Solution MERGER & ACQUISITION, CA-FINAL-SFM by CA PRAVINN MAHAJAN

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
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
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
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
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

Pick
Dick
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
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
=
=
7.50
=
iii.
= 8 times

Pick
Dick
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.
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.
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
PRAVINN
MAHAJAN
CA CLASESS
iii.
= 8 times

Pick
Dick
6 x 0.67 = 4.02
Due to merger EPS of Pick ltd and EPS of dick ltd remain same.
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
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
=
=
25,000
= 1
= Rs 51.2
PRAVINN
MAHAJAN
CA CLASESS
iii.
- 1,00,000
= 8 times
Statement of Impact on EPS

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
54
20
= 51.2
51.2 x 0.5 = 25.6
Wealth of Shareholders of Pick ltd decreased and wealth of shareholder of

Dick ltd increased
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

Pick
6
6.26

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
54
20
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
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
=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
6
=5
5 x 1.2 = 6
Thus EPS after merger remain same and not diminished
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
XYZ Ltd
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

ABC
5
XYZ
3
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
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
Exchange ratio of the basis of MP
post merger EPS
PRAVINN
MAHAJAN
CA CLASESS
c.
= 0.32 : 1
=
=
Rs 2.16
for XYZ ltds 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
= 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%
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
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
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
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
=
=
EPS before Merger

EPS after merger

A
5
=5
1.2 : 1
B
6
5 x 1.2 = 6
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

2. Post merger EPS
= 0.667
=
iv
=
=
Rs 1.875
32,00,000 x 0.667 = 21,33,333
If exchange takes place on the basis of P/E

2. Post merger EPS
= 0.6 : 1
=
=
Rs 1.943
32,00,000 x 0.6 = 19,20,000
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
=
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
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
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
ii.

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
40
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
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 =
= 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 =
= 0.267857 : 1
= 840,000 x 0.267857 = 2,25,000 shares
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
-

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.
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
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
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
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
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
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
=
Exchange ratio
- 25 lac
10 lac shares
= 0.667 : 1
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
=
=
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.
(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
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
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
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.
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
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 As shareholders
iv.
NPV to Bs shareholder
=
=
=
=
=
=
=
=
Synergy gain true cost

25 lac 15 lac
10 lac
True cost of Merger
RS 15 lac
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
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
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
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
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
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
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
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
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
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
= 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

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

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)
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
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
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
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 ABCs decision of Merger is financially sound
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
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
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
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 ABCs existing share holders

Rs
Wealth of ABCs shareholders after Merger
5395.56 - 2023.335
Wealth of ABCs shareholders before merger
Increase in wealth of ABCs shareholders due to merger
3372.225
2919.80
452.425
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
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
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
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
Q42
Statement of net cash outflows in zero period

Debentures and other liabilities
( 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
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
Computation of cash flows required after tax for return of 20%

Annual cash inflows x factor (8yrs,20%)
X
x
3.837
=
=
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
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
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
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
Q47
=
=
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
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
16
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
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
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
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
0.3
0.3
0.3
0.3
0.3
0.3
(in mil)
Statement of Evaluation of EBIT

1
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

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

1
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
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
=
=
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 (beta) = one share of alpha
Rs 3.33 per share
Rs 3.33 per share
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.
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 Ts offer
1. Net consideration payable =
7 times EBIDT 7 x 115.71
Less debt
809.97 lac
240.00 lac
569.97 lac
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 Ltds 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

Solution MERGER &amp; ACQUISITION, CA-FINAL-SFM by CA PRAVINN MAHAJAN

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MERGER AND ACQUISITION

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

Statement of impact on EPS

6.428 x 0.833 = 5.356

a. Exchange ratio if merger is on base of EPS

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

PRAVINN MAHAJAN CA CLASSES 9871255244

Statement of wealth of shareholder of B

EPS of new firm

Statement of impact on EPS

EPS before acquisition

EPS after acquisition

6.75 x 0.37037 = 2.49

PRAVINN MAHAJAN CA CLASSES 9871255244

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

Shares to Dick ltd

EPS of new firm

Statement of impact on EPS

EPS before acquisition

EPS after acquisition

7.5 x 0.1333 = 0.99975

PRAVINN MAHAJAN CA CLASSES 9871255244

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

MPS of new firm

Statement of impact on EPS

EPS before acquisition

EPS after acquisition

PRAVINN MAHAJAN CA CLASSES 9871255244

Exchange ratio to maintain EPS Rs 4 per share after Merger

No. of shares to Dick Ltd=

PE ratio of new firm

Statement of Impact on EPS

EPS before acquisition

6.4 x 0.5 = 3.2

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

51.2 x 0.5 = 25.6

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

PRAVINN MAHAJAN CA CLASSES 9871255244

If Exchange ratio is on the basis of PE ratio

post merger EPS

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

Statement of Impact on EPS

EPS before acquisition

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

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

PRAVINN MAHAJAN CA CLASSES 9871255244

Exchange ratio on the basis of MP

post merger EPS

Present EPS of N Ltd

Present EPS of M Ltd

Statement of Impact EPS

EPS before acquisition

Thus EPS after merger remain same and not diminished

PRAVINN MAHAJAN CA CLASSES 9871255244

Present EPS of ABC Ltd

post merger EPS

Statement of Impact on EPS

EPS after acquisition

Exchange ratio based on MP

PRAVINN MAHAJAN CA CLASSES 9871255244

b. post merger EPS

d. Market value of merged firm =

Post merger MP x No. of shares after merger

Gain / loss to shareholders of 2 companies.

Solution MERGER & ACQUISITION, CA-FINAL-SFM by CA PRAVINN MAHAJAN

Solution MERGER & ACQUISITION, CA-FINAL-SFM by CA PRAVINN MAHAJAN