Solution MERGER & ACQUISITION, CA-FINAL-SFM by CA PRAVINN MAHAJAN
April 25, 2017 | Author: Pravinn_Mahajan | Category: N/A
Short Description
CA - FINAL - SFM Assignment...
Description
MERGER AND ACQUISITION Q1
PRAVINN MAHAJAN CA CLASESS
Sunny
Rainy
PAT No. of shares PE Ratio
3,00,000 50,000 3 times
75,000 10,000 2 times
EPS
6
7.5
MP (PE x EPS) Market capitalization (MP x No. of shares)
18
15
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 EPS before acquisition EPS after acquisition (
)
Rainy
6
7.5
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 Value of firm MP per share PE ratio
80,000 8,00,000 10 5
20,000 1,00,000 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 MP before acquisition MP after acquisition
A 10 9.72
B 5 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 CLASSES 9871255244
Statement of wealth of shareholder of B Wealth before acquisition Wealth after acquisition Or
Q3 No. of shares EPS Market Price PE ratio a. i.
Pick
Dick
1,00,000 6 54 9
50,000 4 20 5
If market price before merger and after merger is to remain same then, Exchange ratio should be on basis of MP =
ii.
1,00,000 1,21,500
12,500 x 9.72 20,000 x 6.08
EPS of new firm
=
= 0.37037 : 1
=
= = PE ratio of new firm
PRAVINN MAHAJAN CA CLASESS
6.75
=
=
= iii.
= 8 times
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 CLASSES 9871255244
b. i.
Exchange ratio for post merger price of Pick ltd to be Rs 60
MP after merger
PRAVINN MAHAJAN CA CLASESS
=
60
=
Shares to Dick ltd
= =
Ratio
- 1,00,000 6,667 shares
= 0.1333 : 1
=
i.e 0.1333 share in Pick ltd for every 1 share in Dick ltd ii.
EPS of new firm
=
= = PE ratio of new firm
7.50
=
=
= iii.
= 8 times
Statement of impact on EPS Pick
Dick
EPS before acquisition
6
4
EPS after acquisition
7.5
7.5 x 0.1333 = 0.99975 or 1
Due to merger EPS of Pick ltd increases and EPS of Dick ltd decreases. Statement of Impact on wealth MP before merger MP after merger
Pick 54 60
Dick 20 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 CLASSES 9871255244
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
=
= = PE ratio of new firm
Rs 48
=
=
PRAVINN MAHAJAN CA CLASESS
=
iii.
= 8 times
Statement of impact on EPS Pick
Dick
EPS before acquisition
6
4
EPS after acquisition
6
6 x 0.67 = 4.02
Due to merger EPS of Pick ltd and EPS of dick ltd remain same. Statement of Impact on wealth MP before merger MP after merger
Pick 54 48
Dick 20 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 CLASSES 9871255244
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= =
ii.
Exchange ratio
=
MP after Merger
= =
PE ratio of new firm
25,000 = 1
= Rs 51.2
=
=
PRAVINN MAHAJAN CA CLASESS
iii.
- 1,00,000
=
= 8 times
Statement of Impact on EPS
EPS before acquisition EPS after acquisition
Pick 6
Dick 4 = 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 before acquisition 54 20 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 CLASSES 9871255244
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 6 6.26
EPS before acquisition EPS after acquisition
Dick 4 6.26 x 0.555 = 3.4743
EPS of Pick ltd is increasing and EPS of dick Ltd is decreasing Statement of impact on wealth of Shareholder Pick Dick MP before acquisition 54 20 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 = 3x4 = Rs 12
ii.
Exchange ratio = post merger EPS
=
PRAVINN MAHAJAN CA CLASESS
= 0.222 : 1
=
= =
7.2
PRAVINN MAHAJAN CA CLASSES 9871255244
Q4
i.
MLtd
N Ltd
EAT No. of equity shares MP per share
80,00,000 16,00,000 200
24,00,000 4,00,000 160
Exchange ratio on the basis of MP
= = =
post merger EPS
0.8 : 1
=
= = ii.
Present EPS of N Ltd
PRAVINN MAHAJAN CA CLASESS
= =
Present EPS of M Ltd
Rs 5.416
6
=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
EPS before acquisition EPS after acquisition
M Ltd
N Ltd
5
6 =5
5 x 1.2 = 6
Thus EPS after merger remain same and not diminished
PRAVINN MAHAJAN CA CLASSES 9871255244
Q5 No. of shares EAT MP i.
ii.
ABC Ltd.
XYZ Ltd.
10,00,000 50,00,000 42
6,00,000 18,00,000 28
Present EPS of ABC Ltd
=
=
5
XYZ Ltd
=
=
3
Exchange ratio
=
post merger EPS
=
=
= 0.67 : 1
= = iii.
4.850
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 EPS before acquisition 5
XYZ 3
EPS after acquisition
5 x 0.6 = 3
=5
Q6 EAT Number of shares P/E ratio
Mark Ltd
Mask Ltd.
2000 lac 200 lac 10
400 lac 100 lac 5
=
10 x
= 100
MP of Mask Ltd
=
5x
= 20
Exchange ratio based on MP
=
a. MP of Mark Ltd
(PE x EPS)
=
=
PRAVINN MAHAJAN CA CLASESS
0.2 : 1
PRAVINN MAHAJAN CA CLASSES 9871255244
b. post merger EPS
=
= = 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 = = = e.
Rs 10.91
Post merger MP x No. of shares after merger 109.10 x 220 lac Rs 24002 lac
Gain / loss to shareholders of 2 companies. Statement of Impact on MP
PRAVINN MAHAJAN CA CLASESS
Mark 100 109.1
MP before merger MP after merger
Mask 20 109.1 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 MP No. of shares Earnings
XYZ
ABC
25 2,00,000 4,00,000
12.50 1,00,000 1,00,000
XYZ a. Pre merger EPS
=2
=
= 12.5
Pre merger PE ratio b. If ABC ltd PE ratio is 8, its MP will be MP = =
ABC
PE x EPS 8x1 =
=1 = 12.5
Rs 8
PRAVINN MAHAJAN CA CLASSES 9871255244
Exchange ratio of the basis of MP
=
post merger EPS
=
PRAVINN MAHAJAN CA CLASESS c.
= 0.32 : 1
=
= =
Rs 2.16
for XYZ ltd’s pre merger and post merger EPS to be same, Exchange ratio should be on the basis of EPS Exchange ratio =
= 0.5 : 1
=
= 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 Swap ratio =
=
=
4:1
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 CLASSES 9871255244
ii.
post merger EPS
= = =
iii.
If PE ratio of E Ltd remain unchanged, i.e Post merger PE ratio is 10 Post Merger MP
Market capitalization
iv.
Rs 6.956
= = = = = =
Post merger EPS x Post merger PE ratio 10 x 6.956 Rs 69.56 Post merger MP x No. of shares 69.56 x 28.75 lac Rs 1,999.85 lac
Free float market capitalization = =
Q9
28,75,000 x 0.4 x 69.56 Rs 799.4 lacs
X 3,00,000 30 4
No. of shares MP EPS Exchange ratio on the basis of EPS
Y 2,00,000 20 2.25
=
=0.5625 : 1
= i.
EPS after Merger -
=
If exchange ratio is on basis of EPS = =
-
If exchange ratio is 0.5 : 1
= =
ii.
Rs 4
Rs 4.125
Statement of Impact on EPS
EPS before merger
X 4
Y 2.25
PRAVINN MAHAJAN CA CLASESS
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 CLASSES 9871255244
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
ii.
post merger EPS
=
PRAVINN MAHAJAN CA CLASESS
= = iii.
Iv
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
If PE ratio of A ltd remain unchanged i.e Post merger PE ratio of A ltd is 10 Post merger MP
Q11
Rs 3.13
= = =
Post merger PE ratio x Post merger EPS 10 x 3.13 Rs 31.30
= = =
Post merger MP x No of shares after acquisition 31.30 x 6,90,000 Rs 215,97,000
iv.
Market value of Merged firm
i.
Exchange ratio on the basis of Mp
=
post merger EPS of A Ltd
=
=
= 0.8 : 1
= = ii.
Rs 5.4166
If Post merger EPS is not to be diminished, then exchange ratio should be based on EPS Exchange ratio on the basis of EPS
=
=
= =
EPS before Merger EPS after merger
=
Statement of Impact on EPS A 5 =5
1.2 : 1
B 6 5 x 1.2 = 6
PRAVINN MAHAJAN CA CLASSES 9871255244
Q12
i.
If exchange takes place on the basis of market price 1
Ratio of exchange
=
2.
Post merger EPS
=
=
= 0.4 : 1
= = 3 ii.
Rs 2.178
New shares to be issued 32,00,000 x 0.4
=
12,80,000
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
=
PRAVINN MAHAJAN CA CLASESS
= = 2. Post merger EPS
0.488 : 1
= = =
3. New shares to be issued iii.
=
Rs 2.0678
32,00,000 x 0.488 = 15,61,600
If Exchange ratio takes place as per EPS 1. Ratio of exchange
=
2. Post merger EPS
=
= 0.667
=
= 3. New shares to be issued iv
= =
Rs 1.875 32,00,000 x 0.667 = 21,33,333
If exchange takes place on the basis of P/E 1. Ratio of exchange
=
2. Post merger EPS
=
=
= 0.6 : 1
=
3. New shares to be issued
= =
Rs 1.943 32,00,000 x 0.6 = 19,20,000
PRAVINN MAHAJAN CA CLASSES 9871255244
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
ii.
Pre merger EPS
=5
=6
Pre merger PE ratio is
=7
= 6.67
Post merger EPS
= = =
Rs 4.643
= = =
Post Merger P.E x Post Merger EPS 7 x 4.643 32.501
iii.
Post Merger MP
iv
IMPLIED exchange ratio on the basis of MP
=
= 1.231
=
v. Q14
Implied P/E ratio of ABC
)
(
=
= 7
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
=
=
= EPS after acquisition
Rs 195
=
PRAVINN MAHAJAN CA CLASESS
=
=
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 CLASSES 9871255244
Q15
i.
Post merger EPS
= = =
ii.
Rs 2.833
Statement Of Impact On EPS
EPS before merger EPS after Merger
Rama
Krishna
2.5 2.833
3.5 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
Iv
= = =
Post merger PE x Post merger EPS 14 x 2.833 Rs 39.662
Statement of Impact on MP Pre merger MP Post merger MP
Rama 35 39.662
Krishna 35 39.662 x 1 = 39.662
PRAVINN MAHAJAN CA CLASESS
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
Less
Fixed Assets Net current Assets Preference shares 10% debentures Net assets No. of shares Net asset value
Exchange ratio =
Jupiter
Tally
1,22,000 51,000 20,000 15,000 1,38,000 10,000 13.80
35,000 26,000 5,000 56,000 5,000 11.20
=
= 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 CLASSES 9871255244
ii.
Exchange ratio on the basis of EPS Jupiter
Tally
= 2.4
Premerger EPS Exchange ratio
=3
= 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
= 500
Book value per share Market price per share Free float Market capitalization Free float or Market holding
400 lac 50%
Total market capitalization No. of shares Mp per share Earning per share PE ratio EPS
= 60
128 lac 40% = 800 lac
= 320 lac
2 lac Rs 400
10 lac Rs 32
10
4
40
8
PRAVINN MAHAJAN CA CLASESS
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 New shares to be issued
= = =
0.12 x 0.25 + 0.2 x 0.5 + 0.08 x 0.25 0.15 : 1 0.15 x 10 lac = 1.5 lac
PRAVINN MAHAJAN CA CLASSES 9871255244
b.
c.
Post acquisition Book value per share
=
= Rs 457.14
Post Acquisition EPS
=
=
Post acquisition MP (PE x EPS) (PE ratio of Abhiman Ltd remain unchanged)
=
i.
45.71 x 10
Rs 45.71 = Rs 457.10
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
=
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
Rs 731.36 lac
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
=
= Rs 15.2381
Book value per share after Bonus issue and stock split Q18
i.
Ii.
Pre merger MP = PE x EPS Large co ltd = Small co Ltd =
12.5 x 5.6 7.5 x 2.5
= =
PRAVINN MAHAJAN CA CLASESS
Rs 70 Rs 18.75
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 = New shares to be issued
=
= 0.446429 : 1
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 = New shares to be issued
=
= 0.267857 : 1
= 840,000 x 0.267857 = 2,25,000 shares
PRAVINN MAHAJAN CA CLASSES 9871255244
Q19
Allen Ltd is acquiring Ben Ltd and exchange ratio is determined on the basis of Market price of shares
=
Exchange ratio =
= 0.5 : 1
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
= 24
Premerger EPS
)
Post Merger EPS (
= 36.364
= 80 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
PRAVINN MAHAJAN CA CLASESS
=
( since Exch. Ratio is on the basis of MP and nothing is mentioned about PE = ratio, so Post merger PE ratio Weighted avg PE ratio)
=
1.3748
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 CLASSES 9871255244
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
PRAVINN MAHAJAN CA CLASESS
Pre merger PE ratio of Arjun ltd (to be maintained after merger)
=
10
Post Merger Market value
= = =
Post Merger PE x Post Merger Earnings 10 x ( 1,40,000 + 37,500) 17,75,000
=
20,000 x 70 = 14,00,000
From post merger MV, value retained by A ( equal to its Pre merger value)
Thus MP of share of Arjun Ltd will be same Value given to shareholders of Karan Ltd
= 70 = =
No of shares given to shareholder of vendor co. =
Exchange ratio =
17,75,000 – 14,00,000 3,75,000 = 5,357
= 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
= =
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
=
Value give to shareholders of Karan Ltd ( equal to Pre merger value of Karan Ltd)
=
0.5424 : 1
PRAVINN MAHAJAN CA CLASSES 9871255244
Q21
PRAVINN MAHAJAN CA CLASESS
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
Thus Post merger MP of A Ltd
=
= 38.4
Value given to shareholders of B Ltd
= =
No of shares given to shareholder of B Ltd.
=
Exchange ratio =
= Rs 384 mil
441 mil – 384 mil 57 mil = 1.4843 mil shares
= 0.2120 : 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 PE ratio of A ltd
=
9
Post Merger value of A Ltd
= =
9 x ( 48 + 15) 567 mil
= =
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
=
Value give to shareholders of B Ltd ( equal to Pre merger value of B Ltd)
=
0.3246 : 1
PRAVINN MAHAJAN CA CLASSES 9871255244
Q22
Bugs Ltd is acquiring reptiles Ltd a.
Earnings before Merger Bugs Ltd Reptiles Ltd
25,00,000 x 9 15,00,000 x 5
Earnings after Merger of bugs Ltd
= =
225 lac 75 lac
= =
(225 lac + 75 lac) 1.32 396 lac
Exchange ratio to keep Post merger EPS at Rs 12 Post merger EPS
PRAVINN MAHAJAN CA CLASESS
=
12
=
x
=
=
Exchange ratio
- 25 lac 8 lac shares
=
= 0.533 : 1 Impact on EPS Bugs 9 12 (given)
Pre Merger EPS Post merger EPS
Reptiles 5 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
b. Earnings before Merger Bugs Ltd Reptiles Ltd
Bugs Reptiles
= =
3 x 25lac 1.4 x 15 lac
25,00,000 x 9 15,00,000 x 5
= =
225 lac 75 lac
= =
(225 lac + 75 lac) 1.05 315 lac
Earnings after Merger of bugs Ltd
= 75 lac = 21 lac
Exchange ratio to keep Post merger EPS at Rs 9 Post merger EPS
=
9
=
x
=
= Exchange ratio
=
- 25 lac 10 lac shares = 0.667 : 1
PRAVINN MAHAJAN CA CLASSES 9871255244
c.
Present value of all synergy gains
=
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
= =
a.
b.
- 25 lac 5 lac
= 0.333 : 1
Exchange ratio = Q23
275 lac
MP before merger RIL SIL
= = =
PE x EPS 10 x 2 1 x 5
Exchange ratio
1 : 4 i.e 1 share in RIL for 4 shares in SIL
i.
No of shares to be issued =
ii.
MP after acquisition (PE ratio of RIL is same)
=
= =
Rs 20 Rs 5
= 2,50,000 shares Post merger EPS x Post Merger PE
=
x 10
=
x 10
= Rs 24 Statement of Impact on MP RIL Pre merger MP 20 Post merger MP 24
PRAVINN MAHAJAN CA CLASESS
SIL 5 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
= =
Post merger EPS
= =
(20 lac + 10 lac) 1.1 33 lac
= Rs 2.64
PRAVINN MAHAJAN CA CLASSES 9871255244
Post merger Price ( if PE of RIL remain same)
Pre merger MP Post merger MP
= = =
Post merger PE x Post merger EPS 10 x 2.64 Rs 26.4
Statement of Impact on MP RIL 20 26.4
SIL 5 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 For 10 lac share is
= =
240 lac + 110 lac 350 lac
Value per share offered
=
PRAVINN MAHAJAN CA CLASESS
= 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 CLASSES 9871255244
Q25
Co 1 80 lac 4 42
PAT EPS MP
Co. 2 15.75 lac 10.5 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 For EPS to be Rs 4
= 80 lac
Tax rate is 52%. Co 1 will pay cash by borrowing at 15%. And interest is a deductible expense Combined PAT PBT
= =
80 lac + 15.75 lac 95.75 lac
=
= 199.48
PRAVINN MAHAJAN CA CLASESS
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 = Q26
Q27
Value of firm before Merger Value of firm after merger Cost of merger
= Rs 145.833 per share
= 108 lac = 140 lac = value of firm after merger = 140 lac - 118 lac = Rs 32 lac
- value of firm before merger
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
iv.
NPV to B’s shareholder
= = =
= = = = =
Synergy gain – true cost 25 lac – 15 lac 10 lac True cost of Merger RS 15 lac
PRAVINN MAHAJAN CA CLASSES 9871255244
Q28 a True cost of Merger
=
Value given to vendor company In consideration of acquisition
Value of Firm B before acquisition
= =
Combined value of firm after acquisition = = =
b.
Value of A + value of B + synergy gains 750 lac + 150 lac + 150 lac 1050 lac
=
(No of shares after acq = 12,50,000 Shares given to B = 2,50,000)
=
210 lac
True cost of merger
= =
210 lac - 150 lac 60 lac
NPV of merger to B NPV of merger to A
Q29
5 lac x 30 150 lac
Combined value given to firm B
Synergy gain form merger
True cost of Merger
a
=
x 1050 lac
= =
Value of purchasing co. Value of purchasing co. after acq before acq 1050 lac 900 lac 150 lac
= = = = =
true cost of merger 60 lac total synergy gain – true cost of merger 150 lac - 60 lac 90 lac
Value given to vendor company In consideration of acquisition
- value of vendor co. before acquisition
True cost of merger if Rs 60 per share is given in cash to YZ true cost
b.
=
- value of vendor co. before acquisition
= = =
12 lac x 60 - 12 lac x 50 720 lac 600 lac 120 lac
PRAVINN MAHAJAN CA CLASESS
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 CLASSES 9871255244
Combined value of Merged firm =
Value of AB + Value of YZ
Value of YZ after merger Ke of YZ
=
+g
=
+ 0.06
=
PRAVINN MAHAJAN CA CLASESS
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 = Combined value of merged firm after merger
Combined value of merger given to YZ Exchange ratio :
1 : 3
New shares given to YZ
:
Total shares after merger
:
20 lac + 4 lac
Combined value given to YZ
:
4800 lac x
:
800 lac
: :
800 lac - 600 lac 200 lac
True cost of merger
c.Synergy gain from acquisition = = = Gain (NPV) given to YZ = = NPV available to AB = = d.
12 lac x 100 = 1200 lac = Value of AB + Value of YZ = 20 lac x 180 + 1200 lac = 4800 lac
x1
=
4 lac shares
=
24 lac
value of merged firm - value of AB & YZ before merger 4800 lac (20 lac x 180 + 600 lac) 600 lac True cost of merger 200 lac 600 lac - 200 lac 400 lac
If expected growth rate continues to be 6% Value of YZ before merger Value of YZ after merger
= =
600 lac 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 CLASSES 9871255244
Value of Merged Firm
= = =
Value of merged firm given to YZ
=
True cost of merger
Q30
i.
Value of AB + value of YZ 3600 lac + 600 lac 4200 lac x 4200 lac
=
700 lac
= =
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)
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
PRAVINN MAHAJAN CA CLASESS
+ 0.07 0.1021 0r 10.21%
If growth rate after merger is 8%, then MP of share of YZ after Merger P0
= =
Current value of Firm = Value of firm after merger = Increase in value of BCD after merger ii.
= Rs 29.32 5,00,000 x 20 = 5,00,000 x 29.32 = =
Rs 100,00,000 Rs 146,60,633 Rs 46,60,633
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 CLASSES 9871255244
Synergy gain
=
Rs 46,60,663
Value of combined firm after merger Given to BCD
= =
True cost of Merger
iii.
x 1146,60,663 127,40,073
= 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
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 = = = Thus gain to SH of BCD =
value given to SH of BCD – Value before merger 22 x 5 lac – 5 lac x 20 10 lac Rs 10 lac
Mp of Merged firm
=
Post merger EPS x Post merger PE
=
x
True cost of merger
= =
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
PRAVINN MAHAJAN CA CLASSES 9871255244
Q31
S Ltd is acquiring K Ltd i.
ii.
Cost of Merger If S Ltd paid cash of Rs 40 per share True cost of merger
= = = =
Synergy gain
=Value of S ltd after merger - value of S Ltd before merger = 1135 lac - 1000 lac = Rs 35 lac
Gain to SH of S Ltd iii.
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
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
= =
PRAVINN MAHAJAN CA CLASESS
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
=
NPV to S Ltd
= =
1360 lac - 1135 lac Synergy gain - true cost of merger Rs 225 lac
PRAVINN MAHAJAN CA CLASSES 9871255244
Q32
i.
EPS of Merged firm
=
EPS of Merged Firm
=
2.67
=
Shares issued to XYZ
= =
Shares of Merged Firm = = ii.
MP after Merger
Rs 2.67
- 50,000 81,086 shares
50,000 + 81,086 1,31,086
= = =
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
= =
c.
Cost of merger
= = = =
d.
PRAVINN MAHAJAN CA CLASESS
6.43 times
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
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 CLASSES 9871255244
Q33
Market Price
i.
EPS
P/E
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
EPS
PRAVINN MAHAJAN CA CLASESS Book value
ROE 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
PRAVINN MAHAJAN CA CLASSES 9871255244
ii.
iii.
Calculation of Growth rate BA Ltd DA Ltd a.
( g = b.r) = =
( 1 - 0.4) 17.5% ( 1 - 0.6) 12.375%
= =
10.5% 4.95 %
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) Value given to SH of DA Ltd
= =
Shares given to DA Ltd (at rs 40)
=
= 40,000
Exchange Ratio
=
= 0.5 : 1
40,00,000 16,00,000
Minimum Exchange ratio Combined value of firm after merger
PRAVINN MAHAJAN CA CLASESS
b.
= 1,00,000 x 40 + 80,000 x 20 = 56,00,000
Value given to DA Ltd ( Pre merger value) Value retained by BA Ltd
= =
Post merger MP of BA
=
Shares given to DA Ltd (at rs 44)
=
= 27,273
Exchange Ratio
=
= 0.341 : 1
12,00,000 44,00,000 = Rs 44
Based on i and ii EPS ROE PE ratio Growth rate
Ba Ltd 2.10 17.5% 19.05 10.5%
DA Ltd. 1.2375 12.375% 12.12 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
Statement of Impact on EPS Pre Merger EPS Post Merger EPS
BA 2.10 2.341
Increase (decrease) in EPS
0.241
DA 1.2375 1 x 0.4 x 2.341 = 0.9364 (0.3011)
PRAVINN MAHAJAN CA CLASSES 9871255244
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,
=
(if PE ratio of BA is maintained)
PRAVINN MAHAJAN CA CLASESS
Q34
i.
19.05 x = =
19.05 x 2.341 Rs 44.60
Statement of Impact on MP
Pre Merger MP Post Merger MP
BA Ltd 40 44.60
Accretion (dilution) in MP
4.60
DA Ltd 15 0.4 x 1 x 44.60 = 17.84 2.84
Maximum exchange ratio if PE ratio is 12 times Combined value after merger
ii.
PE ratio x Post Merger EPS
= = =
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
Exchange ratio
=
= 0.8 : 1
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
Exchange ratio
=
= 0.3287 : 1
PRAVINN MAHAJAN CA CLASSES 9871255244
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 =
= = Q35
PRAVINN MAHAJAN CA CLASESS
11.4286 times
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) Exchange ratio =
=
= 0.4 : 1
No. of shares in merged firm after merger
Post merger EPS
= =
6,00,000 + 2,50,000 x 0.4 7,00,000 shares
= = =
5.1428 Impact on EPS ABC Ltd 5 5.1428
Pre merger EPS Post Merger EPS
XYZ Ltd 2.40 1 x 0.4 x 5.1428 = 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) Exchange ratio =
=
= 0.533 : 1
PRAVINN MAHAJAN CA CLASSES 9871255244
No. of shares in merged firm after merger
Post merger EPS
= =
6,00,000 + 2,50,000 x 0.5333 7,33,333 shares
= = =
4.9090 Impact on EPS
Pre merger EPS Post Merger EPS
ABC Ltd 5 4.9090
XYZ Ltd 2.40 1 x 0.4 x 4.9090 = 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 Creditors Cash (14 x 10,000) Equity share capital Dissolution expenses Cash outflow
1,10,000 30,000 1,40,000 1,60,000 10,000 4,50,000
Inventories 1,00,000 Debtors 20,000 Bank balance 10,000 Net cash outflow at the time of absorption
1,30,000 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
PRAVINN MAHAJAN CA CLASESS
Less
Since NPV is positive, so ABC’s decision of Merger is financially sound
PRAVINN MAHAJAN CA CLASSES 9871255244
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 Maximum price A ltd will be willing to pay ii.
= Rs 10 lakh 90 lakh
Maximum price if Cost of capital of A ltd is 12% PV of Cash inflows
=
= Rs 125 lakh
Less debt Maximum price A ltd will be willing to pay Iii
PRAVINN MAHAJAN CA CLASESS
= Rs 10 lakh 115 lakh
Statement of Net cash inflows Particulars
1
2
3
4
5
Cash inflows
15 lac
18 lac
21.6 lac 21.6 lac 21.6 lac
Incremental cash inflows
-
3 lac
3.6 lac
Incremental cash outflow (0.7)
-
2.1 lac
Net cash inflows
15 lac 15.9 lac
-
2.52 lac
-
6 21.6lac
-
-
-
-
19.08 lac 21.6 lac 21.6 lac 21.6 lac
Statement of NPV Cash Inflows 15 lac 15.90 Lac 19.08 Lac 21.6 Lac
1 2 3 4 onward
0.893 0.797 0.712
13,39,500 12,67,230 13,58,496 128,16,000 167,81,226
Cash outflow Debt Maximum price A will pay
10,00,000 157,81,226
PRAVINN MAHAJAN CA CLASSES 9871255244
Q38
Current value of Firm is present value of all cash inflows Statement of value of ABC Ltd without Merger Year 1 2 3 4 5
Cash flows 275 302.5 324.5 341 357.5
PV factor ( 15%) 0.870 0.756 0.658 0.572 0.497
= 3753.75 0.497
5
Present value 239.25 228.69 213.52 195.05 177.677 1865.614
Current value of ABC without merger
2919.801
Statement of value of ABC Ltd after Merger Year 1 2 3 4 5 5
Cash flows 440 495 563.75 591.25 618.75 = 7287.5
PV factor (15%) 0.870 0.756 0.658 0.572 0.497
Present value 382.8 374.22 370.9475 338.195 307.51875
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
PRAVINN MAHAJAN CA CLASESS
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 Wealth of ABC’s shareholders before merger Increase in wealth of ABC’s shareholders due to merger
3372.225 2919.80 452.425
PRAVINN MAHAJAN CA CLASSES 9871255244
Q39
Value of acquisition is Present value of all cash inflows Year
PAT
Cash outflows
Depreciation
Net cash inflows
factor
Present value
1 2 3 4 5 6
20 30 40 50 50 50
50 50 -
30 40 -
20 40 50 50 50
0.870 0.756 0.658 0.572 0.497 0.432
15.12 26.32 28.6 24.85 21.6
-
-
400
0.432
172.8
6
Value of acquisition
289.29
PRAVINN MAHAJAN CA CLASESS
PRAVINN MAHAJAN CA CLASSES 9871255244
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 Balance 50,000 shares 50,000 x 50 Total amount payable
= =
32,50,000 25,00,000 57,50,000
Total amount receivable by Sugar Ltd Current market value of Sugar Ltd 1,00,000 x 55 From economies of 15 lakh amt available to Sugar Ltd
57,50,000 55,00,000 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.
Q41
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
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
PRAVINN MAHAJAN CA CLASESS
1. Value of business of XY Ltd -
On the basis of discounted cash flows Year
cash inflows
Disc factor @ 8%
1 105 0.930 2 120 0.857 3 125 0.794 4 120 0.735 5 100 + 200 0.681 Value of business on the basis of discounted cash flows
Present value 97.65 102.84 99.25 88.20 204.3 592.24 lakh
PRAVINN MAHAJAN CA CLASSES 9871255244
-
On the basis of Net Assets Statement of Net Assets Rs in Lakh 150 200 350 (100) 250
Fixed Assets Current Assets Total Assets Loans Net Assets Value of Business
= = =
ii.
Rs 421.12 lakh
Number of shares to be issued Shares will be issued at
= =
Shares to be issued
iii.
Rs 500 per share
=
= 84,240 shares
PRAVINN MAHAJAN CA CLASESS
Allocation of shares among shareholders of XY Statement of Equivalent partly paid up shares in XY 10 lakh shares of Rs 5 each 20 lakh shares of Rs 10 each ie 40 Lakh shares of Rs 5 each Total partly paid up shares
Exchange ratio =
10 lakh 40 lakh 50 lakh
= 0.016848 : 1
Shares issued to 10 lakh partly paid up shares Shares issued to 20 lakh fully paid up shares
= = = =
10 lakh x 0.016848 16,848 shares 40 lakh x 0.016848 67392
PRAVINN MAHAJAN CA CLASSES 9871255244
Q42
Statement of net cash outflows in zero period Debentures and other liabilities Dissolution expenses Equity share capital ( Calculation of equity shares to be issued Value of assets taken over Land and building Plant and machinery Inventories Debtors Bank Goodwill Total amount payable Payable as cash Balance by equity Total cash outflows Less
1,30,000 10,000
5,00,000 5,00,000 70,000 35,000 15,000 50,000 11,70,000 1,30,000 10,40,000)
10,40,000 11,80,000
Cash received Bank Realization of current assets Net cash outflows
(15,000) (90,000) 10,75,000
Present value of cash inflows CFAT
2,00,000 1e 0.870 3,00,000 2e 0.756 2,60,000 3e 0.658 2,00,000 4e 0.572 1,00,000 5e 0.497 Terminal value 6,40,000 5e 0.497 Ney benefit (loss) Proposal should be rejected Q43
Cost of acquisition (outflows in zero period) 10% preference share capital 12% convertible debentures Equity share capital
x 42
1,74,000 2,26,800 1,71,080 1,14,400 49,700 3,18,080
PRAVINN MAHAJAN CA CLASESS
10,54,060 (20,940)
100 crore 80 crore 420 crore
Payment of liabilities
100 crore
Sale of stock Debtors Investments Cash in hand received Net cost
(150) crore (102) crore (55) crore (65) crore 328 crore
Less
PRAVINN MAHAJAN CA CLASSES 9871255244
-
Computation of cash flows required after tax for return of 20% Annual cash inflows x factor (8yrs,20%) X x 3.837
= =
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%) X x 3.837
= cost of acq = 328 crore – 30 crore x 0.233
X
=
Annual cash inflows required
Q44
cost of acq 328 crore
=
83.662 crore
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 Investments Stock Less workers compensation S. creditors Retrenchment benefit Cash inflow
PRAVINN MAHAJAN CA CLASESS
45 212 470 (130) (400) (48) 149
Statement of Present value of incremental future cash inflows Year 1 2 3 4 5 6 7 8 9 10
Post Merger 1800 1900 2300 2950 3500 4000 4500 5300 5800 6900
Pre merger 1500 1700 2000 2500 3000 3400 3800 4500 5000 6000
Incremental 300 200 300 450 500 600 700 800 800 900
factor 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162
Present value 249.9 138.8 173.7 216.9 201 201 195.3 186.4 155.2 145.8 1864
Thus maximum quote of Shyam Ltd is 1864 + 149 = 2013
PRAVINN MAHAJAN CA CLASSES 9871255244
b.
Difference in valuation of Kiddies wear had there been no merger Year 1 2 3 4 5 6 7 8 9 10
Q45
Cash flows 120 160 200 280 340 460 520 600 660 800
factor 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162
present value 99.96 111.04 115.8 134.96 136.68 154.10 145.08 139,80 128.04 129.60 1295.06
PRAVINN MAHAJAN CA CLASESS
Statement of present value of cash outflows in zero period 11% debentures 12% preference shares Equity shares in A Ltd Dissolution expenses Current liabilities
300 lakh 100 lakh 3000 Lakh 30 lakh 190 lakh
Sale of Investments Bank Net cash outflow
120 lakh 100 lakh 3400 lakh
Less
Statement of Present of cash inflows Year Cash inflow 1 450 2 600 3 780 4 900 5 650 6 350 6
factor 0.877 0.769 0.675 0.592 0.519 0.456
= 1312.5 0.456 Cash inflows
Net cash inflows
= =
Present value 394.65 461.4 526.5 532.8 337.35 159.6 598.5 3010.8
3010.80 – 3400 389.20 lakh
Proposal should be rejected Q46
value of business is present value of all cash inflows Year 1 2 3
Cash inflows factor 250 0.893 300 0.797 400 0.712 Value of business
Present value 223.25 239.10 284.80 747.15
PRAVINN MAHAJAN CA CLASSES 9871255244
Q47
Exchange ratio on the basis of MP
= =
New shares to be issued
EPS of B Ltd before merger
=
1.25 : 1
= =
1,00,000 x 1.25 1,25,000 shares
(B ltd) = =
EPS after Merger
=
0.706
(B ltd) = = =
= 0.805
After Merger EPS of B Ltd increased by (0.805 – 0.706) = Q48
0.099 per share
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 Preference shares Equity shares Dissolution expenses Current Liabilities
3,30,000 1,00,000 22,50,000 30,000 1,90,000
Bank Investments Debtors Inventories
1,00,000 1,25,000 3,50,000 4,25,000 19,00,000
Less
Net cash outflows
Year 1–6 6
PRAVINN MAHAJAN CA CLASESS
Statement of Present value of cash inflows cash flow factor Present value 7,00,000 3.784 26,48,800 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 CLASSES 9871255244
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 Total Earnings of Fortune India No of shares of Fortune India
42 Rs 11,400 3,000
EPS
3.8
MP
PE x EPS
Rs 159.60
3. Book Value of Both companies after DE Merger Fortune Pharma Fixed Assets 7.740 Investments 7,600 Current assets 8,800 Loans and Advances 900 Deferred taxes 60 Less Secured Loans (400) Unsecured loans (2400) Current liabilities (1300) 21,000 No. of shares 1500 BV per share 14 Q51
Fortune India 12,660 4,700 21,400 6,400 (260)
PRAVINN MAHAJAN CA CLASESS
(2600) 1600 (19,900) 24,000 3000 8
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 CLASSES 9871255244
b.
Total incremental Benefits in future Cash available to Kolkata Ltd 50% of 475.41
= =
Cash available to each shareholder of Kolkata Ltd
=
=
= 0.5 : 1
New share to be issued Total value of shares offered
= =
0.5 x 10,00,000 = 5,00,000 shares 5,00,000 x 50 = Rs 250 lakh
Total Purchase consideration
= =
237.705 lakh + 250 lakh 487.705 Lakh
a.
b.
= Rs 23.771
Total Purchase consideration is Cash + shares issued to Kolkata Ltd in Chennai Ltd Exchange ratio =
Q50
475.41 Lakh 237.705 lakh
Statement of valuation of Business Profit After Tax Tax rate Profit before tax Less Extraordinary Income Add Extraordinary Losses Profit from launch of new product Sale 60 Material cost 15 Labour cost 10 Fixed cost 8 Expected profits before taxes Taxes 35% PAT
65 Lakh 35% 100 lakh (10) 3
Capitalization rate
520 lakh
Statement of MP Profit after tax Preference share dividend 100 lakh x 0.10 Earning for equity shareholders
78 (11) 67
EPS PE ratio MP
PRAVINN MAHAJAN CA CLASESS
27 120 lakh 42 lakh 78 Lakh
1.675 PE x EPS
8 times Rs 13.4
PRAVINN MAHAJAN CA CLASSES 9871255244
Q52
A is considering to Buy Firm B -
Statement of Present value of Cash Flows
Cash Flows (1,00,000) (5,00,000) 5,00,000 10,00,000 15,00,000
1e 2e 3e 4e 5e
0.833 0.694 0.579 0.482 0.402
(83,300) (3,47,000) 2,89,500 4,82,000 6,03,000
315, 00,000
5e
0.402
126,63,000
PV of cash flows -
Q54
PRAVINN MAHAJAN CA CLASESS
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 If A offers Minimum price it will pay PV of synergies
136,072 lac 30 lac
Interest and principal payable to Senior lender and EBIT required to serve Year
Principal
Interest
1 2 3 4 5
1.4 1.4 1.4 1.4 1.4
0.98 0.784 0.588 0.392 0.196
EBIT for principal
(in mil)
2.1 2.1 2.1 2.1 2.1
Amount payable to Junior lender Year
Principal
Interest
EBIT for principal
1 2 3 4 5 6
2
0.3 0.3 0.3 0.3 0.3 0.3
3
(in mil)
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 CLASSES 9871255244
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 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 nd Since Actual EBIT is less than Required EBIT in 2 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 1 2 3 4 5
Principal 17.696 17.696 17.696 17.696 17.696
Interest 10.6176 8.49408 6.370 4.247 2.123
Amount payable to Junior lender Year 1 2 3 5 6
Principal 22.12
PRAVINN MAHAJAN CA CLASESS
Interest 2.8756 2.8756 2.8756 2.8756 2.8756
Statement of Evaluation of EBIT 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 CLASSES 9871255244
Q56
Pre Merger value of Alpha Ltd (No. of share x price per share (4 mil x 4) Pre merger value of Beta Ltd (2 mil x 2) A
16 mil 4 mil
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) = = =
Day 12 =
Rs 3 per share
The benefit of synergy gain Rs 6 mil also notified value per share Beta Rs 4 Value per share (alpha) = =
= 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
PRAVINN MAHAJAN CA CLASESS
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
Value per share (alpha) = =
=
Value per share (beta) = one share of alpha
Rs 3.33 per share
Rs 3.33 per share
PRAVINN MAHAJAN CA CLASSES 9871255244
Day 12 =
Value per share of alpha when synergy benefit is not notified Value per share (alpha) = = Rs 4.33 per share Value of one share of Beta = Rs 4.33 ( one share of alpha)
ii.
Q57
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
Existing position No. of existing shares PAT
= =
EPS
=
PE ratio Price per share
= =
Proposed position (after going private) Increased post tax profit Additional pre tax savings Additional post tax savings Total post tax profits
EPS
Q58
10 mil Rs 9 mil = Rs 0.90 12 0.90 x 12 = Rs 10.80
= 110% of 9 mil = 9.90 mil = 0.80 mil = 0.80 ( 1 – 0.30) = 0.56 mil = 9.90 + 0.56 = Rs 10.46 mil = =
1.046 mil
Price per share
= =
1.046 x 12 12,552
Premium over existing price
= =
12.552 - 10.80 Rs 1.752
PRAVINN MAHAJAN CA CLASESS
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 Less debt
809.97 lac 240.00 lac 569.97 lac
PRAVINN MAHAJAN CA CLASSES 9871255244
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) Less interest Less 30% tax PAT No. of shares
516.57 88 428.57 128.57 300 lac 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
2. No.of share to be issued by T
x 6 lakh
6,60,000 3 lakh
3. EPS of T ltd after acquisition = Rs 20 per share 5. Expected MP = =
Rs 220
PRAVINN MAHAJAN CA CLASESS
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 CLASSES 9871255244
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