP x No of shares after acquisition

= 31.30 x 6,90,000

= Rs 215,97,000

Q11 i. Exchange ratio on the basis of Mp = = = 0.8 : 1

post merger EPS of A Ltd =

=

= Rs 5.4166

ii. If Post merger EPS is not to be diminished, then exchange ratio should be based on EPS

Exchange ratio on the basis of EPS =

=

=

= = 1.2 : 1


A B

EPS before Merger 5 6

EPS after merger = 5 5 x 1.2 = 6

PRAVINN

MAHAJAN

CA CLASESS


Q12 i. If exchange takes place on the basis of market price

1 Ratio of exchange = = = 0.4 : 1

2. Post merger EPS =

=

= Rs 2.178

3 New shares to be issued 32,00,000 x 0.4 = 12,80,000

ii. If A Ltd plans to offer a premium of 22% over the market price of B Ltd

Offer price = 7.5 x 1.22 = 9.15

1. Ratio of exchange =

=

= 0.488 : 1


=

= Rs 2.0678

3. New shares to be issued = 32,00,000 x 0.488 = 15,61,600

iii. If Exchange ratio takes place as per EPS

1. Ratio of exchange = = = 0.667


=

= Rs 1.875


iv If exchange takes place on the basis of P/E

1. Ratio of exchange = = = 0.6 : 1


=

= Rs 1.943


PRAVINN

MAHAJAN

CA CLASESS


Q13 Exchange ratio is 1.6 share in XYZ for every 1 share of ABC. PE ratio of XYZ ltd is to be

maintained after merger

i. XYZ ABC

Pre merger EPS = 5 = 6

Pre merger PE ratio is = 7 = 6.67

ii. Post merger EPS =

=

= Rs 4.643

iii. Post Merger MP = Post Merger P.E x Post Merger EPS

= 7 x 4.643

= 32.501

iv IMPLIED exchange ratio on the basis of MP =

= = 1.231

v. Implied P/E ratio of ABC ( ) = = 7

Q14 ABC is acquiring XYZ Ltd. ABC holds 2% of XYZ Ltd. Exchange ratio is 1 share in ABC for every

6 share in XYZ

Chairman of ABC claims that due to this acquisition EPS will increase by 13%

EPS of ABC before merger =

= = Rs 195

EPS after acquisition =

=

= 221.70

% increase in Post merger EPS = x 100

= x 100

= 13.692%

Increase in post merger EPS is more than 13% as per the claim of chairman. So this takeover is

beneficial for shareholders of ABC ltd

Post Merger MP = Post merger P.E ratio x Post merger EPS

= x 221.70

= Rs 363.8153

PRAVINN

MAHAJAN

CA CLASESS


Q15 i. Post merger EPS =

=

= Rs 2.833

ii. Statement Of Impact On EPS

Rama Krishna

EPS before merger 2.5 3.5

EPS after Merger 2.833 2.833

EPs of shareholders of Rama Ltd increases and EPS of shareholders of Krishna Ltd

decreases

iii. Post merger MP if PE ratio of Rama Ltd is to remain same

Post Merger MP = Post merger PE x Post merger EPS

= 14 x 2.833

= Rs 39.662

Iv Statement of Impact on MP

Rama Krishna

Pre merger MP 35 35

Post merger MP 39.662 39.662 x 1

= 39.662

Wealth of shareholders of Rama and Krishna Ltd increased

Q16 i. Exchange ratio based on net assets

Statement of Net Assets of Jupiter and Tally

Jupiter Tally

Fixed Assets 1,22,000 35,000

Net current Assets 51,000 26,000

Less Preference shares 20,000 -

10% debentures 15,000 5,000

Net assets 1,38,000 56,000

No. of shares 10,000 5,000

Net asset value 13.80 11.20

Exchange ratio = = = 0.8116

= 0.8116 share in Jupiter for 1 share in tally

= New shares to be issued 50,00,000 x 0.8116 = Rs 40,58,000

PRAVINN

MAHAJAN

CA CLASESS


ii. Exchange ratio on the basis of EPS

Jupiter Tally

Premerger EPS = 2.4 = 3

Exchange ratio = = 1.25

= New shares to be issued by Jupiter 1.25 x 50,00,000 = 62,50,000

iv. Exchange ratio based on market price

= = = 1.125

New shares to be issued by Jupiter Ltd 50,00,000 x 1.125 = 56,25,000

The exchange ratio based on Net assets is best from acquirer (Jupiter) point of view, as on the

basis of net assets it will be required to issue minimum number of shares.

Q17 i. Abhiman Ltd Abhshek Ltd

Book value per share = 500 = 60

Market price per share

Free float Market capitalization 400 lac 128 lac

Free float or Market holding 50% 40%

Total market capitalization = 800 lac = 320 lac

No. of shares 2 lac 10 lac

Mp per share Rs 400 Rs 32

Earning per share

PE ratio 10 4

EPS 40 8

Exchange ratio

on the basis of book value = = 0.12

On the basis of EPS = = 0.2

On the basis of MP = = 0.08

Weighted exchange ratio = 0.12 x 0.25 + 0.2 x 0.5 + 0.08 x 0.25

= 0.15 : 1

New shares to be issued = 0.15 x 10 lac = 1.5 lac

PRAVINN

MAHAJAN

CA CLASESS


b. Post acquisition Book value per share = = Rs 457.14

Post Acquisition EPS = = Rs 45.71

Post acquisition MP (PE x EPS) = 45.71 x 10 = Rs 457.10

(PE ratio of Abhiman Ltd remain unchanged)

c. i. Promoters revised holding in Abhiman Ltd

Pre acquisition holding of promoters in Abhiman 2 lac x 50% = 1 lac

No of shares issued to promoters of Abhishek Ltd 10 lac x 60 % x 0.15 = 0.90 lac

Total promoters holding = = 54.29%

ii. Free float Market cap ( 3.5 lac – 1.9 lac ) 457.10 = Rs 731.36 lac

iii. No of bonus shares issued (ratio 1 : 2) = = 1.75 lac

No. of shares after Bonus issue = 1.75 lac + 3.5 lac = 5.25 lac of Rs 100 each

No of shares after Stock split

(Rs 100 per share into Rs 5 per share fully paid ) = x 5.25 lac = 105 lac

EPS after Bonus issue and tock split = = Rs 1.524

Book value per share after Bonus issue

and stock split = = Rs 15.2381

Q18 i. Pre merger MP = PE x EPS

Large co ltd = 12.5 x 5.6 = Rs 70

Small co Ltd = 7.5 x 2.5 = Rs 18.75

Ii. If EPS of Large Ltd is not to be diluted then exchange ratio should be on the basis of EPS

Pre merger EPS of Large Ltd = = = Rs 5.6

Pre- Merger of small ltd = = = Rs 2.5

Exchange ratio = = = 0.446429 : 1

New shares to be issued = 8,40,000 x 0.446429 = 3,75,000 shares

If MP of large Ltd is not to be diluted then exchange ratio should be on the basis of MP

Exchange ratio = = = 0.267857 : 1

New shares to be issued = 840,000 x 0.267857 = 2,25,000 shares

PRAVINN

MAHAJAN

CA CLASESS


Q19 Allen Ltd is acquiring Ben Ltd and exchange ratio is determined on the basis of Market price of

shares


i.e 0.5 share in Allen for every 1 share in Ben

New shares to be issued 10,000 x 0.5 = 5,000

- Statement of Impact on EPS

Allen Ben

Premerger EPS = 24 = 80

Post Merger EPS ( ) = 36.364 1 x 0.5 x 36.364

= 18.182

Thus after Merger EPS of shareholder of Allen ltd increases and EPS of shareholder of Ben Ltd

declines

Earnings of shareholder of Ben Ltd before merger = 8,00,000

Earnings of shareholder of Ben Ltd after merger = 10,000 x 0.5 x 36.364

1,81,120

Earnings of shareholder of Ben Ltd declines by ( 8,00,000 – 1,81,120) = Rs 6,18,180

- PE ratio before merger =

Allen Ltd = = 2.083

Ben Ltd = = 0.3125

PE ratio after merger =

( since Exch. Ratio is on the basis

of MP and nothing is mentioned about PE =

ratio, so Post merger PE ratio Weighted = 1.3748

avg PE ratio)

On the basis of Post merger PE ratio

and Post merger EPS, Post merger MP is = post Merger PE x Post Merger EPS

= 1.3748 x 36.364

= 49.993 or 50

Thus MP of share of Allen Ltd after merger is same as MP of Allen Ltd before merger, i.e wealth

of shareholders of Allen Ltd remain same.

PRAVINN

MAHAJAN

CA CLASESS


Q20 If Exchange ratio is Maximum, then from combined value of merger, Purchasing company will

retain its Premerger value and balance value is Given to share holders of Vendor Company. Thus

all gains from merger are given to shareholders of vendor company

Pre merger PE ratio of Arjun ltd = 10

(to be maintained after merger)

Post Merger Market value = Post Merger PE x Post Merger Earnings

= 10 x ( 1,40,000 + 37,500)

= 17,75,000

From post merger MV, value retained

by A ( equal to its Pre merger value) = 20,000 x 70 = 14,00,000

Thus MP of share of Arjun Ltd will be same = 70

Value given to shareholders of Karan Ltd = 17,75,000 – 14,00,000

= 3,75,000

No of shares given to shareholder of vendor co. = = 5,357

Exchange ratio = = 0.71427 : 1

If Exchange ratio is Minimum, then from combined value of merger, Purchasing company will give

to Vendor co that part of combined value which is equal to premerger value of vendor company

and balance value will be retained by Purchasing company. Thus all gains from merger are

retained by purchasing company

Post Merger value of Arjun Ltd = 17,75,000

Value give to shareholders of Karan Ltd

( equal to Pre merger value of Karan Ltd) = 7500 x 40

= 3,00,000

Thus value retained by Arjun Ltd = 17,75,000 – 3,00,000

= 14,75,000

Post Merger MP of Arjun Ltd = = Rs 73.75

No. of shares issued to Karan Ltd = = 4068 shares

Exchange ratio =

= 0.5424 : 1

PRAVINN

MAHAJAN

CA CLASESS


Q21 If Exchange ratio is Maximum, then from combined value of merger, Purchasing company will

retain its Premerger value and balance value is given to share holders of Vendor Company. Thus

all gains from merger are given to shareholders of vendor company

Post merger PE ratio of A ltd = 7

Post Merger Market value = Post Merger PE x Post Merger Earnings

= 7 x ( 48 mil + 15 mil)

= Rs 441 mil

From post merger MV, value retained

by A ( equal to its Pre merger value) = 10 x 38.4 mil = Rs 384 mil

Thus Post merger MP of A Ltd = = 38.4

Value given to shareholders of B Ltd = 441 mil – 384 mil

= 57 mil

No of shares given to shareholder of B Ltd. = = 1.4843 mil shares


If Exchange ratio is Minimum, then from combined value of merger, Purchasing company will give

to Vendor co that part of combined value which is equal to premerger value of vendor company

and balance value will be retained by Purchasing company. Thus all gains from merger are

retained by purchasing company

Post merger PE ratio of A ltd = 9

Post Merger value of A Ltd = 9 x ( 48 + 15)

= 567 mil

Value give to shareholders of B Ltd

( equal to Pre merger value of B Ltd) = 7 x 15 mil

= 105 mil

Thus value retained by A Ltd = 567 mil – 105 mil

= 462 mil

Post Merger MP of A Ltd = = Rs 46.2

No. of shares issued to B Ltd = = 2.2727 mil

Exchange ratio =

= 0.3246 : 1

PRAVINN

MAHAJAN

CA CLASESS


Q22 Bugs Ltd is acquiring reptiles Ltd

a. Earnings before Merger

Bugs Ltd 25,00,000 x 9 = 225 lac

Reptiles Ltd 15,00,000 x 5 = 75 lac

Earnings after Merger of bugs Ltd = (225 lac + 75 lac) 1.32

= 396 lac

Exchange ratio to keep Post merger EPS at Rs 12

Post merger EPS =

12 =

x = - 25 lac

= 8 lac shares


Impact on EPS

Bugs Reptiles

Pre Merger EPS 9 5

Post merger EPS 12 (given) 1 x 0.533 x 12

= 6.4

Earnings of shareholders of Bugs Ltd and reptiles Ltd increased after merger. Earnings of

Bugs Ltd increased by rs 3 per share and of reptiles Ltd by Rs 1.396 per share.

Total increase in earnings Bugs = 3 x 25lac = 75 lac

Reptiles = 1.4 x 15 lac = 21 lac

b. Earnings before Merger

Bugs Ltd 25,00,000 x 9 = 225 lac

Reptiles Ltd 15,00,000 x 5 = 75 lac

Earnings after Merger of bugs Ltd = (225 lac + 75 lac) 1.05

= 315 lac

Exchange ratio to keep Post merger EPS at Rs 9

Post merger EPS =

9 =

x = - 25 lac

= 10 lac shares


PRAVINN

MAHAJAN

CA CLASESS


c. Present value of all synergy gains = 275 lac

Combined value after merger =value of bugs + value of reptiles + Value of synergy

= 1000 lacs + 225 lac + 275 lac

= 1500 lacs

Post merger MP =

50 =

x = - 25 lac

= 5 lac


Q23 a. MP before merger = PE x EPS

RIL = 10 x 2 = Rs 20

SIL = 1 x 5 = Rs 5

b. Exchange ratio 1 : 4 i.e 1 share in RIL for 4 shares in SIL

i. No of shares to be issued = = 2,50,000 shares

ii. MP after acquisition

(PE ratio of RIL is same) = Post merger EPS x Post Merger PE

= x 10

= x 10

= Rs 24


RIL SIL

Pre merger MP 20 5

Post merger MP 24 24 x 0.25 x 1 = 6

Market price of share of RIL increased after merger, Thus after merger wealth of

shareholder Of RIL Increased

Pre merger wealth of shareholder of RIL = 10 lac x 20 = 200 lac

Post merger wealth of existing shareholder of RIL = 10 lac x 24 = 240 lac

c. Due to synergy earnings will increase by 10%

Post merger earnings = (20 lac + 10 lac) 1.1

= 33 lac

Post merger EPS =

= = Rs 2.64

PRAVINN

MAHAJAN

CA CLASESS


Post merger Price

( if PE of RIL remain same) = Post merger PE x Post merger EPS

= 10 x 2.64

= Rs 26.4


RIL SIL

Pre merger MP 20 5

Post merger MP 26.4 26.4 x 0.25 = 6.6

MP of shares of Both companies increase after merger. Thus wealth of shareholders of

RIL and SIL increased after merger

Pre merger wealth of shareholder of RIL = 10 lac x 20 = 200 lac

Post merger wealth of existing shareholder of RIL = 10 lac x 26.4 = 264 lac

Q24 .a. Maximum price is current value of vendor company + synergy gains

Pre Merger value of XYZ = No of shares x MP per share

= 10 lac x 24

= Rs 240 lac

Value of synergy gains = 80 loac + 30 lac

= 110 lac

Thus maximum value offered = 240 lac + 110 lac

For 10 lac share is = 350 lac

Value per share offered = = Rs 35 per share

Value offered to top management= 10 lac x 0.4 x 35 = Rs 140 lac

Value offered to public = 10 lac x 0.6 x 35 = 210 lac

b. Minimum price at which Mgt is willing to give up its controlling interest is the existing

value of shares of the company i.e the full value of synergy gains is given to PQR ltd

Thus controlling interest will be transferred @ Rs 24 per share.

PRAVINN

MAHAJAN

CA CLASESS


Q25 Co 1 Co. 2

PAT 80 lac 15.75 lac

EPS 4 10.5

MP 42 85

Co. 1 is acquiring Company 2 by paying cash in such a way that its post merger EPS is

same i.e 4

Post merger EPS =

4 =

Combined after tax earnings required = 80 lac

For EPS to be Rs 4

Tax rate is 52%. Co 1 will pay cash by borrowing at 15%. And interest is a deductible

expense

Combined PAT = 80 lac + 15.75 lac

= 95.75 lac

PBT = = 199.48

Less interest = - 0.15 x

Taxable profit = 199.48 – 0.15 x

PAT = (199.48 – 0.15x) 0.48

80 = (199.48 – 0.15x) 0.48

80 = (95.7504 – 0.072x)

x = 218.755

Thus amount borrowed for payment of cash to Co. 2 is Rs 218.755 lac

Amount paid per share = = Rs 145.833 per share

Q26 Value of firm before Merger = 108 lac

Value of firm after merger = 140 lac

Cost of merger = value of firm after merger - value of firm before merger

= 140 lac - 118 lac

= Rs 32 lac

Q27 i. Value of combined firm = Value of A + Value of B + synergy gain

= 200 + 50 + 25

= 275 lac

ii. Cost of merger = value of firm after merger – value of firm before merger

= 65 lac - 50 lac

= 15 lac

iii. NPV to A’s shareholder’s = Synergy gain – true cost

= 25 lac – 15 lac

= 10 lac

iv. NPV to B’s shareholder = True cost of Merger

= RS 15 lac

PRAVINN

MAHAJAN

CA CLASESS


Q28 a True cost of Merger = Value given to vendor company - value of vendor co. before

In consideration of acquisition acquisition

Value of Firm B before acquisition = 5 lac x 30

= 150 lac

Combined value of firm after acquisition = Value of A + value of B + synergy gains

= 750 lac + 150 lac + 150 lac

= 1050 lac

Combined value given to firm B = x 1050 lac

(No of shares after acq = 12,50,000 = 210 lac

Shares given to B = 2,50,000)

True cost of merger = 210 lac - 150 lac

= 60 lac

b. Synergy gain form merger = Value of purchasing co. - Value of purchasing co.

after acq before acq

= 1050 lac - 900 lac

= 150 lac

NPV of merger to B = true cost of merger

= 60 lac

NPV of merger to A = total synergy gain – true cost of merger

= 150 lac - 60 lac

= 90 lac

Q29 True cost of Merger = Value given to vendor company - value of vendor co. before

In consideration of acquisition acquisition

a True cost of merger if Rs 60 per share is given in cash to YZ

true cost = 12 lac x 60 - 12 lac x 50

= 720 lac - 600 lac

= 120 lac

b. True cost of Merger is exchange ratio is 1:3

Value of YZ before Merger = 12 lac x 50

= Rs 600 lac

PRAVINN

MAHAJAN

CA CLASESS


Combined value of Merged firm = Value of AB + Value of YZ

Value of YZ after merger

Ke of YZ = + g

= + 0.06

= 0.10 0r 10%

If growth rate after merger is 8%, then MP of share of YZ after Merger

P0 =

= = Rs 100

Value of shares of YZ after acquisition = 12 lac x 100 = 1200 lac

Combined value of merged firm after merger = Value of AB + Value of YZ

= 20 lac x 180 + 1200 lac

= 4800 lac

Combined value of merger given to YZ

Exchange ratio : 1 : 3

New shares given to YZ : x 1 = 4 lac shares

Total shares after merger : 20 lac + 4 lac = 24 lac

Combined value given to YZ : 4800 lac x

: 800 lac

True cost of merger : 800 lac - 600 lac

: 200 lac

c.Synergy gain from acquisition = value of merged firm - value of AB & YZ before merger

= 4800 lac - (20 lac x 180 + 600 lac)

= 600 lac

Gain (NPV) given to YZ = True cost of merger

= 200 lac

NPV available to AB = 600 lac - 200 lac

= 400 lac

d. If expected growth rate continues to be 6%

Value of YZ before merger = 600 lac

Value of YZ after merger = Since growth rate is same so MP per share of

YZ before merger is equal to MP per share of

YZ after merger. So value of YZ after merger is

600 lac

PRAVINN

MAHAJAN

CA CLASESS


Value of Merged Firm = Value of AB + value of YZ

= 3600 lac + 600 lac

= 4200 lac

Value of merged firm given to YZ = x 4200 lac

= 700 lac

True cost of merger = 700 lac – 600 lac

= 100 lac

Synergy gain = value of Merged firm - Value of AB & YZ before merger

= 4200 lac – 4200 lac

= Nil

NPV given to YZ = 100 lac

NPV available to AB = Synergy gain – true cost of merger

= nil - 100 lac

= (100 lac)

Q30 i. Calculation of increase in total value of BCD Ltd. resulting from acquisition.

Cost of capital of BCD Ltd. before acquisition using Dividend growth model

Ke of BCD = + g

= + 0.07

= 0.1021 0r 10.21%

If growth rate after merger is 8%, then MP of share of YZ after Merger

P0 =

= = Rs 29.32

Current value of Firm = 5,00,000 x 20 = Rs 100,00,000

Value of firm after merger = 5,00,000 x 29.32 = Rs 146,60,633

Increase in value of BCD after merger = Rs 46,60,633

ii. calculation of gain or loss to shareholders of AFC Ltd and BCD Ltd, if AFC offers one

share for four shares in BCD Ltd

Combined value of firm after merger = 10 lac x 100 + 5 lac x 29.32

= 1000 lac + 146,60,663

= 1,146, 60,663

Combined Value of firm before merger = 10lac x 100 + 5 lac x 20

= 1100 lac

PRAVINN

MAHAJAN

CA CLASESS


Synergy gain = Rs 46,60,663

Value of combined firm after merger

Given to BCD = x 1146,60,663

= 127,40,073

True cost of Merger = value given to BCD – Value of BCD before merger

= 127,40,073 - 100 lac

= 27,40,073

Thus gain to SH o BCD

(NPV given to BCD) = 27,40,073

Gain to SH of AFC Ltd

(NPV to AFC) = 46,60,663 - 27,40,073

= Rs 19,20,590

iii. If AFC Ltd pays cash of Rs 22 per share to BCD and PE ratio of AFC is maintained and

EPS of AFC and BCD is 8 and 2.5 respectively, gain to shareholders of both companies

is

True cost of merger = value given to SH of BCD – Value before merger

= 22 x 5 lac – 5 lac x 20

= 10 lac

Thus gain to SH of BCD = Rs 10 lac

Mp of Merged firm = Post merger EPS x Post merger PE

= x

= 8.15 x 12.5

= Rs 101.875 per share

Value of AFC per merger = 101.875 x 10 lac

= Rs 1018.75 lac

Gain to SH of AFC = Rs 18.75 lac

PRAVINN

MAHAJAN

CA CLASESS


Q31 S Ltd is acquiring K Ltd

i. Cost of Merger If S Ltd paid cash of Rs 40 per share

True cost of merger = Value paid to K Ltd - Value of K Ltd before merger

= 40 x 4.5 lac - 135 lac

= 180 lac - 135 lac

= Rs 45 lac

ii. Synergy gain =Value of S ltd after merger - value of S Ltd before merger

= 1135 lac - 1000 lac

Gain to SH of S Ltd = Rs 35 lac

iii. Cost of merger if share exchange ratio is 0.25:1

Ke of K Ltd = + g

= + 0.075

= 0.115 or 11.5%

Price of share if after merger growth rate is 10%

MP =

=

= 80

Value of K ltd after merger = 4.5 lac x 80

= 360 lac

Value of S Ltd after merger = 1000 lac + 360 lac

= 1360 lac

Value of S & K before merger = 1000 lac + 135 lac

= 1135 lac

Value of merged firm given to K ltd = x 1360 lac

= Rs 177.40 lac

True cost of merger = Value paid to K Ltd - Value of K Ltd before merger

= 177.40 lac - 135 lac

= Rs 42.40 lac

Synergy gain = 1360 lac - 1135 lac

NPV to S Ltd = Synergy gain - true cost of merger

= Rs 225 lac

PRAVINN

MAHAJAN

CA CLASESS


Q32 i. EPS of Merged firm = Rs 2.67

EPS of Merged Firm =

2.67 =

Shares issued to XYZ = - 50,000

= 81,086 shares

Shares of Merged Firm = 50,000 + 81,086

= 1,31,086

ii. MP after Merger =

=

= Rs 17.164 per share

iii. Total market value after merger = 10,00,000 + 12,50,000

= Rs 22,50,000

iv. Total earnings after merger = 1,00,000 + 2,50,000

= Rs 3,50,000

v. PE ratio after merger =

= 6.43 times

c. Cost of merger = Value paid to XYZ - Value of XYZ before merger

= 81,086 x 17.164 - 10,00,000

= 13,91,760 - 10,00,000

= 3,91,760

d. Change in the total value of ABC shares that were outstanding before merger

= 50,000 ( 20 – 17.164)

= Rs 1,41,800 decrease

PRAVINN

MAHAJAN

CA CLASESS


Q33 i.

Calculation of EPS

BA Ltd = = Rs 2.10 per share

DA Ltd = = Rs 1.2375 per share

Calculation of PE ratio

BA Ltd = = 19.05 times

DA Ltd = = 12.12

Calculation of Equity Funds = Equity cap + Retained earnings

BA Ltd = 10,00,000 + 200,000

= 12,00,000

DA Ltd = 8,00,000 + 0

Calculation of ROE =

BA Ltd = = 17.5%

DA = = 12.375%

Calculation of Book value =

BA Ltd = = Rs 12

DA Ltd = = Rs 10

Market Price

EPS P/E

EPS

ROE Book value

PRAVINN

MAHAJAN

CA CLASESS


ii. Calculation of Growth rate ( g = b.r)

BA Ltd = ( 1 - 0.4) 17.5% = 10.5%

DA Ltd = ( 1 - 0.6) 12.375% = 4.95 %

iii. a. Share Exchange ratios

Maximum Ratio

Combined value of firm after merger = 1,00,000 x 40 + 80,000 x 20

= 56,00,000

Value retained by BA Ltd

( Pre merger value) = 40,00,000

Value given to SH of DA Ltd = 16,00,000

Shares given to DA Ltd (at rs 40) = = 40,000

Exchange Ratio = = 0.5 : 1

Minimum Exchange ratio

Combined value of firm after merger = 1,00,000 x 40 + 80,000 x 20

= 56,00,000

Value given to DA Ltd

( Pre merger value) = 12,00,000

Value retained by BA Ltd = 44,00,000

Post merger MP of BA = = Rs 44

Shares given to DA Ltd (at rs 44) = = 27,273

Exchange Ratio = = 0.341 : 1

b. Based on i and ii

Ba Ltd DA Ltd.

EPS 2.10 1.2375

ROE 17.5% 12.375%

PE ratio 19.05 12.12

Growth rate 10.5% 4.95%

Since BA has a higher EPS, ROE, PE ratio, and growth rate, the negotiable

terms would be expected to be closer to lower limit

iv. If exchange ratio is 0.4 : 1, New shares to be issued to Da Ltd are 80,000 x 0.4 = 32,000

Post merger EPS =

= 2.341


BA DA

Pre Merger EPS 2.10 1.2375

Post Merger EPS 2.341 1 x 0.4 x 2.341

= 0.9364

Increase (decrease) in EPS 0.241 (0.3011)

PRAVINN

MAHAJAN

CA CLASESS


v. If exchange ratio is 0.4 : 1, New shares to be issued to Da Ltd are 80,000 x 0.4 = 32,000

Post Merger MP, = PE ratio x Post Merger EPS

(if PE ratio of BA is maintained) 19.05 x

= 19.05 x 2.341

= Rs 44.60


BA Ltd DA Ltd

Pre Merger MP 40 15

Post Merger MP 44.60 0.4 x 1 x 44.60

= 17.84

Accretion (dilution) in MP 4.60 2.84

Q34 i. Maximum exchange ratio if PE ratio is 12 times

Combined value after merger = PE x total earnings

= 12 x 70 mil

= 840 mil

Value of merged firm Retained by A Ltd

( pre merger value) = 20 mil x 30 = 600 mil

Value of merged firm given to B ltd = 240 mil

Shares issued to B Ltd = = 8 mil


ii. Minimum exchange ratio if PE ratio is 11 and synergy gains is 5%

Combined value of merger = PE x total earnings

= 11 x 70(1.05)

= 808.5 mil

Value of merged firm given to B ltd

(Pre merger value) = 200 mil

Value retained by A Ltd = 608.5 mil

Post merger share price = = Rs 30.425

Shares issued to B Ltd = = 6.574 mil shares


PRAVINN

MAHAJAN

CA CLASESS


iii. If exchange ratio is on the basis MP then Pre-merger and Post merger MP remains same

i.e Value of holding of share holders of Vendor company after merger is equal to its value

before merger ie after merger SH of Vendor company take shares equal to its pre-merger

value

Similarly value oh holding of SH of Purchasing company after merger is similar to

premerger value

Thus, Minimum and maximum ratio is same if exchange ratio is on the basis MP. If

Exchange ratio is on the basis of MP, then post merger PE ratio is weighted average PE

ratio

Thus at weighted average PE ratio minimum and maximum exchange ratio is same

Weighted Avg. PE ratio =

=

= 11.4286 times

Q35 ABC is considering to acquire XYZ.

a. Effect on EPS, if ABC offers to pay Rs 30 per share to XYZ ( i.e ABC is giving price of rs 30

per share of XYZ)


No. of shares in merged firm after merger = 6,00,000 + 2,50,000 x 0.4

= 7,00,000 shares

Post merger EPS =

=

= 5.1428

Impact on EPS

ABC Ltd XYZ Ltd

Pre merger EPS 5 2.40


= 2.057

If ABC Ltd offers Price of rs 30 per share, Post merger EPS of ABC Ltd will increase by

Rs 0.1428 per share

b. Effect on EPS, if ABC offers to pay Rs 40 per share to XYZ ( i.e ABC is giving price of Rs 40

per share of XYZ)


PRAVINN

MAHAJAN

CA CLASESS


No. of shares in merged firm after merger = 6,00,000 + 2,50,000 x 0.5333

= 7,33,333 shares

Post merger EPS =

=

= 4.9090

Impact on EPS

ABC Ltd XYZ Ltd

Pre merger EPS 5 2.40


= 2.618

If ABC Ltd offers Price of rs 30 per share, Post merger EPS of ABC Ltd will decrease by

Rs 0.091 per share

Q36 ABC Ltd is absorbing XYZ Ltd. The proposal will be sound if Present value of cash inflow is more

than cash outflow

Net Cash Outflows in zero period

Debentures 1,00,000 x 1.1 1,10,000

Creditors 30,000

Cash (14 x 10,000) 1,40,000

Equity share capital 1,60,000

Dissolution expenses 10,000

Cash outflow 4,50,000

Less Inventories 1,00,000

Debtors 20,000

Bank balance 10,000 1,30,000

Net cash outflow at the time of absorption 3,20,000

Net cash inflows

Annual cash inflows 1,50,000 for 5 years

Present value of cash inflows 1,50,000 x 3.433 5,14,950

Thus NPV of Proposal 5,14,950 - 3,20,000 Rs 1,94,950

Since NPV is positive, so ABC’s decision of Merger is financially sound

PRAVINN

MAHAJAN

CA CLASESS


Q37 i. Maximum price that A ltd will be willing to pay is Present value cash inflows reduced by

amount payable to clear debt

Annual cash inflows will be of Rs 15,00,000

PV of Cash inflows = = Rs 100 lakh

Less debt = Rs 10 lakh

Maximum price A ltd will be willing to pay 90 lakh

ii. Maximum price if Cost of capital of A ltd is 12%

PV of Cash inflows = = Rs 125 lakh

Less debt = Rs 10 lakh

Maximum price A ltd will be willing to pay 115 lakh

Iii Statement of Net cash inflows

Particulars 1 2 3 4 5 6

Cash inflows 15 lac 18 lac 21.6 lac 21.6 lac 21.6 lac 21.6lac

Incremental

cash inflows - 3 lac 3.6 lac - - -

Incremental

cash outflow (0.7) - 2.1 lac 2.52 lac - - -

Net cash inflows 15 lac 15.9 lac 19.08 lac 21.6 lac 21.6 lac 21.6 lac

Statement of NPV

Cash Inflows

15 lac 1 0.893 13,39,500

15.90 Lac 2 0.797 12,67,230

19.08 Lac 3 0.712 13,58,496

21.6 Lac 4 onward 128,16,000

167,81,226

Cash outflow

Debt 10,00,000

Maximum price A will pay 157,81,226

PRAVINN

MAHAJAN

CA CLASESS


Q38 Current value of Firm is present value of all cash inflows

Statement of value of ABC Ltd without Merger

Year Cash flows PV factor ( 15%) Present value

1 275 0.870 239.25

2 302.5 0.756 228.69

3 324.5 0.658 213.52

4 341 0.572 195.05

5 357.5 0.497 177.677

5 = 3753.75 0.497 1865.614

Current value of ABC without merger 2919.801

Statement of value of ABC Ltd after Merger

Year Cash flows PV factor (15%) Present value

1 440 0.870 382.8

2 495 0.756 374.22

3 563.75 0.658 370.9475

4 591.25 0.572 338.195

5 618.75 0.497 307.51875

5 = 7287.5 0.497 3621.88

Current value of ABC after merger 5395.56

Share of Pre-merger SH of ABC in Post merger value of ABC

Let shares of ABC before Merger be 1

Let shares of PQ before Merger be 1

No. of shares offered to PQ in Merger 1 x 0.6 = 0.6

Shares in ABC after merger 1 + 0.6 = 1.6

Share of PQ in combined value = 5395.56 x

= 2023.335

Statement of Increase in the total wealth of ABC’s existing share holders

Rs

Wealth of ABC’s shareholders after Merger

5395.56 - 2023.335 3372.225

Wealth of ABC’s shareholders before merger 2919.80

Increase in wealth of ABC’s shareholders due to merger 452.425

PRAVINN

MAHAJAN

CA CLASESS


Q39 Value of acquisition is Present value of all cash inflows

Year PAT Cash Depreciation Net cash factor Present

outflows inflows value

1 20 50 30 - 0.870 -

2 30 50 40 20 0.756 15.12

3 40 - - 40 0.658 26.32

4 50 - - 50 0.572 28.6

5 50 - - 50 0.497 24.85

6 50 - - 50 0.432 21.6

6 - - 400 0.432 172.8

Value of acquisition 289.29

PRAVINN

MAHAJAN

CA CLASESS


Q40 Salt Ltd is considering to acquire Sugar Ltd. Salt Ltd offered Rs 65 for first 50,000 shares and

Rs 50 for remaining 50,000 shares

a. If offer is accepted Salt Ltd will pay

First 50,000 shares 50,000 x 65 = 32,50,000

Balance 50,000 shares 50,000 x 50 = 25,00,000

Total amount payable 57,50,000

Total amount receivable by Sugar Ltd 57,50,000

Current market value of Sugar Ltd 1,00,000 x 55 55,00,000

From economies of 15 lakh amt available to Sugar Ltd 2,50,000

b. If Acting independently, shareholders of Sugar Ltd can maximize their wealth by acting

promptly upon the offer of Salt Ltd i.e shareholders of sugar Ltd should sell their shares in

first lot to get Rs 55 per share

If shareholders of sugar Ltd respond collectively as cartel, they can influence Salt ltd to offer

same price (i.e Rs 55) or more for full 1,00,000 shares

c. Amount payable by Salt Ltd if Rs 65 is paid for first 50,000 shares and Rs 40 for balance

50,000 shares

First 50,000 shares 50,000 x 65 32,50,000

Balance 50,000 shares 50,000 x 40 20,00,000

Total amount payable by Salt Ltd 52,50,000

Q41 AB is planning to acquire XY . Business of XY is valued on the basis of average of

1. Value on the basis of Discounted cash flows

2. Value on the basis of Net Assets

Purchase consideration will be discharged at price which is average of highest (Rs 570) and

lowest (Rs 430) price in last 6 months

1. Value of business of XY Ltd

- On the basis of discounted cash flows

Year cash inflows Disc factor @ 8% Present value

1 105 0.930 97.65

2 120 0.857 102.84

3 125 0.794 99.25

4 120 0.735 88.20

5 100 + 200 0.681 204.3

Value of business on the basis of discounted cash flows 592.24 lakh

PRAVINN

MAHAJAN

CA CLASESS


- On the basis of Net Assets

Statement of Net Assets

Rs in Lakh

Fixed Assets 150

Current Assets 200

Total Assets 350

Loans (100)

Net Assets 250

Value of Business =

=

= Rs 421.12 lakh

ii. Number of shares to be issued

Shares will be issued at =

= Rs 500 per share

Shares to be issued = = 84,240 shares

iii. Allocation of shares among shareholders of XY

Statement of Equivalent partly paid up shares in XY

10 lakh shares of Rs 5 each 10 lakh

20 lakh shares of Rs 10 each ie 40 Lakh shares

of Rs 5 each 40 lakh

Total partly paid up shares 50 lakh


Shares issued to 10 lakh partly paid up shares = 10 lakh x 0.016848

= 16,848 shares

Shares issued to 20 lakh fully paid up shares = 40 lakh x 0.016848

= 67392

PRAVINN

MAHAJAN

CA CLASESS


Q42 Statement of net cash outflows in zero period

Debentures and other liabilities 1,30,000


Equity share capital

( Calculation of equity shares to be issued

Value of assets taken over

Land and building 5,00,000

Plant and machinery 5,00,000

Inventories 70,000

Debtors 35,000

Bank 15,000

Goodwill 50,000

Total amount payable 11,70,000

Payable as cash 1,30,000

Balance by equity 10,40,000) 10,40,000

Total cash outflows 11,80,000

Less Cash received Bank (15,000)

Realization of current assets (90,000)

Net cash outflows 10,75,000

Present value of cash inflows

CFAT 2,00,000 1e 0.870 1,74,000

3,00,000 2e 0.756 2,26,800

2,60,000 3e 0.658 1,71,080

2,00,000 4e 0.572 1,14,400

1,00,000 5e 0.497 49,700

Terminal value 6,40,000 5e 0.497 3,18,080 10,54,060

Ney benefit (loss) (20,940)

Proposal should be rejected

Q43 Cost of acquisition (outflows in zero period)

10% preference share capital 100 crore

12% convertible debentures 80 crore

Equity share capital x 42 420 crore

Payment of liabilities 100 crore

Less

Sale of stock (150) crore

Debtors (102) crore

Investments (55) crore

Cash in hand received (65) crore

Net cost 328 crore

PRAVINN

MAHAJAN

CA CLASESS


- Computation of cash flows required after tax for return of 20%

Annual cash inflows x factor (8yrs,20%) = cost of acq

X x 3.837 = 328 crore

X =

Annual cash inflows required = 85.483 crore

- Computation of cash inflows if there is a salvage value of 30 crore after 8 years

Annual cash inflows x factor (8yrs,20%) = cost of acq

X x 3.837 = 328 crore – 30 crore x 0.233

X =

Annual cash inflows required = 83.662 crore

Q44 Maximum value which Shyam Ltd can quote for Kiddies wear is the benefit which Shyam Ltd

expects to derive from Kiddies wear which is equal to present value of incremental cash flows in

future adjusted with cash outflow or inflow in zero period

Statement of cash flow in zero period

Sale of fixed Assets 45

Investments 212

Stock 470

Less workers compensation (130)

S. creditors (400)

Retrenchment benefit (48)

Cash inflow 149

Statement of Present value of incremental future cash inflows

Year Post Merger Pre merger Incremental factor Present value

1 1800 1500 300 0.833 249.9

2 1900 1700 200 0.694 138.8

3 2300 2000 300 0.579 173.7

4 2950 2500 450 0.482 216.9

5 3500 3000 500 0.402 201

6 4000 3400 600 0.335 201

7 4500 3800 700 0.279 195.3

8 5300 4500 800 0.233 186.4

9 5800 5000 800 0.194 155.2

10 6900 6000 900 0.162 145.8

1864

Thus maximum quote of Shyam Ltd is 1864 + 149 = 2013

PRAVINN

MAHAJAN

CA CLASESS


b. Difference in valuation of Kiddies wear had there been no merger

Year Cash flows factor present value

1 120 0.833 99.96

2 160 0.694 111.04

3 200 0.579 115.8

4 280 0.482 134.96

5 340 0.402 136.68

6 460 0.335 154.10

7 520 0.279 145.08

8 600 0.233 139,80

9 660 0.194 128.04

10 800 0.162 129.60

1295.06

Q45 Statement of present value of cash outflows in zero period

11% debentures 300 lakh

12% preference shares 100 lakh

Equity shares in A Ltd 3000 Lakh

Dissolution expenses 30 lakh

Current liabilities 190 lakh

Less

Sale of Investments 120 lakh

Bank 100 lakh

Net cash outflow 3400 lakh

Statement of Present of cash inflows

Year Cash inflow factor Present value

1 450 0.877 394.65

2 600 0.769 461.4

3 780 0.675 526.5

4 900 0.592 532.8

5 650 0.519 337.35

6 350 0.456 159.6

6 = 1312.5 0.456 598.5

Cash inflows 3010.8

Net cash inflows = 3010.80 – 3400

= 389.20 lakh

Proposal should be rejected

Q46 value of business is present value of all cash inflows

Year Cash inflows factor Present value

1 250 0.893 223.25

2 300 0.797 239.10

3 400 0.712 284.80

Value of business 747.15

PRAVINN

MAHAJAN

CA CLASESS


Q47 Exchange ratio on the basis of MP =

=

= 1.25 : 1

New shares to be issued = 1,00,000 x 1.25

= 1,25,000 shares

EPS of B Ltd before merger (B ltd) =

= = 0.706

EPS after Merger (B ltd) =

=

= = 0.805

After Merger EPS of B Ltd increased by (0.805 – 0.706) = 0.099 per share

Q48 Proposal of Acquiring A ltd is beneficial if Present value of cash inflow is higher than cash outflow

Statement of Net cash outflow in zero period

Payment of debentures 3,30,000

Preference shares 1,00,000

Equity shares 22,50,000


Current Liabilities 1,90,000

Less

Bank 1,00,000

Investments 1,25,000

Debtors 3,50,000

Inventories 4,25,000

Net cash outflows 19,00,000

Statement of Present value of cash inflows

Year cash flow factor Present value

1 – 6 7,00,000 3.784 26,48,800

6 3,00,000 0.432 1,29,600

Present value of cash inflow 27,78,400

Net cash inflows from proposal = 27,78,400 – 19,00,000

= 8,78,400

PRAVINN

MAHAJAN

CA CLASESS


Q49 Fortune India Ltd is considering de-merger of its Pharma division

1. Ratio in which shares are to be issued to shareholders of Fortune India Ltd In Fortune

Pharma Ltd

PE ratio of Fortune Pharma 25

Price of Fortune Pharma Rs 24.50

EPS of Fortune Pharma = 0.98

Total earnings of Fortune Pharma Rs 1470 lakhs

No of shares issued 1500 lakhs shares

Exchange ratio = 0.5 : 1

2. MP of Fortune India Ltd

PE Ratio of FMCG 42

Total Earnings of Fortune India Rs 11,400

No of shares of Fortune India 3,000

EPS 3.8

MP PE x EPS Rs 159.60

3. Book Value of Both companies after DE Merger

Fortune Pharma Fortune India

Fixed Assets 7.740 12,660

Investments 7,600 4,700

Current assets 8,800 21,400

Loans and Advances 900 6,400

Deferred taxes 60 (260)

Less

Secured Loans (400) (2600)

Unsecured loans (2400) 1600

Current liabilities (1300) (19,900)

21,000 24,000

No. of shares 1500 3000

BV per share 14 8

Q51 Chennai Ltd will acquire Kolkata Ltd. Kolkata Ltd will receive shares in Chennai Ltd and cash

from Chennai Ltd

a. Kolkata Ltd will receive cash equal to 50% of the projected benefits from the merger. Benefits

from the merger are Present value of incremental Future projected earnings

Statement of Present value of Incremental projected earnings

Year Cash Flow Factor Present Value

05 50 0.833 41.65

06 75 0.694 52.05

07 90 0.579 52.11

08 100 0.482 48.2

09 105 0.402 42.21

09 = 595 0.402 239.19

475.41

PRAVINN

MAHAJAN

CA CLASESS


Total incremental Benefits in future = 475.41 Lakh

Cash available to Kolkata Ltd 50% of 475.41 = 237.705 lakh

Cash available to each shareholder of Kolkata Ltd = = Rs 23.771

b. Total Purchase consideration is Cash + shares issued to Kolkata Ltd in Chennai Ltd


New share to be issued = 0.5 x 10,00,000 = 5,00,000 shares

Total value of shares offered = 5,00,000 x 50 = Rs 250 lakh

Total Purchase consideration = 237.705 lakh + 250 lakh

= 487.705 Lakh

Q50 a. Statement of valuation of Business

Profit After Tax 65 Lakh

Tax rate 35%

Profit before tax 100 lakh

Less Extraordinary Income (10)

Add Extraordinary Losses 3

Profit from launch of new product

Sale 60

Material cost 15

Labour cost 10

Fixed cost 8 27

Expected profits before taxes 120 lakh

Taxes 35% 42 lakh

PAT 78 Lakh

Capitalization rate 520 lakh

b. Statement of MP Profit after tax 78

Preference share dividend 100 lakh x 0.10 (11)

Earning for equity shareholders 67

EPS 1.675

PE ratio 8 times

MP PE x EPS Rs 13.4

PRAVINN

MAHAJAN

CA CLASESS


Q52 A is considering to Buy Firm B

- Statement of Present value of Cash Flows

Cash Flows

(1,00,000) 1e 0.833 (83,300)

(5,00,000) 2e 0.694 (3,47,000)

5,00,000 3e 0.579 2,89,500

10,00,000 4e 0.482 4,82,000

15,00,000 5e 0.402 6,03,000

315, 00,000 5e 0.402 126,63,000

PV of cash flows 136,07,200

- PV of estimated synergy by combining A nad B is Rs 30 lac

If A offers maximum price, it will pay PV of cash flows 136,072 lac

If A offers Minimum price it will pay PV of synergies 30 lac

Q54 Interest and principal payable to Senior lender and EBIT required to serve

Year Principal Interest EBIT for principal (in mil)

1 1.4 0.98 2.1

2 1.4 0.784 2.1

3 1.4 0.588 2.1

4 1.4 0.392 2.1

5 1.4 0.196 2.1

Amount payable to Junior lender

Year Principal Interest EBIT for principal (in mil)

1 - 0.3

2 - 0.3

3 - 0.3

4 - 0.3

5 - 0.3

6 2 0.3 3

Statement of Evaluation of EBIT

1 2 3 4 5 6

Senior debt

Principal 2.1 2.1 2.1 2.1 2.1 -

Interest 0.98 0.784 0.588 0.392 0.196 -

Junior Debt

Principal - - - - - 3

Interest 0.3 0.3 0.3 0.3 0.3 0.3

Required EBIT 3.38 3.184 2.988 2.792 2.596 3.3

Actual EBIT 3.4 3.4 3.4 3.4 3.4 3.4

Since Actual EBIT is more than Required EBIT so proposal should be accepted

PRAVINN

MAHAJAN

CA CLASESS



1 2 3 4 5 6

Senior debt

Principal 2.1 2.1 2.1 2.1 2.1 -

Interest 0.98 1.232 0.924 0.616 0.308 -

Junior Debt

Principal - - - - - 3

Interest 0.3 0.3 0.3 0.3 0.3 0.3

Required EBIT 3.38 3.632 3.324 3.016 2.708 3.3

Actual EBIT 3.4 3.4 3.4 3.4 3.4 3.4

Since Actual EBIT is less than Required EBIT in 2nd

year and it is mentioned that debt is to be

serviced only from profits, so proposal should not be accepted

Q55 Interest and principal payable to Senior lender

Year Principal Interest

1 17.696 10.6176

2 17.696 8.49408

3 17.696 6.370

4 17.696 4.247

5 17.696 2.123

Amount payable to Junior lender

Year Principal Interest

1 - 2.8756

2 - 2.8756

3 - 2.8756

5 - 2.8756

6 22.12 2.8756


1 2 3 4 5 6

Senior debt

Principal 17.696 17.696 17.696 17.696 17.696 -

Interest 10.6176 8.49408 6.370 4.247 2.123 -

Junior Debt

Principal - - - - - 22.12

Interest 2.8756 2.8756 2.8756 2.8756 2.8756 2.8756

Required EBIT 31.1892 29.06568 26.9416 24.8186 22.6946 24.9956

Actual EBIT 3.4 3.4 3.4 3.4 3.4 3.4

Since Actual EBIT is less than Required EBIT so proposal should not be accepted

PRAVINN

MAHAJAN

CA CLASESS


Q56 Pre Merger value of Alpha Ltd

(No. of share x price per share (4 mil x 4) 16 mil

Pre merger value of Beta Ltd (2 mil x 2) 4 mil

A Cash take over arrangement

Day 1 = Price per share (Alpha) = Rs4

Price per share (beta) = Rs 2

Market semi strong

The market price of share will be affected by notified decision

Day 4 = Nothing is notified to public

Price per share (Alpha) = Rs4

Price per share (beta) = Rs 2

Day 6 = The decision of take over is notified and no information about synergy

Benefits

Value per share (beta) = Rs 4

Value per share (alpha) =

=

= Rs 3 per share

Day 12 = The benefit of synergy gain Rs 6 mil also notified value per share Beta

Rs 4


=

= Rs 4.50 per share

Strong form market

Under strong market it is assumed that everything is in the knowledge of all from vary starting

point whether communicated or not

In this case share price will change from Day 1 itself, when decision was taken in person in

melting price per share

Day (4,6,12) = Alpha Rs 4.5

Beta Rs 4.00

B Share for share exchange

One share in Alpha is offered for one share of Beta

i. Market semi strong

Day 4 = Nothing is notified. No change in price

Price per share Alpha Rs 4

Beta Rs 2

Day 6 = Merger decision is notified but nothing about synergy benefit


= = Rs 3.33 per share

Value per share (beta) = one share of alpha Rs 3.33 per share

PRAVINN

MAHAJAN

CA CLASESS


Day 12 = Value per share of alpha when synergy benefit is not notified


= Rs 4.33 per share

Value of one share of Beta = Rs 4.33 ( one share of alpha)

ii. Market strong form

If market follows strong form hypothesis the price of the sharebwill change from

day 4 itself

Day 4,6,12 Price per share Alpha Rs 4.33

Price per share Beta Rs 4.33

Q57 Existing position

No. of existing shares = 10 mil

PAT = Rs 9 mil

EPS = = Rs 0.90

PE ratio = 12

Price per share = 0.90 x 12 = Rs 10.80

Proposed position (after going private)

Increased post tax profit = 110% of 9 mil

= 9.90 mil

Additional pre tax savings = 0.80 mil

Additional post tax savings = 0.80 ( 1 – 0.30)

= 0.56 mil

Total post tax profits = 9.90 + 0.56

= Rs 10.46 mil

EPS =

= 1.046 mil

Price per share = 1.046 x 12

= 12,552

Premium over existing price = 12.552 - 10.80

= Rs 1.752

Q58 T ltd is acquiring E Ltd. T Ltd offers Consideration of 7 times EBDIT reduced by debt whereas E

ltd seek exchange ratio of 0.5 : 1

According to T’s offer

1. Net consideration payable =

7 times EBIDT 7 x 115.71 809.97 lac

Less debt 240.00 lac

569.97 lac

PRAVINN

MAHAJAN

CA CLASESS


2. No. of shares issued by T ltd 2,59,000

3. EPS of T Ltd after acquisition

Total EBDIT ( 400.86 + 115.71 lac) 516.57

Less interest 88

428.57

Less 30% tax 128.57

PAT 300 lac

No. of shares 14.59 lac

EPS Rs 20.56 per share

4. Post merger MP =

=

= Rs 226.18

According to E Ltd’s offer

1. Net consideration payable 6 lakh x 110 6,60,000

2. No.of share to be issued by T x 6 lakh 3 lakh

3. EPS of T ltd after acquisition

= Rs 20 per share

5. Expected MP

=

= Rs 220

Advantages of Acquisition to T Ltd

Since 2 companies are in the same industry , following advantages could accrue

- Synergy, cost reduction and operating efficiency

- Better market share

- Avoidance of competition

PRAVINN

MAHAJAN

CA CLASESS

solution merger & acquisition, ca-final-sfm by ca pravinn mahajan

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