{"id":19216,"date":"2023-03-29T14:23:25","date_gmt":"2023-03-29T08:53:25","guid":{"rendered":"https:\/\/gstguntur.com\/?p=19216"},"modified":"2023-03-30T17:19:50","modified_gmt":"2023-03-30T11:49:50","slug":"mergers-acquisitions-and-corporate-restructuring-ca-final-sfm-study-material","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/mergers-acquisitions-and-corporate-restructuring-ca-final-sfm-study-material\/","title":{"rendered":"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material"},"content":{"rendered":"<p>Mergers, Acquisitions and Corporate Restructuring \u2013 <a href=\"https:\/\/gstguntur.com\/ca-final-sfm-study-material\/\">CA Final SFM Study Material<\/a>\u00a0is designed strictly as per the latest syllabus and exam pattern.<\/p>\n<h2>Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material<\/h2>\n<p>Part-1(Theory)<\/p>\n<p>Question 1.<br \/>\nWrite short note on Horizontal Merger and Vertical Merger. [May 2016] [4 Marks]<br \/>\nAnswer:<br \/>\nA merger is generally understood to be a fusion of two companies. It may be classified as horizontal merger or vertical merger.<\/p>\n<p>Horizontal Merger: Under this type of merger, the two companies which have merged are in the same industry. Normally the market share of the new consolidated company would be larger and it is possible that it may move closer to being a monopoly or a near monopoly to avoid competition.<\/p>\n<p>Vertical Merger: This merger happens when two companies that have &#8216;buyer- seller&#8217; relationship (or potential buyer-seller relationship) come together.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 2.<br \/>\nWhat are the problems for \u201cMerger and Acquisitions&#8221; in India? [Nov. 2016] [4 Marks]<br \/>\nAnswer:<br \/>\nThe following are the problems of mergers and acquisitions in India:<\/p>\n<ul>\n<li>Controlling Interest: The Indian companies are largely promoter-controlled and managed.<\/li>\n<li>Legal Compliances: There are strict SEBI rules and regulations. In addition, the need for \u2018prior negotiations and concurrence of financial institutions and banks\u2019 also creates problem.<\/li>\n<li>Funding Problem: The reluctance of financial institutions and banks to fund acquisitions directly.<\/li>\n<li>Exit Policy: There is a lack of exit policy for restructuring or downsizing of schemes of mergers and acquisitions.<\/li>\n<li>Valuation Problem: The absence of efficient capital market system makes the market capitalisation not fair in some cases. The fair valuation of entity is still creating hurdles.<\/li>\n<\/ul>\n<p>Question 3.<br \/>\nExplain &#8220;Synergy\u201d in the context of Merger and Acquisitions? [Nov. 2012] [4 Marks]<br \/>\nAnswer:<br \/>\nThe one of the most common reasons for Mergers and Acquisition (M&amp;A) is Synergistic operating economics. In simple terms, synergy implies that one plus one is more than two. In terms of mergers and acquisition, if V (A) and V (B) denote the Values of two Firms \u2018A\u2019 and \u2018B\u2019 then following shall prevail:<br \/>\nV (AB) &gt; V (A) + V (B)<br \/>\nIn other words the combined value of two firms or companies shall be more than their individual value. The &#8216;Synergy\u2019 is the increase in performance of the combined firm over what the two firms are already expected or required to accomplish as independent firms. The synergy benefits arise due to following:<br \/>\n1. Economics of combined efforts: A company may have a good networking of branches and other company may have efficient production system. Thus, the merged companies will be more efficient than individual companies.<\/p>\n<p>2. Economies of scale: The economies of large scale are also one of the reasons for synergy benefits. The main reason is that, the large scale production results in lower average cost of production e.g. reduction in overhead costs on account of sharing of central services such as accounting and finances, office executives, top level management, legal, sales promotion and advertisement etc.<\/p>\n<p>3. Real and Pecuniary Economies: The economics can be &#8220;real\u2019\u2019 arising out of reduction in factor input per unit of output, whereas pecuniary economics are realized from paying lower prices for factor inputs for bulk transactions.<\/p>\n<p>Question 4.<br \/>\nHow synergy is used as a tool when deciding merger and acquisitions? &#8211; [May 2017] [4 Marks]<br \/>\nAnswer:<br \/>\nThe mergers and acquisitions are made with the goal of improving the company\u2019s financial performance for the shareholders. The shareholders will benefit if company\u2019s post-merger share price increases due to the synergistic effect of the deal. The expected synergy achieved through the merger can be attributed to various factors, such as increased revenues, combined talent and technology or cost reduction.<\/p>\n<p>The two businesses can merger to form one company that is capable of producing more revenue than either could have been able to independently or to create one company that is able to eliminate or streamline redundant processes, resulting in significant cost reduction.<br \/>\nWhen two companies merge to create greater efficiency or scale, it is called as synergy merge. It is clear the synergy may be used as a tool for deciding the merger or acquisition.<\/p>\n<p>Question 5.<br \/>\nWhat is equity carve out? How does it differ from a spin off? [Nov. 2013] [4 Marks]<br \/>\nAnswer:<br \/>\nEquity Carve out:<br \/>\nIt is partial spin-off in which a company creates its own new subsidiary and subsequently brings out its IPO. The parent keeps a controlling stake in the newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster and carrying higher valuations than other businesses owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances the parent\u2019s shareholder value.<\/p>\n<p>Spin-off<br \/>\nIn this case, a part of the business is separated and created as a separate firm. The existing shareholders of the firm get proportionate ownership. So there is no change in ownership and the same shareholders continue to own the newly created entity in the same proportion as previously in the original firm.<\/p>\n<p>Difference between Equity Carve Out and Spin-Off<\/p>\n<ol>\n<li>Under spin-off, the shareholders in new company remain the same but not in case of equity curve out.<\/li>\n<li>Under Spin-off parent company does not receive any cash but equity carve-out generates cash because shares in the subsidiary are sold to the public.<\/li>\n<\/ol>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 6.<br \/>\nWrite short note on &#8220;Takeover by Reverse Bid\u201d. [Nov, 2011, 2014, 2019] [4 Marks]<br \/>\nAnswer:<br \/>\nUsually, a large company takes over smaller company. In a &#8216;reverse takeover\u2019, a smaller company gains control of a larger one. The concept of takeover by reverse bid, or of reverse merger, is thus not the usual case of amalgamation of a sick unit which is non-viable with a healthy or prosperous unit but is a case whereby the entire undertaking of the healthy and prosperous company is to be merged and vested in the sick company which is non-viable. A company becomes a sick industrial company when there is erosion in its net worth. This alternative is also known as taking over by reverse bid.<\/p>\n<p>Conditions for Reverse Takeover:<br \/>\nThe following are the conditions of reverse merger:<br \/>\n(a) Value of Assets: The assets of the transferor company are greater than the transferee company,<br \/>\n(b) Value of Shares issued: The equity capital to be issued by the transferee company pursuant to the acquisition exceeds its original issued capital, and<br \/>\n(c) Controlling Interest: The change of control in the transferee company through the introduction of a minority holder or group of holders.<\/p>\n<p>Question 7.<br \/>\nWrite short note on \u201cFinancial Restructuring.\u201d [Nov. 2008, May 2013] [4 Marks]<br \/>\nAnswer:<br \/>\nWhen a company incurs continuous losses, the share capital or net worth of such companies gets substantially eroded. In fact, in some cases, the accumulated losses are even more than the share capital and thus leading to negative net worth, putting the firm on the verge of liquidation. In order to revive such firms, financial restructuring is one of the techniques to bring into health such firms which are having potential and promise for better financial performance in the years to come. Financial restructuring refers to a kind of internal changes made by the management in Assets and Liabilities of a company with the consent of its various stakeholders. With the help of restructuring, the firm re-starts with a fresh balance sheet free from losses and fictitious assets and show share capital at its true worth.<\/p>\n<p>Normally equity shareholders make maximum sacrihce by foregoing certain accrued benefits, followed by preference shareholders and debenture holders, lenders and creditors etc. The sacrifice may be in the form of waving a part of the sum payable to various liability holders. The foregone benefits may be in the form of new securities with lower coupon rates so as to reduce future liabilities. The sacrifice may also lead to the conversion of debt into equity. Sometime, creditors, apart from reducing their claim, may also agree to convert their dues into securities to avert pressure of payment. These measures will lead to better financial liquidity. The financial restructuring leads to significant changes in the financial obligations and capital structure of corporate firm, leading to a change in the financing pattern, ownership and control and payment of various financial charges.<\/p>\n<p>The financial restructuring results into the following:<br \/>\n(i) The reduction or waiver in the claims from various stakeholders.<br \/>\n(ii) The revaluation of various properties and assets of the entity.<br \/>\n(iii) The profit accruing on account of appreciation of assets is utilised to write off accumulated losses and fictitious assets (such as preliminary expenses and cost of issue of shares and debentures) and creating provision for bad and doubtful debts.<\/p>\n<p><strong>Part-2(Numerical Problems: Topic Wise In Chronological Order)<\/strong><\/p>\n<p>Question 1.<br \/>\n1K Ltd. is considering acquiring N. Ltd., the following information is available:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19278\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-1.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 1\" width=\"602\" height=\"75\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-1.png 602w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-1-300x37.png 300w\" sizes=\"(max-width: 602px) 100vw, 602px\" \/><br \/>\nExchange of equity shares for acquisition is based on current market value as above. There is no synergy advantage available:<br \/>\n(i) Find the earning per share for company K. Ltd. after merger.<br \/>\n(ii) Find the exchange ratio so that shareholders of N. Ltd. would not be at a loss. [Nov. 2008] [12 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of new EPS of K. Ltd. after Merger:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Exchange Ratio<\/td>\n<td>= \\(\\frac{\\text { Market Value of } N \\text { Ltd } .}{\\text { Market Value of } K \\mathrm{Ltd} .}\\) = \\( \\frac{160}{200} \\) = 0.8<br \/>\n[0.8 shares of K Ltd. for every 1 share of N Ltd.]<\/td>\n<\/tr>\n<tr>\n<td>No. of shares to be issued<\/td>\n<td>= 2,50,000 \u00d7 0.8 = 2,00,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Shares of K Limited (after merger)<\/td>\n<td>= 10,00,000 + 2,00,000 = 12,00,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Profits of K Ltd. (After Merger)<\/td>\n<td>Rs. 50,00,000 + Rs. 15,00,000 = Rs. 65,00,000<\/td>\n<\/tr>\n<tr>\n<td>EPS of K Ltd. (After Merger)<\/td>\n<td>= \\( \\frac{R s .65,00,000}{12,00,000 \\text { Shares }} \\) = Rs. 5.42<\/p>\n<p>&nbsp;<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Exchange Ratio so that shareholder of N. Ltd. would not be at a Loss:<br \/>\nThe shareholders of N Limited would not be at loss if the exchange ratio is based on EPS.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>K Ltd.<\/td>\n<td>N Ltd.<\/td>\n<\/tr>\n<tr>\n<td>EPS before Merger<\/td>\n<td>= \\(\\frac{\\text { Rs. } 50,00,000}{10,00,000 \\text { Shares }} \\) = Rs. 5.00<\/td>\n<td>= \\(\\frac{R s \\cdot 15,00,000}{2,50,000 \\text { Shares }} \\) = Rs. 6.00<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Exchange Ratio (with EPS as base) = \\(\\frac{E P S \\text { of } N \\text { Ltd. }(\\text { Target Co. })}{\\text { EPS of } K \\text { Ltd. }(\\text { Acquirer Co. })}\\)<br \/>\n= \\(\\frac{R s .6}{R s .5}\\) = 1.2<br \/>\nIt means 1.2 shares of K Ltd. for every 1 share of N Ltd.<br \/>\nShares to be issued to N Ltd. = 2,50,000 Shares \u00d7 1.2 = 3,00,000 Shares<br \/>\nTotal number of Shares = 10,00,000 + 3,00,000 = 13,00,000 Shares<br \/>\nEPS of K Ltd. (after merger) = \\(\\frac{R s .65,00,000}{R s .13,00,000}\\) = \u20b9 5.00<\/p>\n<p>Verification that the shareholders of target company are not at loss:<br \/>\nMethod 1 (Total Earnings approach)<br \/>\nTotal Earnings available to Shareholders of N. Ltd,:<br \/>\nBefore Merger = 2,50,000 Shares \u00d7 \u20b9 6.00 (EPS) = \u20b9 15,00,000<br \/>\nAfter Merger = 3,00,000 Shares \u00d7 \u20b9 5.00 (EPS) = \u20b9 15,00,000<\/p>\n<p>Method 2 (EPS approach)<br \/>\nThe EPS available to Shareholders of N. Ltd.:<br \/>\nBefore Merger = \u20b9 6<br \/>\nAfter Merger = EPS of K Ltd, after merger \u00d7 Exchange Ratio = 5 \u00d7 1.2 = \u20b9 6<br \/>\nTherefore, the exchange ratio on the basis of EPS is recommended.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 2.<br \/>\nYou have been provided the following Financial data of two companies:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Krishna Ltd. (\u20b9)<\/td>\n<td>Rama Ltd. (\u20b9)<\/td>\n<\/tr>\n<tr>\n<td>Earnings after taxes<\/td>\n<td>7,00,000<\/td>\n<td>10,00,000<\/td>\n<\/tr>\n<tr>\n<td>Equity shares (outstanding)<\/td>\n<td>2,00,000<\/td>\n<td>4,00,000<\/td>\n<\/tr>\n<tr>\n<td>EPS<\/td>\n<td>3.5<\/td>\n<td>2.5<\/td>\n<\/tr>\n<tr>\n<td>P\/E ratio<\/td>\n<td>10 times<\/td>\n<td>14 times<\/td>\n<\/tr>\n<tr>\n<td>Market price per share<\/td>\n<td>35<\/td>\n<td>35<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Company Rama Ltd. is acquiring the company Krishna Ltd., exchanging its shares on a one-to-one basis for company Krishna Ltd. The exchange ratio is based on the market prices of the shares of the two companies.<br \/>\nRequired:<br \/>\n(i) What will be the EPS subsequent to merger?<br \/>\n(ii) What is the change in EPS for the shareholders of companies Rama Ltd. and Krishna Ltd.?<br \/>\n(iii) Determine the market value of the post-merger firm: PE ratio is likely to remain the same.<br \/>\n(iv) Ascertain profits accounting to shareholders of both the companies. [Nov. 2009] [10 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of new EPS subsequent to Merger:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Exchange Ratio<\/td>\n<td>= \\(\\frac{\\text { Market Value of Krishna Ltd. } . \\text { Target Co.) }}{\\text { Market Value of Rama Ltd. }}\\) = \\(\\frac{35}{35}\\) = 1<br \/>\n[1 share of K Ltd. for every 1 share of Krishna Ltd.]<\/td>\n<\/tr>\n<tr>\n<td>No. of shares to be issued<\/td>\n<td>= 2,00,000 \u00d7 1 = 2,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total Shares of Rama Limited (after merger)<\/td>\n<td>= 4,00,000 + 2,00,000 = 6,00,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Profits of Rama Ltd. (After Merger)<\/td>\n<td>= (2,00,000 \u00d7 3.5) + (4,00,000 \u00d7 2.5) = Rs. 7,00,000 + Rs. 10,00,000 = Rs. 17,00,000<\/td>\n<\/tr>\n<tr>\n<td>EPS of Rama Ltd. (After Merger)<\/td>\n<td>= \\(\\frac{R s, 17,00,000}{6,00,000 \\text { Shares }}\\) = Rs. 2.83<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Change in EPS for shareholders of both companies:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19277\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-2.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 2\" width=\"568\" height=\"75\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-2.png 568w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-2-300x40.png 300w\" sizes=\"(max-width: 568px) 100vw, 568px\" \/><br \/>\nThe exchange ratio is 1:1, therefore the new EPS of Rama Ltd. i.e. Rs. 2.83 need not to be adjusted while determining the impact on EPS.<\/p>\n<p>(iii) Market Value of merged firm:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>P\/E ratio of new firm (expected to remain same)<\/td>\n<td>14 times<\/td>\n<\/tr>\n<tr>\n<td>New market price (14 \u00d7 \u20b9 2.83)<\/td>\n<td>\u20b9 39.62<\/td>\n<\/tr>\n<tr>\n<td>Total No. of Shares (4,00,000 + 2,00,000)<\/td>\n<td>6,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total market Capitalization (6,00,000 \u00d7 \u20b9 39.62)<\/td>\n<td>\u20b9 2,37,72,000<\/td>\n<\/tr>\n<tr>\n<td>Existing market capitalization (\u20b9 70,00,000 + \u20b9 1,40,00,000)<\/td>\n<td>\u20b9 2,10,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total gain<\/td>\n<td>\u20b9 27,72,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(iv) Determination of profits to shareholders of companies:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19276\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-3.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 3\" width=\"684\" height=\"153\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-3.png 684w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-3-300x67.png 300w\" sizes=\"(max-width: 684px) 100vw, 684px\" \/><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 3<br \/>\nMK Ltd. is considering acquiring NN Ltd. The following information is available:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19275\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-4.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 4\" width=\"594\" height=\"100\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-4.png 594w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-4-300x51.png 300w\" sizes=\"(max-width: 594px) 100vw, 594px\" \/><br \/>\nExchange of equity shares for acquisition is based on current market value as above. There is no synergy advantage available.<br \/>\n(i) Find the earning per share for company MK Ltd. after merger, and<br \/>\n(ii) Find the exchange ratio so that shareho1rers of NN Ltd. would not be at a loss. [Nov. 2010] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of new EPS of MK Ltd. after merger:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Exchange Ratio<\/td>\n<td>= \\(\\frac{\\text { Market Value of NN Ltd }}{\\text { Market Value of MK Ltd. }} \\) = \\( \\frac{160}{200} \\) = 0.8<br \/>\n[0.8 shares of MK Ltd. for every 1 share of NN Ltd.]<\/td>\n<\/tr>\n<tr>\n<td>No. of shares to be issued<\/td>\n<td>= 3,00,000 \u00d7 0.8 = 2,40,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Shares of MK Limited (after merger)<\/td>\n<td>= 12,00,000 + 2,40,000 = 14,40,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Profits of MK Ltd. (After Merger)<\/td>\n<td>Rs. 60,00,000 + Rs. 18,00,000 = Rs. 78,00,000<\/td>\n<\/tr>\n<tr>\n<td>EPS of MK Ltd. (After Merger)<\/td>\n<td>= \\(\\frac{\\text { Rs. } 78,00,000}{14,40,000 \\text { Shares }} \\) = Rs. 5.42 per share<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Exchange Ratio so that shareholder of NN Ltd. would not be at a Loss: The shareholders of NN Limited would not be at loss if the exchange ratio is based on EPS.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>MK Ltd.<\/td>\n<td>NN Ltd.<\/td>\n<\/tr>\n<tr>\n<td>EPS before Merger<\/td>\n<td>= \\(\\frac{\\text { Rs. } 60,00,000}{12,00,000 \\text { Shares }}\\) = Rs. 5.00<\/td>\n<td>= \\(\\frac{\\text { Rs. } 18,00,000}{3,00,000 \\text { Shares }}\\) = Rs. 6.00<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Exchange Ratio (with EPS as base) = \\(\\frac{E P S \\text { of } N N \\text { Ltd } .(\\text { Target Co. })}{\\text { EPS of MK Ltd. }(\\text { Acquirer Co. })}\\) = \\(\\frac{\\text { Rs. } 6}{\\text { Rs. } 5}\\) = 1.2<br \/>\nIt means 1.2 shares of MK Ltd. for every 1 share of NN Ltd.<br \/>\nShares to be issued to NN Ltd. = 3,00,000 Shares \u00d7 1.2 = 3,60,000 Shares<br \/>\nTotal number of Shares = 12,00,000 + 3,60,000 = 15,60,000 Shares<br \/>\nEPS of MK Ltd. (after, merger) = \\(\\frac{R s .78,00,000}{15,60,000 \\text { Shares }}\\) = \u20b9 5.00<\/p>\n<p>Verification that the shareholders of target company are not at loss:<br \/>\nMethod 1 (Total Earnings approach)<br \/>\nTotal Earnings available to Shareholders of NN Ltd.:<br \/>\nBefore Merger = 3,00,000 Shares \u00d7 \u20b9 6.00 (EPS) = \u20b9 18,00,000<br \/>\nAfter Merger = 3,60,000 Shares \u00d7 \u20b9 5.00 (EPS) = \u20b9 18,00,000<\/p>\n<p>Method 2 (EPS approach)<br \/>\nThe EPS available to Shareholders of NN Ltd.:<br \/>\nBefore Merger = \u20b9 6<br \/>\nAfter Merger = EPS of MK Ltd, after merger \u00d7 Exchange Ratio = 5 \u00d7 12 = \u20b9 6<br \/>\nTherefore, the exchange ratio on the basis of EPS is recommended.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 4.<br \/>\nLongitude Limited is in the process of acquiring Latitude Limited on a share exchange basis. Following relevant data are available:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19274\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-5.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 5\" width=\"596\" height=\"148\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-5.png 596w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-5-300x74.png 300w\" sizes=\"(max-width: 596px) 100vw, 596px\" \/><\/p>\n<p>You are required to determine:<br \/>\n(i) Pre-merger Market Value per Share, and<br \/>\n(ii) The maximum exchange ratio Longitude Limited can offer without the dilution of<br \/>\n(1) EPS and<br \/>\n(2) Market Value per Share<br \/>\nCalculate Ratio\/s up to four decimal points and amounts and number of shares up to two decimal points. [May 2013] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Pre-Merger Market Value of Share (in unit):<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Formula<\/td>\n<td>Longitude Ltd.<\/td>\n<td>Latitude Ltd.<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio \u00d7 EPS<\/td>\n<td>15 \u00d7 Rs. 8 = Rs. 120<\/td>\n<td>10 \u00d7 Rs. 5 = Rs. 50<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) (i) Maximum Exchange Ratio without dilution of EPS:<br \/>\nThe shareholders of Latitude Ltd. would not be at loss if the exchange ratio is based on EPS.<\/p>\n<p>Exchange Ratio (with EPS as base)<br \/>\n= \\(\\frac{\\text { EPS of Latitude Ltd. }(\\text { Target Co.) }}{\\text { EPS of Longitude Ltd. }(\\text { Acquirer Co.) }}\\) = \\(\\frac{R s .5}{R s .8}\\) = 0.625<br \/>\nIt means 0.625 shares of Longitude Ltd. for every 1 share of Latitude Ltd.<br \/>\nShares to be issued to Latitude Ltd. = 16 Lakh Shares \u00d7 0.625 = 10 Lakh Shares<\/p>\n<p>(ii) Maximum Exchange Ratio without dilution of Market Value per share: The shareholders of Latitude Ltd. would not be at loss if the exchange ratio is based on Market Price.<\/p>\n<p>Exchange Ratio (with Market Price as base)<br \/>\n= \\(\\frac{\\text { Market Price of Latitude Ltd. }(\\text { Target Co.) }}{\\text { Market Price of Longitude Ltd. }(\\text { Acquirer Co.) }}\\) = \\(\\frac{R s .50}{R s .120}\\) = 0.4167<\/p>\n<p>It means 0.4167 shares of Longitude Ltd. for every 1 share of Latitude Ltd.<br \/>\nShares to be issued to Latitude Ltd.= 16 Lakh Shares \u00d7 0.4167 = 6,66,666.67 Shares<\/p>\n<p>Alternative approach:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Longitude Ltd.<\/td>\n<td>Latitude Ltd.<\/td>\n<td>Total<\/td>\n<\/tr>\n<tr>\n<td>Pre-merger<\/td>\n<td>= Rs. 120 \u00d7 15 Lakhs<\/td>\n<td>= Rs. 50 \u00d7 16 Lakhs<\/td>\n<td>Rs. 2,600 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>Market Capitalisation<\/td>\n<td>= Rs. 1800 Lakhs<\/td>\n<td>= Rs. 800 Lakhs<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Max. No. of Shares (After Merger)<br \/>\n= \\(\\frac{\\text { Combined Market Capitalisation }}{\\text { Current Market Price of Longitude Lid. }}\\)<br \/>\n= \\(\\frac{R s .2600}{R s .120}\\) = 21.67 Lakh Shares<\/p>\n<p>Max. Shares no. be issued to Latitude Limited = 21.67 &#8211; 15 = 6.67 Lakh Shares<br \/>\nTherefore, the maximum share exchange ratio is 6.67:16 or 0.4169:1<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 5.<br \/>\nCauliflower Limited is contemplating acquisition of Cabbage Limited. Cauliflower Limited has 5 lakh shares having market value of \u20b9 40 per share while Cabbage Limited has 3 lakh shares having market value of \u20b9 25 per share. The EPS for Cabbage Limited and Cauliflower Limited are \u20b9 3 per share and \u20b9 5 per share respectively. The managements of both the companies are discussing two alternatives for exchange of shares as follows:<br \/>\n(i) In proportion to relative earnings per share of the two companies.<br \/>\n(ii) 1 share of Cauliflower Limited for two shares of Cabbage Limited.<br \/>\nRequired:<br \/>\n(i) Calculate the EPS after merger under both the alternatives.<br \/>\n(ii) Show the impact of EPS for the shareholders of the two companies under both the alternatives. [Nov. 2014] [10 Marks]<br \/>\nAnswer:<br \/>\n(i) Calculation of EPS after merger:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Alternative I (EPS Basis)<\/td>\n<td>Alternative II (Exchange Ratio 1:2)<\/td>\n<\/tr>\n<tr>\n<td>Total Earnings (W.N.1)<\/td>\n<td>Rs. 34,00,000<\/td>\n<td>Rs. 34,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total Shares (W.N.3)<\/td>\n<td>6,80,000<\/td>\n<td>6,50,000<\/td>\n<\/tr>\n<tr>\n<td>EPS of Cauliflower after Merger<\/td>\n<td>\\( \\frac{34,00,000}{6,80,000} \\) = \u20b9 5.00<\/td>\n<td>\\( \\frac{34,00,000}{6,50,000} \\) = \u20b9 5.23<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Merger impact of EPS for the shareholders of the two companies:<br \/>\nWith EPS based Share Exchange Ratio:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>EPS (Existing)<\/td>\n<td>EPS (After Merger)<\/td>\n<td>Change in EPS<\/td>\n<\/tr>\n<tr>\n<td>Cauliflower Ltd.<\/td>\n<td>Rs. 5<\/td>\n<td>Rs. 5<\/td>\n<td>No Change<\/td>\n<\/tr>\n<tr>\n<td>Cabbage Ltd<\/td>\n<td>Rs. 3<\/td>\n<td>Rs. 5 \u00d7 0.6 = Rs. 3<\/td>\n<td>No Change<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>With Exchange Ratio of 1:2<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>EPS<\/td>\n<td>Existing<\/td>\n<td>After Merger<\/td>\n<td>Change in EPS<\/td>\n<\/tr>\n<tr>\n<td>Cauliflower Ltd.<\/td>\n<td>Rs. 5<\/td>\n<td>Rs. 5.23<\/td>\n<td>Increase [0.23]<\/td>\n<\/tr>\n<tr>\n<td>Cabbage Ltd.<\/td>\n<td>Rs. 3<\/td>\n<td>Rs. 5.23 \u00d7 0.5 = Rs. 2.615<\/td>\n<td>Decrease [0.385]<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Note: While comparing the EPS (before and after merger) for the shareholders of target company (Cabbage Ltd.), the post-merger EPS has to be adjusted on the basis of Exchange Ratio.<\/p>\n<p>Working Note-1 Calculation of total earnings<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Company<\/td>\n<td>Existing No. of Shares<\/td>\n<td>EPS<\/td>\n<td>Total earnings<\/td>\n<\/tr>\n<tr>\n<td>Cauliflower Ltd.<\/td>\n<td>5,00,000<\/td>\n<td>5.00<\/td>\n<td>25,00,000<\/td>\n<\/tr>\n<tr>\n<td>Cabbage Ltd.<\/td>\n<td>3,00,000<\/td>\n<td>3.00<\/td>\n<td>9,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total earnings<\/td>\n<td><\/td>\n<td>Rs. 34,00,000<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Working Note-2 Calculation of total shares to be issued to Cabbage Company:<br \/>\nNo. of shares (EPS Basis) = Shares in Cabbage Ltd. \u00d7 \\(=\\frac{\\text { EPS of Cabbage }}{\\text { EPS of Cauliflower }}\\)<br \/>\n= 3,00,000 \u00d7 \\(\\frac{\\text { Rs. } 3}{\\text { Rs. } 5}\\) = 1,80,000 shares<br \/>\nNo. of shares (ER 1:2) = Shares in Cabbage Ltd. \u00d7 Exchange Ratio<br \/>\n= 3,00,000 \u00d7 \\(\\frac{\\text { Rs. } 1}{\\text { Rs. } 2}\\) = 1,50,000 shares<\/p>\n<p>Working Note-3 Calculation of total number of shares<br \/>\nNo. of shares after merger = 5,00,000 + 1,80,000 = 6,80,000<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Alternative I (EPS Basis)<\/td>\n<td>Alternative II (Exchange Ratio 1:2)<\/td>\n<\/tr>\n<tr>\n<td>Existing Shares<\/td>\n<td>5,00,000<\/td>\n<td>5,00,000<\/td>\n<\/tr>\n<tr>\n<td>Fresh Shares issued<\/td>\n<td>1,80,000<\/td>\n<td>1,50,000<\/td>\n<\/tr>\n<tr>\n<td>Total Shares<\/td>\n<td>6,80,000<\/td>\n<td>6,50,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 6.<br \/>\nEast Co. Ltd. is studying the possible acquisition of Fost Co. Ltd. by way of merger. The following data are available in respect of the companies.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>East Co. Ltd.<\/td>\n<td>Fost Co. Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Earning after tax (\u20b9)<\/td>\n<td>2,00,000<\/td>\n<td>60,000<\/td>\n<\/tr>\n<tr>\n<td>No. of equity shares<\/td>\n<td>40,000<\/td>\n<td>10,000<\/td>\n<\/tr>\n<tr>\n<td>Market value per share (\u20b9)<\/td>\n<td>15<\/td>\n<td>12<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(i) If the merger goes through by exchange of equity share and the exchange ratio is based on the current market price, what is the new earning per share for East Co. Ltd.?<br \/>\n(ii) Fost Co. Ltd. wants to be sure that the merger will not diminish the earnings available to its shareholders. What should be the exchange ratio in that case? [Nov. 2017] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of new EPS of East Ltd. (After Merger):<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Exchange Ratio<\/td>\n<td>= \\(\\frac{\\text { Market Value of Fost Ltd }}{\\text { Market Value of East Ltd. }}\\) = \\(\\frac{12}{15}\\) = 0.8<br \/>\n[0.8 shares of East Ltd. for every 1 share of Fost Ltd.]<\/td>\n<\/tr>\n<tr>\n<td>No. of shares to be issued<\/td>\n<td>= 10,000 x 0.8 = 8,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Shares of East Lim\u00adited (after merger)<\/td>\n<td>= 40,000 + 8,000 = 48,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Profits of East Ltd. (After Merger)<\/td>\n<td>Rs. 2,00,000 + Rs. 60,000 = Rs. 2,60,000<\/td>\n<\/tr>\n<tr>\n<td>EPS of East Ltd. (After Merger)<\/td>\n<td>= \\( \\frac{R s, 2,60,000}{48,000 \\text { Shares }\\) = Rs. 5.416<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Exchange Ratio so that shareholder of Fost Ltd. would not be at a Loss: The shareholders of Fost Limited would not be at loss if the exchange ratio is based on EPS.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>East Ltd.<\/td>\n<td>Fost Ltd.<\/td>\n<\/tr>\n<tr>\n<td>EPS before Merger<\/td>\n<td>= \\(\\frac{R s .2,00,000}{40,000 \\text { Shares }}\\) = Rs. 5.00<\/td>\n<td>= \\(\\frac{R s .60,000}{10,000 \\text { Shares }}\\) = Rs. 6.00<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Exchange Ratio (with EPS as base) = \\(\\frac{\\text { EPS of Fost Ltd. }(\\text { Target Co.) }}{\\text { EPS of East Ltd. }(\\text { Acquirer Co. })}\\) = \\(\\frac{R s .6}{R s .5}\\) = 1.2<br \/>\nIt means 1.2 shares of East Ltd. for every 1 share of Fost Ltd.<br \/>\nShares to be issued to Fost Ltd. = 10,000 Shares \u00d7 1.2 = 12,000<br \/>\nShares Total number of Shares = 40,000 + 12,000 = 52,000 Shares<br \/>\nEPS of East Ltd. (after merger) = \\(\\frac{R s .2,60,000}{R s .52,000}\\) = Rs. 5.00<\/p>\n<p>Verification that the shareholders of target company are not at loss:<br \/>\nThe EPS available to Shareholders of Fost Ltd.:<br \/>\nBefore Merger = 10,000 shares \u00d7 Rs. 6 = Rs. 60,000<br \/>\nAfter Merger = Shares issued to Foster \u00d7 Post merger EPS = 12,000 \u00d7 5 = Rs. 60,000<br \/>\nTherefore, the exchange ratio on the basis of EPS is recommended.<\/p>\n<p>Question 7.<br \/>\nTatu Ltd. wants to takeover Mantu Ltd. and has offered a swap ratio of 1:2 (0.5 shares for everyone share of Mantu Ltd.). Following information is provided:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Tatu Ltd.<\/td>\n<td>Mantu Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Profit after tax<\/td>\n<td>Rs. 24,00,000<\/td>\n<td>Rs.4,80,000<\/td>\n<\/tr>\n<tr>\n<td>Equity shares outstanding (Nos.)<\/td>\n<td>8,00,000<\/td>\n<td>2,40,000<\/td>\n<\/tr>\n<tr>\n<td>EPS<\/td>\n<td>Rs. 3<\/td>\n<td>Rs. 2<\/td>\n<\/tr>\n<tr>\n<td>PE Ratio<\/td>\n<td>10 times<\/td>\n<td>7 times<\/td>\n<\/tr>\n<tr>\n<td>Market price per share<\/td>\n<td>Rs. 30<\/td>\n<td>Rs. 14<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>You are required to calculate:<br \/>\n(i) The number of equity shares to be issued by Tatu Ltd. for acquisition of Mantu Ltd.<br \/>\n(ii) What is the EPS of Tatu Ltd. after the acquisition?<br \/>\n(in) Determine the equivalent earnings per share of Mantu Ltd.<br \/>\n(iv) What is the expected market price per share of Tatu Ltd. after the acquisition, assuming its PE multiple remains unchanged?<br \/>\n(v) Determine the market value of the merged firm. [May 2018][8 Marks]<br \/>\nAnswer:<br \/>\n(i) The number of equity shares to be issued by Tatu Ltd.:<br \/>\n= Shares in Mantu Ltd. \u00d7 Exchange Ratio<br \/>\n= 2,40,000 \u00d7 0.5 = 1,20,000 Shares<\/p>\n<p>(ii) Determination of new EPS subsequent to Merger:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Total Shares of Tatu Limited (after merger)<\/td>\n<td>= 8,00,000 + 1,20,000 = 9,20,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Profits of Tatu Ltd. (After Merger)<\/td>\n<td>= Rs. 24 Lakhs + Rs. 4,80,000 = Rs. 28,80,000<\/td>\n<\/tr>\n<tr>\n<td>EPS of Tatu Ltd. (After Merger)<\/td>\n<td>= \\(\\frac{\\text { Rs. } 28,80,000}{9,20,000 \\text { Shares }}\\) = Rs. 3.13<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(iii) Equivalent EPS of Mantu Limited:<br \/>\n= New EPS \u00d7 Exchange Ratio = 3.13 \u00d7 0.5 = 1.57<\/p>\n<p>(iv) New Market price of Tatu Limited (P\/E remaining unchanged)<br \/>\n= Expected EPS \u00d7 P\/E Ratio = 3.13 \u00d7 10 = \u20b9 31.30<\/p>\n<p>(v) Market value of Merged Firm<br \/>\n= Total No. of Shares \u00d7 Expected market price<br \/>\n= 9,20,000 Shares \u00d7 Rs. 31.30 = Rs. 287,96,000<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 8.<br \/>\nT Ltd. and E Ltd. are in the same industry. The former is in negotiation for acquisition of the latter. Important information about the two companies as per their latest financial statements is given below:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>T Ltd.<\/td>\n<td>E Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Number of outstanding Equity shares @ \u20b9 10 each<\/td>\n<td>12 lakhs<\/td>\n<td>6 lakhs<\/td>\n<\/tr>\n<tr>\n<td>Debt:<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>10% Debentures (\u20b9 lakhs)<\/td>\n<td>580<\/td>\n<td>&#8211;<\/td>\n<\/tr>\n<tr>\n<td>12.5% Institutional Loan (\u20b9 lakhs)<\/td>\n<td>&#8211;<\/td>\n<td>240<\/td>\n<\/tr>\n<tr>\n<td>Earnings before interest, depreciation and Tax (EBI- DAT) (\u20b9 lakhs)<\/td>\n<td>400.86<\/td>\n<td>115.71<\/td>\n<\/tr>\n<tr>\n<td>Market Price\/Share (\u20b9)<\/td>\n<td>220.00<\/td>\n<td>110.00<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>T Ltd. plans to offer a price for E Ltd., business as a whole which will be 7 times EBITDAT reduced by outstanding debt, to be discharged by own shares at market price.<br \/>\nE Ltd. is planning to seek one share in T Ltd. for every 2 shares in E Ltd. based on the market price. Tax rate for the two companies may be assumed as 30%.<br \/>\nCalculate and show the following under both alternatives &#8211; T Ltd.\u2019s offer and E Ltd.\u2019s plan:<br \/>\n(i) Net consideration payable.<br \/>\n(ii) No. of shares to be issued by T Ltd.<br \/>\n(iii) EPS of T Ltd. after acquisition.<br \/>\n(iv) Expected market price per share of T Ltd. after acquisition.<br \/>\n(v) State briefly the advantages to T Ltd. from the acquisition.<br \/>\nCalculate (except EPS) may be rounded off to 2 decimals in lakhs.<br \/>\n[May 2010] [16 Marks]<br \/>\nAnswer:<br \/>\nAs per T Ltd\u2019s Offer<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19272\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-7.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 7\" width=\"612\" height=\"611\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-7.png 612w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-7-300x300.png 300w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-7-150x150.png 150w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><br \/>\nAs per E Ltd\u2019s Plan<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>(\u20b9 in lakhs)<\/td>\n<\/tr>\n<tr>\n<td>(i) Net Consideration Payable<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>6 lakh shares \u00d7 \u20b9 110<\/td>\n<td>660<\/td>\n<\/tr>\n<tr>\n<td>(ii) No. of shares to be issued by T Ltd.<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u20b9 660 lakhs \u00f7 \u20b9 220<\/td>\n<td>3 lakh<\/td>\n<\/tr>\n<tr>\n<td>(iii) EPS of T Ltd. after Acquisition<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>NPAT (as per earlier calculations)<\/td>\n<td>300.00<\/td>\n<\/tr>\n<tr>\n<td>Total no. of shares outstanding (12 lakhs &#8211; 3 lakhs)<\/td>\n<td>1 5 lakh<\/td>\n<\/tr>\n<tr>\n<td>Earnings per share (EPS) \u20b9 300 lakh 15 lakh<\/td>\n<td>\u20b9 20.00<\/td>\n<\/tr>\n<tr>\n<td>(iv) Expected Market Price (\u20b9 20 \u00d7 11)<\/td>\n<td>220<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Advantage of Acquisition T Ltd.<br \/>\nSince the two companies are in the same industry, the following advantage could accrue:<br \/>\n(i) Synergy, cost reduction and operating efficiency.<br \/>\n(ii) Better market share<br \/>\n(ii) Avoidance of competition<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 9.<br \/>\nTK Ltd. and SK Ltd. are both in the same industry. The former is in negotiation for acquisition of the latter. Information about the two companies as per their latest financial statements are given below:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>TK Ltd.<\/td>\n<td>SK Ltd.<\/td>\n<\/tr>\n<tr>\n<td>\u20b9 10 Equity shares outstanding<\/td>\n<td>24 Lakhs<\/td>\n<td>12 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>10% Debentures (\u20b9 Lakhs)<\/td>\n<td>1160<\/td>\n<td>&#8211;<\/td>\n<\/tr>\n<tr>\n<td>12.5% Institutional loan (\u20b9 Lakhs)<\/td>\n<td>&#8211;<\/td>\n<td>480<\/td>\n<\/tr>\n<tr>\n<td>Earnings before interest, depreciation and tax (EBIDAT) (\u20b9 Lakhs)<\/td>\n<td>800.00<\/td>\n<td>230.00<\/td>\n<\/tr>\n<tr>\n<td>Market Price\/Share (\u20b9)<\/td>\n<td>220.00<\/td>\n<td>110.00<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>TK Ltd. plans to offer a price for SK Ltd. business, as a whole, which will be 7 times of EBIDAT as reduced by outstanding debt and to be discharged by own shares at market price.<br \/>\nSK Ltd. is planning to seek one share in TK Ltd. for every 2 shares in SK Ltd. based on the market price. Tax rate for the two companies may be assumed as 30%.<br \/>\nCalculate and show the following under both alternatives- TK Ltd.&#8217;s offer and SK Ltd.\u2019s plan:<br \/>\n(i) Net consideration payable.<br \/>\n(ii) No. of shares to be issued by TK Ltd.<br \/>\n(iii) EPS of TK Ltd. after acquisition.<br \/>\n(iv) Expected market price per share of TK Ltd. after acquisition.<br \/>\n(v) State briefly the advantages to TK Ltd. from the acquisition.<br \/>\nCalculate may be rounded off to two decimals points. [Nov. 2018 New Syllabus] [12 Marks]<br \/>\nAnswer:<br \/>\nAs per TK Ltd\u2019s Offer<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19271\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-8.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 8\" width=\"620\" height=\"640\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-8.png 620w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-8-291x300.png 291w\" sizes=\"(max-width: 620px) 100vw, 620px\" \/><\/p>\n<p>As per SK Ltd.\u2019s Plan<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>(\u20b9 in lakhs)<\/td>\n<\/tr>\n<tr>\n<td>(i) Net Consideration Payable<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>12 lakhs shares \u00d7 \u20b9 110<\/td>\n<td>1,320<\/td>\n<\/tr>\n<tr>\n<td>(ii) No. of shares to be issued by TK Ltd.<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u20b9 1,320 lakhs + \u20b9 220<\/td>\n<td>6 lakh<\/td>\n<\/tr>\n<tr>\n<td>(iii) EPS of TK Ltd. after Acquisition<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>NOPAT (as per earlier calculations)<\/td>\n<td>597.80<\/td>\n<\/tr>\n<tr>\n<td>Total no. of shares outstanding (24 lakhs &#8211; 6 lakhs)<\/td>\n<td>30 lakh<\/td>\n<\/tr>\n<tr>\n<td>Earnings Per share (EPS) \u20b9 597.8 lakh 30 lakh<\/td>\n<td>\u20b9 19.93<\/td>\n<\/tr>\n<tr>\n<td>(iv) Expected Market Price (\u20b9 19.93 \u00d7 11)<\/td>\n<td>\u20b9 219.23<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Advantage of Acquisition TK Ltd<br \/>\nSince the two companies are in the same industry, the following advantage could accrue.<br \/>\n(i) Synergy, cost reduction and operating efficiency.<br \/>\n(ii) Better market share.<br \/>\n(iii) Avoidance of competition.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 10<br \/>\nLMN Ltd. is considering merger with XYZ Ltd. LMN Ltd\u2019s shares are currently traded at \u20b9 30.00 per share. It has 3,00,000 shares outstanding. Its earnings after taxes (EAT) amount to \u20b9 6,00,000. XYZ Ltd. has 1,60,000 shares outstanding and its current market price is ? 15.00 per share and its earnings after taxes (EAT) amount to \u20b9 1,60,000. The merger is decided to be effected by means of a stock swap (exchange). XYZ Ltd. has agreed to a proposal by which LMN Ltd. will offer the current market value of XYZ Ltd\u2019s shares.<br \/>\nFind out:<br \/>\n(i) The pre-merger earning per share (EPS) and price\/earnings (P\/E) ratios of both the companies.<br \/>\n(ii) If XYZ Ltd\u2019s P\/E Ratio is 9.6, what is its current Market Price? What is the Exchange Ratio? What will LMN Ltd.\u2019s post-merger EPS be?<br \/>\n(iii) What should be the exchange ratio; if LMN Ltd.&#8217;s pre-merger and post-merger EPS are to be the same? [May 2012] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of Pre-merger EPS and P\/E ratios:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>LMN Ltd.<br \/>\n(Acquirer)<\/td>\n<td>XYZ Ltd.<br \/>\n(Target)<\/td>\n<\/tr>\n<tr>\n<td>Earnings after taxes<\/td>\n<td>6,00,000<\/td>\n<td>1,60,000<\/td>\n<\/tr>\n<tr>\n<td>Number of shares outstanding<\/td>\n<td>3,00,000<\/td>\n<td>1,60,000<\/td>\n<\/tr>\n<tr>\n<td>(Earnings per share) EPS (Rs. per share)<\/td>\n<td>2<\/td>\n<td>1<\/td>\n<\/tr>\n<tr>\n<td>Market Price per share<\/td>\n<td>30<\/td>\n<td>15<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio (times)<\/td>\n<td>15<\/td>\n<td>15<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Current Market Price of XYZ Ltd. if P\/E ratio is 9.6<br \/>\nCurrent Market Price of XYZ = P\/E Ratio \u00d7 EPS = \u20b9 1 \u00d7 9.6 = \u20b9 9.60<br \/>\nExchange ratio = \\(\\frac{\\text { Market Price of Target Co. }(X Y Z \\text { Lld. })}{\\text { Market Price of Acquirer Co. }(L M N \\text { Lid. })}\\) = \\(\\frac{9.6}{30}\\) = 32<br \/>\nShares to be issued = 1,60,000 \u00d7 0.32 = 51,200 Shares<br \/>\nPost-merger EPS of LMN Ltd. = \\(\\frac{6,00,000+1,60,000}{3,00,000+51,200}\\) = \\(\\frac{7,60,000}{3,51,200}\\) = \u20b9 2.16<\/p>\n<p>(iii) Desired Exchange Ratio:<br \/>\nExchange ratio = \\(=\\frac{\\text { EPS of Target } C o .(X Y Z \\text { Ltd.) }}{\\text { EPS of Acquirer Co.(LMN Ltd.) }}\\) = \\(\\frac{1}{2}\\) = 0.5<br \/>\nShares to be issued = 1,60,000 \u00d7 0.5 = 80,000 Shares<br \/>\nPost-merger EPS of LMN Ltd. = \\(\\frac{6,00,000+1,60,000}{3,00,000+80,000}\\) = \\(\\frac{7,60,000}{3,80,200}\\) = \u20b9 2<\/p>\n<p>Verification:<br \/>\nBefore Merger = \u20b9 1<br \/>\nEquivalent post-merger = \u20b9 2 \u00d7 0.5 (exchange Ratio) = \u20b9 1<\/p>\n<p>Alternative Method of computation:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Total number of shares in post merged company<\/td>\n<td>= \\(\\frac{\\text { Post-merger earnings }}{\\text { pre-merger EPS of LMN Ltd. }}\\) = \\( \\frac{7,60,000}{2} \\) = 3,80,000 shares<\/td>\n<\/tr>\n<tr>\n<td>Number of shares required to be issued to XYZ Ltd.<\/td>\n<td>= 3,80,000 &#8211; 3,00,000 = 80,000 shares<\/td>\n<\/tr>\n<tr>\n<td>Therefore, the exchange ratio (ER) should be<\/td>\n<td>= 80,000 : 1,60,000 = \\(\\frac{80,000}{1,60,000}\\) = 0.50<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 11.<br \/>\nXYZ Ltd. wants to purchase ABC Ltd. by exchanging 0.7 of its share for each share of ABC Ltd., Relevant financial data are as follows:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>XYZ Ltd.<\/td>\n<td>ABC Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Equity shares outstanding (in numbers)<\/td>\n<td>10,00,000<\/td>\n<td>4,00,000<\/td>\n<\/tr>\n<tr>\n<td>EPS (\u20b9)<\/td>\n<td>40<\/td>\n<td>28<\/td>\n<\/tr>\n<tr>\n<td>Market price per share (\u20b9)<\/td>\n<td>253<\/td>\n<td>160<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(i) Illustrate the impact of merger on EPS of both the companies.<br \/>\n(ii) The management of ABC Ltd. has quoted a share exchange ratio of 1:1 for the merger. Assuming that P\/E ratio of XYZ Ltd. will remain unchanged after the merger, what will be the gain from merger for ABC Ltd.?<br \/>\n(iii) What will be the gain\/loss to shareholders of XYZ Ltd.?<br \/>\n(iv) Determine the maximum exchange ratio acceptable to shareholders of XYZ Ltd. [Nov. 2015] [10 Marks]<br \/>\nAnswer:<br \/>\nCalculation of Earnings and P\/E Ratio:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Earnings (EPS \u00d7 No. of Shares)<\/td>\n<td>P\/E Ratio(MPS + EPS)<\/td>\n<\/tr>\n<tr>\n<td>XYZ Ltd.<\/td>\n<td>10,00,000 \u00d7 40 = \u20b9 400 Lakhs<\/td>\n<td>Rs. 250 \u00f7 40 = 6.25<\/td>\n<\/tr>\n<tr>\n<td>ABC Ltd.<\/td>\n<td>4,00,000 \u00d7 28 = \u20b9 112 Lakhs<\/td>\n<td>Rs. 160 \u00f7 28 = 5.71<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Calculation of EPS after merger:<br \/>\nShare to be issued by XYZ to ABC = 4,00,000 \u00d7 1.7 = 2,80,000 shares<br \/>\nEPS = \\(\\frac{\\text { Rs. } 400 \\text { Lakhs }+ \\text { Rs. } 112 \\text { Lakhs }}{10 \\text { Lakhs + 2.8 Lakhs Shares }}\\) = \\(\\frac{\\text { Rs. } 512 \\text { Lakhs }}{12.8 \\text { Lakh Shares }}\\) = \u20b9 40<\/p>\n<p>(i) Merger impact of EPS with Exchange Ratio 0.7<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>EPS (Existing)<\/td>\n<td>EPS (After Merger)<\/td>\n<td>Change in EPS<\/td>\n<\/tr>\n<tr>\n<td>XYZ Ltd.<\/td>\n<td>\u20b940<\/td>\n<td>\u20b940<\/td>\n<td>No Change<\/td>\n<\/tr>\n<tr>\n<td>ABC Ltd.<\/td>\n<td>\u20b928<\/td>\n<td>\u20b94 \u00d7 0.7 = \u20b9 28<\/td>\n<td>No Change<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Gain from Merger if Exchange Ratio is 1:1<br \/>\nShare to be issued by XYZ to ABC = 4,00,000 \u00d7 1 = 4,00,000 shares<br \/>\nEPS = \\(=\\frac{\\text { Rs. } 400 \\text { Lakhs }+ \\text { Rs. } 112 \\text { Lakhs }}{10 \\text { Lakhs }+4 \\text { Lakhs Shares }}\\) = \\(\\frac{\\text { Rs. } 512 \\text { Lakhs }}{14 \\text { Lakh Shares }}\\) = \u20b9 36.57<br \/>\nMarket Price of Share = \u20b9 36.57 \u00d7 6.25 = \u20b9 228.56<br \/>\nMarket Price (Before Merger of ABC) = \u20b9 160<br \/>\nGain from Merger = \u20b9 68.56<\/p>\n<p>(iii) Gain\/Loss from the Merger to the shareholders of XYZ Ltd.<br \/>\nMarket Price of Share = \u20b9 228.56<br \/>\nMarket Price (Before Merger of ABC) = \u20b9 250<br \/>\nLoss from Merger (per share) = \u20b9 21.44<\/p>\n<p>(iv) Maximum Exchange Ratio acceptable to XYZ Ltd. Shareholders<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>\u20b9 in Lakhs<\/td>\n<\/tr>\n<tr>\n<td>Market Value of Merged Entity (\u20b9 228.57 \u00d7 14,00,000)<\/td>\n<td>3,199.98<\/td>\n<\/tr>\n<tr>\n<td>Less: Value acceptable to shareholders of XYZ Ltd.<\/td>\n<td>2,500.00<\/td>\n<\/tr>\n<tr>\n<td>Value of Merged Entity available to shareholders of ABC Ltd.<\/td>\n<td>699.98<\/td>\n<\/tr>\n<tr>\n<td>Market Price per share<\/td>\n<td>250.00<\/td>\n<\/tr>\n<tr>\n<td>No. of shares to be issued to shareholders of ABC Ltd. (Lakhs)<\/td>\n<td>2.80<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Thus, maximum ratio of issue shall be 2.80:4.00 or 0.70 share of XYZ Ltd. for one share of ABC Ltd.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 12.<br \/>\nA Lid., a listed company, is considering merger of B Ltd. which is also a listed company, with itself by means of a stock swap (exchange). B Ltd. has agreed to a plan under which A Ltd. will offer the current market value of B Ltd\u2019s shares.<br \/>\nAdditional Information :<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>A Ltd.<\/td>\n<td>B Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Earnings after tax (Rs.)<\/td>\n<td>10,00,000<\/td>\n<td>2,50,000<\/td>\n<\/tr>\n<tr>\n<td>Number of shares outstanding<\/td>\n<td>4,00,000<\/td>\n<td>2,00,000<\/td>\n<\/tr>\n<tr>\n<td>Current market price (Rs.) per share<\/td>\n<td>50<\/td>\n<td>20<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>On the basis of above information, you required to calculate the following:<br \/>\n(i) What is the pre-merger Earnings Per Share (EPS) and P\/E ratios of both the companies?<br \/>\n(ii) If B Ltd.\u2019s P\/E is 10, what will be its current market price per share ? What will be the exchange ratio on the basis of such market price? What will be the A Ltd.\u2019s post-merger EPS?<br \/>\n(iii) What must be the exchange ratio if A Ltd.\u2019s Pre-merger and Post-merger EPS to be the same? [Nov. 2019, Modified] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Calculation of Pre-merger EPS &amp; P\/E Ratio<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>EPS = Earnings \u00f7\u00a0 No. of Shares<\/td>\n<td>P\/E Ratio = MPS \u00f7\u00a0 EPS<\/td>\n<\/tr>\n<tr>\n<td>A Ltd.<\/td>\n<td>\\(\\frac{\\mathrm{Rs} .10,00,000}{4,00,000}\\) = Rs. 2.50<\/td>\n<td>Rs. 50 \u00f7\u00a0 2,5 = 20 Times<\/td>\n<\/tr>\n<tr>\n<td>B Ltd.<\/td>\n<td>\\(\\frac{\\text { Rs. } 2,50,000}{2,00,000}\\) = Rs. 1.25<\/td>\n<td>Rs. 20 \u00f7\u00a0 1.25 = 16 Times<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Current Market Price of B Ltd. if P\/E is 10<br \/>\nEPS (B Ltd.) = Rs. 1.25<br \/>\nP\/E Ratio = 10 times<br \/>\nMarket Price = 1.25 \u00d7 10 = Rs. 12.50<br \/>\nExchange Ratio (ER) on the basis of Revised Market Price<br \/>\nExchange Ratio = \\(\\frac{\\text { Market Price of B Ltd. }}{\\text { Market Price of A Ltd. }}\\) = \\(\\frac{12.50}{50}\\) = 0.25<br \/>\nShare to be issued by A Ltd. to B Ltd. = 2,00,000 \u00d7 0.25 = 50,000 shares.<br \/>\nPost Merger EPS of A Ltd.<br \/>\nEPS (A Ltd.) = \\(\\frac{10,00,000+2,50,000}{4,00,000+50,000}\\) = Rs. 2.78<\/p>\n<p>(iii) Required Exchange Ratio to maintain EPS of A Ltd.<br \/>\nThe pre-merger and post-merger EPS would be the same if Exchange Ratio is based on EPS. It may be determined as under:<br \/>\nExchange Ratio = \\(\\frac{\\text { EPS of B Ltd. (Target Company) }}{\\text { EPS of A Ltd. (Acquiring Company) }}\\) = \\(\\frac{1.25}{2.50}\\) = 0.5<\/p>\n<p>Verification:<br \/>\nEPS (After Acquisition) = \\(\\frac{10,00,000+2,50,000}{4,00,000+(2,00,000 \\times 0.5)}\\) = Rs. 2.50<\/p>\n<p>Question 13.<br \/>\nA Ltd. wants to acquire T Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one share of T Ltd.). Following information is provided:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>A Ltd.<\/td>\n<td>T Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Profit after tax (\u20b9)<\/td>\n<td>18,00,000<\/td>\n<td>3,60,000<\/td>\n<\/tr>\n<tr>\n<td>Equity shares outstanding (Nos.)\u00a0\u00a0\u00a0\u00a0\u00a0 .<\/td>\n<td>6,00,000<\/td>\n<td>1,80,000<\/td>\n<\/tr>\n<tr>\n<td>EPS (\u20b9)<\/td>\n<td>3<\/td>\n<td>2<\/td>\n<\/tr>\n<tr>\n<td>PE Ratio<\/td>\n<td>10 times<\/td>\n<td>7 times<\/td>\n<\/tr>\n<tr>\n<td>Market price per share (\u20b9)<\/td>\n<td>30<\/td>\n<td>14<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(i) The number of equity shares to be issued by A Ltd. for acquisition of T Ltd.<br \/>\n(ii) What is the EPS of A Ltd. after the acquisition?<br \/>\n(iii) Determine the equivalent earnings per share of T Ltd.<br \/>\n(iv) What is the expected market price per share of A Ltd. after the acquisition, assuming its PE multiple remains unchanged?<br \/>\n(v) Determine the market value of the merged firm. [Nov. 2007] [10 Marks]<br \/>\nAnswer:<br \/>\n(i) The number of shares to be issued by A Ltd.:<br \/>\nThe Exchange ratio is 0.5<br \/>\nSo, new Shares = 1,80,000 \u00d7 0.5 = 90,000 shares.<\/p>\n<p>(ii) EPS of A Ltd. after acquisition:<br \/>\nTotal Earnings (\u20b9 18,00,000 + \u20b9 3,60,000) = \u20b9 21,60,000<br \/>\nNo. of Shares (6,00,000 + 90,000) = 6,90,000<br \/>\nEPS (\u20b9 21,60,000\/6,90,000) = \u20b9 3.13<\/p>\n<p>(iii) Equivalent EPS of T Ltd.:<br \/>\nNo. of new Shares = 0.5<br \/>\nEPS = \u20b9 3.13<br \/>\nEquivalent EPS (\u20b9 3.13 \u00d7 0.5) = \u20b9 1.57<\/p>\n<p>(iv) New Market Price of A Ltd. (P\/E remaining unchanged):<br \/>\nPresent P\/E Ratio of A Ltd. = 10 times<br \/>\nExpected EPS after merger = \u20b9 3.13<br \/>\nExpected Market Price (\u20b9 3.13 \u00d7 10) = \u20b9 31.30<\/p>\n<p>Market Value of merged firm:<br \/>\nTotal number of Shares = 6,90,000<br \/>\nExpected Market Price = \u20b9 31.30<br \/>\nTotal&#8217; alue (6,90,000 \u00d7 31.30) = \u20b9 2,15,97,000<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 14.<br \/>\nABC Ltd. is intending to acquire XYZ Ltd. by merger and the following information is available in respect of the companies:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>ABC Ltd.<\/td>\n<td>XYZ Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Number of equity shares<\/td>\n<td>10,00,000<\/td>\n<td>6,00,000<\/td>\n<\/tr>\n<tr>\n<td>Earnings after tax (\u20b9)<\/td>\n<td>50,00,000<\/td>\n<td>18,00,000<\/td>\n<\/tr>\n<tr>\n<td>Market value per share (\u20b9)<\/td>\n<td>42<\/td>\n<td>28<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Required:<br \/>\n(i) What is the present EPS of both the companies?<br \/>\n(ii) If the proposed merger takes place, what would be the new earning per share for ABC Ltd.? Assume that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market &#8216; price.<br \/>\n(iii) What should be exchange ratio, if XYZ Ltd. wants to ensure the earnings to members are as before the merger takes place? [May 2004] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Earnings per share = Earnings after tax\/No. of equity shares<br \/>\nABC Ltd. = \u20b9 50,00,000\/10,00,000 = \u20b9 5<br \/>\nXYZ Ltd. = \u20b9 18,00,000\/6,00,000 = \u20b9 3<\/p>\n<p>(it) Number of Shares XYZ limited\u2019s shareholders will get in ABC Ltd. based on market value per share = \u20b9 28\/42 \u00d7 6,00,000 = 4,00,000 shares<br \/>\nTotal number of equity shares of ABC Ltd. after merger = 10,00,000 + 4,00,000 = 14,00,000 shares.<br \/>\nEarnings per share after merger = (\u20b9 50,00,000 + 18,00,000)\/14,00,000 = \u20b9 4.86<\/p>\n<p>(iii) Calculation of exchange ratio to ensure shareholders of XYZ Ltd. to earn the same as was before merger:<br \/>\nShares to be exchanged based on EPS = (\u20b9 3\/\u20b9 5) \u00d7 6,00,000 = 3,60,000 shares<br \/>\nEPS after merger = (\u20b9 50,00,000 + 18,00,000)\/13,60,000 = \u20b9 5<br \/>\nTotal earnings in ABC Ltd. available to shareholders of XYZ Ltd. = 3,60,000 \u00d7 \u20b95 = \u20b9 18,00,000.<br \/>\nThus, to ensure that Earning to members are same as before, the ratio of exchange should be 0.6 share for 1 share.<\/p>\n<p>Question 15.<br \/>\nXYZ Ltd. is considering merger with ABC Ltd. XYZ Ltd.\u2019s shares are currently traded at \u20b9 25. It has 2,00,000 shares outstanding and its earnings after taxes (EAT) amount to \u20b9 4,00,000. ABC Ltd. has 1,00,000 shares outstanding: its current market price is \u20b9 12.50 and its EAT is \u20b9 1,00,000. The merger will be effected by means of a stock swap (exchange). ABC Ltd. has agreed to a plan under which XYZ Ltd. will offer the current market value of ABC Ltd.\u2019s shares.<br \/>\n(i) What is the pre-merger earnings per share (EPS) and P\/E ratios of both the companies?<br \/>\n(ii) If ABC Ltd.\u2019s P\/E ratio is 8, what is its current market price? What is the exchange ratio? What will XYZ Ltd.&#8217;s post merger EPS be?<br \/>\n(iii) What must the exchange ratio be for XYZ Ltd.\u2019s pre-merger and postmerger EPS to be the same? [May 2005] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of Pre-merger EPS and P\/E ratios:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>XYZ Ltd. (Acquirer)<\/td>\n<td>ABC Ltd.<br \/>\n(Target)<\/td>\n<\/tr>\n<tr>\n<td>Earnings After taxes (\u20b9)<br \/>\nNumber of shares outstanding<\/td>\n<td>4,00,000<br \/>\n2,00,000<\/td>\n<td>1,00,000<br \/>\n1,00,000<\/td>\n<\/tr>\n<tr>\n<td>(Earnings per share) EPS (\u20b9 per share) share)<\/td>\n<td>2<\/td>\n<td>1<\/td>\n<\/tr>\n<tr>\n<td>Market Price per share (\u20b9)<\/td>\n<td>25<\/td>\n<td>12.5<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio (times)<\/td>\n<td>12.5<\/td>\n<td>12.5<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Current Market Price of ABC Ltd. if P\/E ratio is 8<br \/>\nCurrent Market Price of ABC = P\/E Ratio \u00d7 EPS = 8 \u00d7 \u20b9 1 = \u20b9 8<br \/>\nExchange ratio = \\(\\frac{\\text { Market Price of Target Co. }(A B C \\text { Ltd. })}{\\text { Market Price of Acquirer }{Co}(X Y Z ~ L t d .)}\\) = \\(\\frac{8}{25}\\) = 32<br \/>\nShares to be issued = 1,00,000 \u00d7 0.32 = 32,000 Shares<br \/>\nPost-merger EPS of XYZ Ltd. = \\(\\frac{4,00,000+1,00,000}{2,00,000+32,000}=\\frac{5,00,000}{2,32,000}\\) = \u20b9 2.16<\/p>\n<p>(iii) Desired Exchange Ratio:<br \/>\nExchange ratio = \\(\\frac{\\text { EPS of Target Co. (ABC Ltd.) }}{\\text { EPS of Acquirer Co. (XYZ Ltd.) }}\\) = \\(\\frac{1}{2}\\) = 0.5<br \/>\nShares to be issued = 1,00,000 \u00d7 0.5 = 50,000 Shares<br \/>\nPost-merger EPS of XYZ Ltd. = \\(\\frac{4,00,000+1,00,000}{2,00,000+50,000}=\\frac{5,00,000}{2,50,000}\\) = \u20b9 2<\/p>\n<p>Verification:<br \/>\nBefore Merger = \u20b9 1<br \/>\nEquivalent post-merger = \u20b9 2 \u00d7 0.5 (exchange Ratio) = \u20b9 1<\/p>\n<p>Alternative Method of computation:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Total number of shares in post-merged company<\/td>\n<td>= \\(\\frac{\\text { Post }- \\text { merger earnings }}{\\text { pre }- \\text { merger EPS of XYZ Ltd. }}\\)<br \/>\n= \\(\\frac{5,00,000}{2}\\) = 2,50,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Number of shares required to be issued to ABC Ltd.<\/td>\n<td>= 2,50,000 &#8211; 2,00,000 = 50,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Therefore, the exchange ratio (ER) should be<\/td>\n<td>= 50,000 : 1,00,000 = \\( \\frac{50,000}{1,00,000} \\) = 0.50<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 16.<br \/>\nM Co. Ltd., is studying the possible acquisition of N Co. Ltd., by way of merger. The following data are available in respect of the companies:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>M Co. Ltd.<\/td>\n<td>N Co. Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Earnings after tax (\u20b9)<\/td>\n<td>80,00,000<\/td>\n<td>24,00,000<\/td>\n<\/tr>\n<tr>\n<td>No. of equity shares<\/td>\n<td>16,00,000<\/td>\n<td>4,00,000<\/td>\n<\/tr>\n<tr>\n<td>Market value per share (\u20b9)<\/td>\n<td>200<\/td>\n<td>160<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(i) If the merger goes through by exchange of equity and the exchange ratio is based on the current market price, what is the new earning per share for M Co. Ltd.?<br \/>\n(ii) N Co. Ltd. wants to be sure that the earnings available to its shareholders will not be diminished by the merger. What should be the exchange ratio in that case? [Nov. 2003] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of new EPS of M Ltd. (After Merger):<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Exchange Ratio<\/td>\n<td>= \\(\\frac{\\text { Market Value of } N L t d}{\\text { Market Value of } M L t d .}\\) = \\(\\frac{160}{200\\) = 0.<\/p>\n<p>[0.8 shares of M Ltd. for every 1 share of N Ltd.]<\/td>\n<\/tr>\n<tr>\n<td>No. of shares to be issued<\/td>\n<td>= 4,00,000 \u00d7 0.8 = 3,20,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Shares of M Limited (after merger)<\/td>\n<td>= 16,00,000 + 3,20,000 = 19,20,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Profits of M Ltd. (After Merger)<\/td>\n<td>\u20b9 80,00,000 + \u20b9 24,00,000 = \u20b9 104,00,000<\/td>\n<\/tr>\n<tr>\n<td>EPS of M Ltd. (After Merger)<\/td>\n<td>= \\(\\frac{R s \\cdot 104,00,000}{19,20,000 \\text { Shares }}\\) = \u20b9 5.416<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Exchange Ratio so that shareholder of N Ltd. would not be at a Loss:<br \/>\nThe shareholders of N Limited would not be at loss if the exchange ratio is based on EPS.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>M Ltd.<\/td>\n<td>N Ltd.<\/td>\n<\/tr>\n<tr>\n<td>EPS before Merger<\/td>\n<td>= \\(\\frac{R s \\cdot 80,00,000}{16,00,000 \\text { Shares }}\\) = \u20b9 5.00<\/td>\n<td>= \\(\\frac{R s .24,00,000}{4,00,000 \\text { Shares }}\\) = \u20b9 60<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Exchange Ratio (with EPS as base) = \\(\\frac{E P S \\text { of } N L t d .(\\text { Target Co.) }}{E P S \\text { of } M L t d .(\\text { Acquirer Co.) }}\\)<br \/>\n= \\(\\frac{R s .6}{R s .5}\\) = 1.2<br \/>\nIt means 1.2 shares of M Ltd. for every 1 share of N Ltd.<br \/>\nShares to be issued to N Ltd. = 4,00,000 Shares \u00d7 1.2 = 4,80,000 Shares<br \/>\nTotal number of Shares = 16,00,000 + 4,80,000 = 20,80,000 Shares<br \/>\nEPS of M Ltd. (after merger) = \\(\\frac{\\text { Rs. } 80,00,000+R s .24,00,000}{\\text { Rs.20,80,000 }}\\) = \u20b9 500<br \/>\nVerification that the shareholders of target company are not at loss:<br \/>\nThe EPS available to Shareholders of N Ltd.:<br \/>\nBefore Merger = 4,00,000 shares \u00d7 \u20b9 6 = \u20b9 24,00,000<br \/>\nAfter Merger = Shares issued to N \u00d7 Post merger EPS<br \/>\n= 4,80,000 \u00d7 5 = \u20b9 24,00,000<br \/>\nTherefore, the exchange ratio on the basis of EPS is recommended.<\/p>\n<p>Question 17.<br \/>\nThe following information is provided related to the acquiring Mark Limited and the target Mask Limited:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Mark Limited<\/td>\n<td>Mask Limited<\/td>\n<\/tr>\n<tr>\n<td>Earnings after tax (\u20b9)<\/td>\n<td>2,000 lakhs<\/td>\n<td>400 lakhs<\/td>\n<\/tr>\n<tr>\n<td>Number of shares outstanding<\/td>\n<td>200 lakhs<\/td>\n<td>100 lakhs<\/td>\n<\/tr>\n<tr>\n<td>P\/E ratio (times)<\/td>\n<td>10<\/td>\n<td>5<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Required:<br \/>\n(i) What is the Swap Ratio based on current market prices?<br \/>\n(ii) What is the EPS of Mark Limited after acquisition?<br \/>\n(iii) What is the expected market price per share of Mark Limited after acquisition, assuming P\/E ratio of Mark Limited remains unchanged?<br \/>\n(iv) Determine the market value of the merged firm.<br \/>\n(v) Calculate gain\/loss for shareholders of the two independent companies after acquisition. [Nov. 2004] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of SWAP Ratio based on Current Market Price:<br \/>\nDetermination of Current Market Price Per Share:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>Mark Ltd. (Acquirer)<\/td>\n<td>Mask Ltd. (Target)<\/td>\n<\/tr>\n<tr>\n<td>Earnings After taxes (\u20b9)<br \/>\nNumber of shares outstanding<\/td>\n<td>2,000 Lakhs<br \/>\n200 Lakhs<\/td>\n<td>400 Lakhs<br \/>\n100 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>EPS (Earnings per share)<\/td>\n<td>\u20b9 10<\/td>\n<td>\u20b9 4<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio (times)<\/td>\n<td>10<\/td>\n<td>5<\/td>\n<\/tr>\n<tr>\n<td>Market Price per share<\/td>\n<td>\u20b9 100<\/td>\n<td>\u20b9 20<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Determination of SWAP Ratio:<br \/>\nExchange Ratio = \\(\\frac{\\text { Market Value of Mask Ltd. }(\\text { Target Co. })}{\\text { Market Value of Mark Ltd. }(\\text { Acquiring Co. })}\\) = \\(\\frac{20}{100}\\) = 0.2<br \/>\n[0.2 share of Mark Ltd. for every 1 share of Mask Ltd.]<\/p>\n<p>(ii) Determination of EPS of Mark Limited after acquisition:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Exchange Ratio<\/td>\n<td>0.2<\/td>\n<\/tr>\n<tr>\n<td>No. of shares to be issued<\/td>\n<td>= 100 Lakhs \u00d7 0.2 = 20 Lakhs Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Shares of Mark Limited (after merger)<\/td>\n<td>= 200 Lakhs + 20 Lakhs = 220 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Profits of Mark Ltd. (After Merger)<\/td>\n<td>= \u20b9 2,000 + \u20b9 400 = \u20b9 2,400 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>EPS of Mark Ltd. (After Merger)<\/td>\n<td>= \\(\\frac{\\text { Rs. 2,400 Lakhs }}{220 \\text { Lakhs Shares }}\\) = \u20b9 10.91<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(iii) Determination of Expected Market Price of Mark Limited after acquisi-tion:<br \/>\nP\/E ratio of new firm (expected to remain same) = 10 times<br \/>\nNew market price (10 \u00d7 \u20b9 10.91) = \u20b9 109.10<\/p>\n<p>(iv) Market value of merged firm<br \/>\n= \u20b9 109.10 market price \u00d7 220 lakhs shares = \u20b9 240.02 crores<\/p>\n<p>(v) Gain from the merger<br \/>\nPost merger market value of the merged firm = \u20b9 240.02 crores<br \/>\nLess: Pre-merger market value<br \/>\nMark Ltd. 200 Lakhs \u00d7 \u20b9 100 = 200 crores<br \/>\nMask Ltd. 100 Lakhs \u00d7 \u20b9 20 = 20 crores = \u20b9 220.00 crores<br \/>\nGain from merger = \u20b9 20.02 crores<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19270\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-9.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 9\" width=\"130\" height=\"122\" \/><\/p>\n<p>Appropriation of gains from the merger among shareholders:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Mark Ltd.<\/td>\n<td>Mask Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Post-merger value<\/p>\n<p>Less: Pre-merger market value<\/td>\n<td>218.20 crores<br \/>\n200.00 crores<\/td>\n<td>21.82 crores<br \/>\n20.00 crores<\/td>\n<\/tr>\n<tr>\n<td>Gain to Shareholders<\/td>\n<td>18.20 crores<\/td>\n<td>1.82 crores<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 18.<br \/>\nFollowing information is provided relating to the acquiring company Mani Ltd. and the target company Ratnam Ltd:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Mani Ltd.<\/td>\n<td>Ratnam Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Earnings after tax (\u20b9 in lakhs)<\/td>\n<td>2,000<\/td>\n<td>4,000<\/td>\n<\/tr>\n<tr>\n<td>Number of shares outstanding (lakhs)<\/td>\n<td>200<\/td>\n<td>1,000<\/td>\n<\/tr>\n<tr>\n<td>P\/E ratio (No. of times)<\/td>\n<td>10<\/td>\n<td>5<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Required:<br \/>\n(i) What is the swap ratio based on current market prices?<br \/>\n(ii) What is the EPS of Mani Ltd. after the acquisition?<br \/>\n(iii) What is the expected market price per share of Mani Ltd. after the acquisition, assuming its P\/E ratio is adversely affected by 10%? [June 2009] [10 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of SWAP Ratio based on Current Market Price:<br \/>\nDetermination of EPS and Current Market Price before acquisition:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>Mani Ltd. (Acquirer)<\/td>\n<td>Ratnam Ltd. (Target)<\/td>\n<\/tr>\n<tr>\n<td>Earnings After taxes (\u20b9)<br \/>\nNumber of shares outstanding<\/td>\n<td>2,000 Lakhs<br \/>\n200 Lakhs<\/td>\n<td>4,0000 Lakhs<br \/>\n1,0000 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio (times)<\/td>\n<td>\u00a010<\/td>\n<td>5<\/td>\n<\/tr>\n<tr>\n<td>EPS (Earnings per share) \u20b9<\/td>\n<td>\u00a010<\/td>\n<td>4<\/td>\n<\/tr>\n<tr>\n<td>Market Price per share \u20b9<\/td>\n<td>\u00a0100<\/td>\n<td>20<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Determination of SWAP Ratio:<br \/>\nExchange Ratio = \\(\\frac{\\text { Market Value of Ratnam Ltd. (Target } C o .)}{\\text { Market Value of Mani Ltd. }(\\text { Acquiring Co.) }}\\) = \\(\\frac{20}{100}\\) = 0.2<br \/>\n[0.2 share of Mani Ltd. for every 1 share of Ratnam Ltd.]<\/p>\n<p>(ii) Determination of EPS of Mani Limited after acquisition:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Exchange Ratio<\/td>\n<td>0.2<\/td>\n<\/tr>\n<tr>\n<td>No. of shares to be issued<\/td>\n<td>= 1,000 Lakhs \u00d7 0.2 = 200 Lakhs Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Shares of Mani Limited (after merger)<\/td>\n<td>= 200 Lakhs + 200 Lakhs = 400 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Profits of Mani Ltd. (After Merger)<\/td>\n<td>= \u20b9 2,000 + \u20b9 4,000 = \u20b9 6,000 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>EPS of Mani Ltd. (After Merger)<\/td>\n<td>= \\(\\frac{\\text { Rs.6,000 Lakhs }}{400 \\text { Lakhs Shares }}\\) = \u20b9 15<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(iii) Determination of Expected Market Price of Mani Limited after acquisition:<br \/>\nEPS after acquisition \u20b9 15<br \/>\nP\/E ratio (after acquisition) = 10 \u00d7 0.9 = 9 times<br \/>\nNew market price (9 \u00d7 \u20b9 15) = \u20b9 135<\/p>\n<p>(iv) Market value of merged company:<br \/>\n= \u20b9 135 \u00d7 400 Lakh Shares = \u20b9 54,000 Lakhs or \u20b9 540 Crores<\/p>\n<p>(v) Gain from the merger<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Mani Ltd.<\/td>\n<td>Ratnam Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Total value before acquisition Less: Value after acquisition<\/td>\n<td>200 crores<br \/>\n270 crores<\/td>\n<td>200 crores<br \/>\n270 crores<\/td>\n<\/tr>\n<tr>\n<td>Total Gain<\/td>\n<td>70 crores<\/td>\n<td>70 crores<\/td>\n<\/tr>\n<tr>\n<td>No. of shares (pre-merger) (Lakhs)<\/td>\n<td>200<\/td>\n<td>1,000<\/td>\n<\/tr>\n<tr>\n<td>Gain per share (\u20b9)<\/td>\n<td>35<\/td>\n<td>7<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 19.<br \/>\nABC Ltd. is a company operating in the software industry. It is considering the acquisition of XYZ Ltd. which is also into software industry. The following information are available for the companies:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>ABC Ltd,<\/td>\n<td>XYZ Ltd,<\/td>\n<\/tr>\n<tr>\n<td>Earnings after tax (Rs.)<\/td>\n<td>9,00,000<\/td>\n<td>2,40,000<\/td>\n<\/tr>\n<tr>\n<td>Number of equity shares<\/td>\n<td>1,50,000<\/td>\n<td>60,000<\/td>\n<\/tr>\n<tr>\n<td>P\/E ratio (no. of times)<\/td>\n<td>14<\/td>\n<td>10<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>ABC Ltd. is planning to offer a premium of 25% over the market price of XYZ Ltd. Required:<br \/>\n(i) What is the swap ratio based on current market price ?<br \/>\n(ii) Find the number of shares to be issued by ABC Ltd. to the shareholders of XYZ Ltd.<br \/>\n(iii) Compute the new EPS of ABC Ltd. after merger and comment on the impact of merger.<br \/>\n(iv) Determine the market price of the share when P\/E ratio remains unchanged.<br \/>\n(v) Compute the market price when P\/E declines to 12 and comment on the results. Figures are to be rounded off to 2 decimals. [Nov. 2019 Old Syllabus] [10 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of SWAP Ratio based on Current Market Price:<br \/>\nDetermination of EPS and Current Market Price before acquisition:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>c<\/td>\n<td>ABC Ltd. (Acquirer)<\/td>\n<td>XYZ Ltd. (Target)<\/td>\n<\/tr>\n<tr>\n<td>Earnings after tax (Rs.)<\/td>\n<td>9,00,000<\/td>\n<td>2,40,000<\/td>\n<\/tr>\n<tr>\n<td>Number of shares outstanding<\/td>\n<td>1,50,000<\/td>\n<td>60,000<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio (times)<\/td>\n<td>14<\/td>\n<td>10<\/td>\n<\/tr>\n<tr>\n<td>EPS (Earnings per share) Rs.<\/td>\n<td>6<\/td>\n<td>4<\/td>\n<\/tr>\n<tr>\n<td>Market Price per share Rs.<\/td>\n<td>84<\/td>\n<td>40<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Determination of SWAP Ratio Based on Current Market Price:<br \/>\nThe Premium offered by ABC Limited has not been considered as SWAP ratio is to be calculated on the basis of Current Market Price.<br \/>\nExchange Ratio = \\(\\frac{\\text { Market Value of XYZ Ltd. (T arg et Co.) }}{\\text { Market Value of ABC Ltd. (Acquring Co.) }}\\) = \\(\\frac{0 \\times 1.25}{84}\\) = 0.6<br \/>\n[0.6 share of ABC Ltd. for every 1 share of XYZ Ltd.]<\/p>\n<p>(ii) Determination of No. of Shares:<br \/>\nExchange Ratio = 0.6 (as calculated above)<br \/>\nAgreed Exchange Ratio = 0.60<br \/>\nNo. of Shares of XYZ Ltd. = 60,000<br \/>\nShare to be issued by ABC Ltd. = 60,000 \u00d7 0.6 = 36,000 shares.<\/p>\n<p>(iii) Determination of EPS of ABC Limited after acquisition:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>No. of shares issued<\/td>\n<td>= 36,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Shares of ABC Limited (after merger)<\/td>\n<td>= 1,50,000 + 36,000 = 1,86,000 Shares<\/td>\n<\/tr>\n<tr>\n<td>Total Profits of ABC Ltd. (After Merger)<\/td>\n<td>= Rs.9,00,000 + 2,40,000 = 11,40,000<\/td>\n<\/tr>\n<tr>\n<td>EPS of ABC Ltd. (After Merger)<\/td>\n<td>= \\(\\frac{\\text { Rs. } 11,40,000}{1,86,000 \\text { Shares }}\\) = Rs. 6.13<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(iv) Determination of Expected Market Price of ABC Limited after acquisition if P\/E ratio remains unchanged:<br \/>\nEPS after Acquisition = Rs. 6.13<br \/>\nNew Market Price (14 \u00d7 Rs. 6.13) = Rs. 85.82<\/p>\n<p>(v) Determination of Expected Market Price of ABC Limited after acquisition if P\/E ratio declines to 12:<br \/>\nEPS after acquisition = Rs. 6.13<br \/>\nDeclined P\/E ratio (after acquisition) = 12 times<br \/>\nResultant New market price (12 \u00d7 Rs. 6.13) = Rs. 73.56<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 20.<br \/>\nP Ltd. is considering takeover of R Ltd. by the exchange of four new shares in P Ltd. for every five shares in R Ltd. The relevant financial details of the two companies prior to merger announcement are as follows:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td width=\"347\"><\/td>\n<td width=\"65\">P Ltd.<\/td>\n<td width=\"65\">R Ltd.<\/td>\n<\/tr>\n<tr>\n<td width=\"347\">Profit before Tax (\u20b9 Crore)<\/td>\n<td width=\"65\">15<\/td>\n<td width=\"65\">13.50<\/td>\n<\/tr>\n<tr>\n<td width=\"347\">No. of Shares (Crore)<\/td>\n<td width=\"65\">25<\/td>\n<td width=\"65\">15<\/td>\n<\/tr>\n<tr>\n<td width=\"347\">P\/E Ratio<\/td>\n<td width=\"65\">12<\/td>\n<td width=\"65\">9<\/td>\n<\/tr>\n<tr>\n<td width=\"347\">Corporate Tax Rate 30%<\/td>\n<td width=\"65\"><\/td>\n<td width=\"65\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>You are required to determine:<br \/>\n(i) Market value of both the company.<br \/>\n(ii) Value of original shareholders.<br \/>\n(iii) Price per share after merger.<br \/>\n(iv) Effect on share price of both the company if the Directors of P Ltd. expect their own pre-merger P\/E ratio to be applied to the combined earnings. [Nov. 2010 (Modified)] [10 Marks]<br \/>\nAnswer:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>P Ltd.<\/td>\n<td>R Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Profit before Tax (\u20b9 in crore)<\/td>\n<td>15<\/td>\n<td>13.50<\/td>\n<\/tr>\n<tr>\n<td>Tax 30% (\u20b9 in crore)<\/td>\n<td>4.50<\/td>\n<td>4.05<\/td>\n<\/tr>\n<tr>\n<td>Profit after Tax (\u20b9 in crore)<\/td>\n<td>10.50<\/td>\n<td>9.45<\/td>\n<\/tr>\n<tr>\n<td>Earning per Share (\u20b9)<\/td>\n<td>\\(\\frac{10.50}{25}\\) = \u20b9 0.42<\/td>\n<td>\\(\\frac{9.45}{15}\\)= \u20b9 0.63<\/td>\n<\/tr>\n<tr>\n<td>Price of Share before Merger<\/td>\n<td>\u20b9 0.42 \u00d7 12<\/td>\n<td>0.63 \u00d7 \u20b9 9<\/td>\n<\/tr>\n<tr>\n<td>(EPS X P\/E Ratio)<\/td>\n<td>= \u20b9 5.04<\/td>\n<td>= \u20b9 5.67<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(i) Market Value of company<br \/>\nP Ltd. = \u20b9 5.04 \u00d7 25 Crore = \u20b9 126 crore<br \/>\nR Ltd. = \u20b9 5.67 \u00d7 15 Crore = \u20b9 85.05 crore<br \/>\nCombined = \u20b9 126 + \u20b9 85.05 = \u20b9 211.05 Crores<\/p>\n<p>After Merger<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>P Ltd.<\/td>\n<td>R Ltd.<\/td>\n<\/tr>\n<tr>\n<td>No. of Shares<\/td>\n<td>25 crores<\/td>\n<td>15 \u00d7 \\(\\frac{4}{5}\\) = 12 crores<\/td>\n<\/tr>\n<tr>\n<td>Combined<\/td>\n<td colspan=\"2\">37 crores<\/td>\n<\/tr>\n<tr>\n<td>% of Combined Equity Owned<\/td>\n<td>\\(\\frac{25}{37}\\) \u00d7 100 = 67.57%<\/td>\n<td>\\(\\frac{12}{37}\\) \u00d7 100 = 32.43%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Value of Original Shareholders<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>P Ltd.<\/td>\n<td>R Ltd.<\/td>\n<\/tr>\n<tr>\n<td>\u20b9 211.05 crore \u00d7 67.57% = \u20b9 142.61<\/td>\n<td>\u20b9 211.05 crore \u00d7 32.43% = \u20b9 68.44<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(iii) Price per Share after Merger<br \/>\nEPS = \u20b9 \\(\\frac{\u20b9 19.95 \\text { crore }}{37 \\text { crore }}\\) = \u20b9 0.539 per share<br \/>\nP\/E Ratio = 12<br \/>\nMarket Value per Share = \u20b9 0.539 \u00d7 12 = \u20b9 6.47<br \/>\nTotal Market Value = \u20b9 6.47 \u00d7 37 crore = \u20b9 239.39 crore<br \/>\nPrice of Share = \\(\\frac{\\text { Market Value }}{\\text { Number of Shares }}\\) = \\(\\frac{239.39 \\text { crore }}{37 \\text { crore }}\\) = \u20b9 6.47<\/p>\n<p>(iv) Effect on Share Price<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>MPS before merger<\/td>\n<td>\u20b9 5.04<\/td>\n<td>\u20b9 5.67<\/td>\n<\/tr>\n<tr>\n<td>MPS after merger<br \/>\n(Equivalent for R Ltd.)<\/td>\n<td>\u20b9 6.47<\/td>\n<td>6.47 \u00d7 \\(\\frac{4}{5}\\) = \u20b9 5.18<\/td>\n<\/tr>\n<tr>\n<td>Gain (Loss) per share<\/td>\n<td>\u20b9 1.43 (Gain)<\/td>\n<td>\u20b9 0.49 (Loss)<\/td>\n<\/tr>\n<tr>\n<td>Change in share price<\/td>\n<td>= \\(\\frac{1.43}{5.04}\\) \u00d7 100<br \/>\n= 0.284<br \/>\n= 28.4%Rise in share price<\/td>\n<td>= \\(\\frac{-0.49}{5.67}\\) \u00d7 100<br \/>\n= &#8211; 0.0864<br \/>\n(- ve) 8.64%<br \/>\nDecrease in share price<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 21.<br \/>\nReliable Industries Ltd. (RIL) is considering a takeover of Sunflower Industries Ltd. (SIL). The particulars of 2 companies are given below:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>Reliable Industries Ltd.<\/td>\n<td>Sunflower Industries Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Earnings After Tax (EAT)<\/td>\n<td>\u20b9 20,00,000<\/td>\n<td>\u20b9 10,00,000<\/td>\n<\/tr>\n<tr>\n<td>Equity shares Outstanding<\/td>\n<td>10,00,000<\/td>\n<td>10,00,000<\/td>\n<\/tr>\n<tr>\n<td>Earnings per share (EPS)<\/td>\n<td>2<\/td>\n<td>1<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio (Times)<\/td>\n<td>10<\/td>\n<td>5<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Required:<br \/>\n(i) What is the market value of each Company before merger?<br \/>\n(ii) Assume that the management of RIL estimates that the shareholders of SIL will accept an offer of one share of RIL for four shares of SIL.<br \/>\nIf there are no synergic effects, what is the market value of the Postmerger RIL? What is the new price per share? Are the shareholders of RIL better or worse off than they were before the merger?<br \/>\n(iii) Due to synergic effects, the management of RIL estimates that the earnings will increase by 20%. What are the new post-merger EPS and Price per share? Will the shareholders be better off or worse off than before the merger? [May 2006] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Market value of Companies before Merger<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>RIL<\/td>\n<td>SIL<\/td>\n<\/tr>\n<tr>\n<td>EPS<\/td>\n<td>\u20b9 2<\/td>\n<td>\u20b9 1<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio<\/td>\n<td>10<\/td>\n<td>5<\/td>\n<\/tr>\n<tr>\n<td>Market Price Per Share<\/td>\n<td>\u20b9 20<\/td>\n<td>\u20b9 5<\/td>\n<\/tr>\n<tr>\n<td>Equity Shares<\/td>\n<td>10,00,000<\/td>\n<td>10,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total Market Value<\/td>\n<td>2,00,00,000<\/td>\n<td>50,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Post-Merger Effects on RIL<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>\u20b9<\/td>\n<\/tr>\n<tr>\n<td>Post-merger earnings<\/td>\n<td>30,00,000<\/td>\n<\/tr>\n<tr>\n<td>Exchange Ratio (1:4)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>No. of equity shares outstanding (10,00,000 + 2,50,000)<\/td>\n<td>12,50,000<\/td>\n<\/tr>\n<tr>\n<td>EPS : 30,00,000\/12,50,000<\/td>\n<td>2.4<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio<\/td>\n<td>10<\/td>\n<\/tr>\n<tr>\n<td>Market Value (10 \u00d7 2.4)<\/td>\n<td>24<\/td>\n<\/tr>\n<tr>\n<td>Total Value (12,50,000 \u00d7 24)<\/td>\n<td>3,00,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Gains from Merger:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19269\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-10.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 10\" width=\"568\" height=\"125\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-10.png 568w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-10-300x66.png 300w\" sizes=\"(max-width: 568px) 100vw, 568px\" \/><\/p>\n<p>Apportionment of Gains between the Shareholders:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>RIL (\u20b9)<\/td>\n<td>SIL (\u20b9)<\/td>\n<\/tr>\n<tr>\n<td>Post Merger Market Value:<\/td>\n<td>10,00,000 \u00d7 24 = 2,40,00,000<\/td>\n<td>2,50,000 \u00d7 24 = 60,00,000<\/td>\n<\/tr>\n<tr>\n<td>Less<strong>: <\/strong>Pre-Merger Market Value<\/td>\n<td>2,00,00,000<\/td>\n<td>50,00,000<\/td>\n<\/tr>\n<tr>\n<td>Gains from Merger<\/td>\n<td>40,00,000<\/td>\n<td>10,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Thus, the shareholders of both the companies (RIL + SIL) are better off than before<\/p>\n<p>(iii) Post-Merger Earnings:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Increase in Earnings by 20%<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>New Earnings = \u20b9 30,00,000 \u00d7 (1 + 0.20)<\/td>\n<td>\u20b9 36,00,000<\/td>\n<\/tr>\n<tr>\n<td>No. of equity shares outstanding<\/td>\n<td>12,50,000<\/td>\n<\/tr>\n<tr>\n<td>EPS (\u20b9 36,00,000\/12,50,000)<\/td>\n<td>\u20b9 2.88<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio<\/td>\n<td>10<\/td>\n<\/tr>\n<tr>\n<td>Market Price Per Share = \u20b9 2.88 \u00d7 10<\/td>\n<td>= \u20b9 28.80<\/td>\n<\/tr>\n<tr>\n<td>Shareholders will be better-off than before the merger situation.<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 22.<br \/>\nThe CEO of a company thinks that shareholders always look for EPS. Therefore he considers maximization of EPS as his company\u2019s objective. His company\u2019s current Net Profits are \u20b9 80 lakhs and P\/E multiple is 10.5. He wants to buy another firm which has current income of \u20b9 15.75 lakhs &amp; P\/E multiple of 10.<br \/>\nWhat is the maximum exchange ratio which the CEO should offer so that he could keep EPS at the current level, given that the current market price of both the acquirer and the target company are \u20b9 42 and \u20b9 105 respectively\u20b9<br \/>\nIf the CEO borrows funds at 15% and buys out Target Company by paying cash, how much should he offer to maintain his EPS\u20b9 Assume tax rate of 30%. [May 2016] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Determination of Maximum Exchange Ratio<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Acquirer Company<\/td>\n<td>Target Company<\/td>\n<\/tr>\n<tr>\n<td>Net Profit<\/td>\n<td>\u20b9 80 Lakhs<\/td>\n<td>\u20b9 15.75 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>P\/E multiple<\/td>\n<td>10.50<\/td>\n<td>10.00<\/td>\n<\/tr>\n<tr>\n<td>Market Capitalisation<\/td>\n<td>\u20b9 840 Lakhs<\/td>\n<td>\u20b9 157.50 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>Market Price<\/td>\n<td>\u20b9 42<\/td>\n<td>\u20b9 105<\/td>\n<\/tr>\n<tr>\n<td>No. of Shares<\/td>\n<td>20 Lakhs<\/td>\n<td>1.50 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>EPS<\/td>\n<td>\u20b9 4<\/td>\n<td>\u20b9 10.50<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Maximum Exchange ratio = \\(\\frac{\\text { EPS of Target Co. }}{\\text { EPS of of Acquirer Co. }}\\) = \\(\\frac{10.5}{4}\\) = 2.625<br \/>\nThus, for every one share of Target Company 2.625 shares of Acquirer Company will be issued.<\/p>\n<p>(ii) Determination of Maximum Exchange Ratio<br \/>\nLet x lakhs be the amount paid by \u2018Acquirer Company\u2019 to &#8216;target company\u2019. Then, to maintain the same EPS (i.e. Rs. 4) the number of shares to be issued will be:<br \/>\n\\(\\frac{(80 \\text { Lakhs }+15.75 \\text { Lakhs })-0.70 \\times 150 \\times x}{20 \\text { Lakhs }}\\) = \u20b9 4<br \/>\n\\(\\frac{95.75-0.105 x}{20}\\) = \u20b9 4<br \/>\nx = \u20b9 150 Lakhs<br \/>\nThus, \u20b9 150 Lakhs shall be offered in cash to target company to maintain same EPS.<\/p>\n<p>Question 23.<br \/>\nC Ltd. &amp; D Ltd. are contemplating a merger deal in which C Ltd. will acquire D Ltd. the relevant information about the firms are given as follow:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>C Ltd.<\/td>\n<td>D Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Total Earning (E) (in millions)<\/td>\n<td>\u20b9 96<\/td>\n<td>\u20b9 30<\/td>\n<\/tr>\n<tr>\n<td>Number of outstanding shares (S) (in millions)<\/td>\n<td>20<\/td>\n<td>14<\/td>\n<\/tr>\n<tr>\n<td>Earnings per share (EPS) (\u20b9 )<\/td>\n<td>4.8<\/td>\n<td>2.143<\/td>\n<\/tr>\n<tr>\n<td>Price earnings ratio (P\/E)<\/td>\n<td>8<\/td>\n<td>7<\/td>\n<\/tr>\n<tr>\n<td>Market price per share (P) (\u20b9)<\/td>\n<td>38.4<\/td>\n<td>15<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(i) What is the maximum exchange ratio acceptable to the shareholders of C Ltd., if the ratio of the combined firm is 7?<br \/>\n(ii) What is the minimum exchange ratio acceptable to the shareholder of D Ltd., if the P\/E ratio of the combined firm is 9? [Nov. 2018 Old Syllabus] [12 Marks]<br \/>\nAnswer:<br \/>\n(i) Maximum Exchange Ratio acceptable to the shareholders of C Limited<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Market Price of share of C Ltd. (\u20b9 4.8 \u00d7 8)<\/td>\n<td>\u20b9 38.40<\/td>\n<\/tr>\n<tr>\n<td>No. of Equity Shares<\/td>\n<td>20 Million<\/td>\n<\/tr>\n<tr>\n<td>Market Capitalisation of C Ltd. (\u20b9 38.40 \u00d7 20 Million)<\/td>\n<td>\u20b9 768 Million<\/td>\n<\/tr>\n<tr>\n<td>Combined Earnings (\u20b9 96 + \u20b9 30 Million)<\/td>\n<td>\u20b9 126 Million<\/td>\n<\/tr>\n<tr>\n<td>Combined Market Capitalisation (\u20b9 126 Million \u00d7 7)<\/td>\n<td>\u20b9 882 Million<\/td>\n<\/tr>\n<tr>\n<td>Market Capitalisation of C Ltd. (\u20b9 38.40 \u00d7 20 Million)<\/td>\n<td>\u20b9 768 Million<\/td>\n<\/tr>\n<tr>\n<td>Balance for D Ltd.<\/td>\n<td>\u20b9 114 Million<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Let D be the no. of equity shares to be issued to D Ltd. then,<br \/>\nD = \\(\\frac{\u20b9 114 \\text { Million }}{\\left[\\frac{126 \\text { Million }}{D+20}\\right] \\times 7}\\)<br \/>\nSolving for D, we get<br \/>\nD = 2.96875 Million Shares<br \/>\nExchange Ratio = \\(\\frac{2.96875}{14}\\) = 0.212:1<\/p>\n<p>(ii) Minimum Exchange Ratio: acceptable to the shareholders of D Ltd.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Market Price of share of D Ltd.<\/td>\n<td>\u20b9 15.00<\/td>\n<\/tr>\n<tr>\n<td>No. of Equity Shares<\/td>\n<td>14 Million<\/td>\n<\/tr>\n<tr>\n<td>Market Capitalisation of D Ltd. (\u20b9 15.00 \u00d7 14 Million)<\/td>\n<td>\u20b9 210 Million<\/td>\n<\/tr>\n<tr>\n<td>Combined Earnings (\u20b9 96 + \u20b9 30) Million<\/td>\n<td>\u20b9 126 Million<\/td>\n<\/tr>\n<tr>\n<td>Combined Market Capitalisation (\u20b9 126 Million \u00d7 9)<\/td>\n<td>\u20b9 1,134 Million<\/td>\n<\/tr>\n<tr>\n<td>Balance for C Ltd.<\/td>\n<td>\u20b9 924 Million<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Let D be the no. of equity shares to be issued to D Ltd. then,<br \/>\nD = \\(\\frac{\\text { Rs. } 210 \\text { Million }}{\\left[\\begin{array}{c}<br \/>\n126 \\text { Million } \\\\<br \/>\n\\text { D }+20<br \/>\n\\end{array}\\right] \\times 9}\\)<br \/>\nD = 4.54545 Million Shares<br \/>\nExchange Ratio = \\(\\frac{4.54545}{14}\\) = 0.325:1<\/p>\n<p>Alternative Method of finding Minimum and Maximum Ratio<br \/>\n(i) Maximum Exchange Ratio from the point of the shareholders of C Ltd.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19268\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-11.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 11\" width=\"328\" height=\"179\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-11.png 328w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-11-300x164.png 300w\" sizes=\"(max-width: 328px) 100vw, 328px\" \/><\/p>\n<p>(ii) Minimum Exchange Ratio from the point of the shareholders of D Ltd.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19267\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-12.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 12\" width=\"456\" height=\"114\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-12.png 456w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-12-300x75.png 300w\" sizes=\"(max-width: 456px) 100vw, 456px\" \/><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 24.<br \/>\nThe following information relating to the acquiring Company Abhiman Ltd. and the target Company Abhishek Ltd. are available. Both the Companies are promoted by Multinational Company, Trident Ltd. The promoter\u2019s holding is 50% and 60% respectively in Abhiman Ltd. and Abhishek Ltd. :<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Abhiman Ltd.<\/td>\n<td>Abhishek Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Share Capital (\u20b9)<\/td>\n<td>200 lakh<\/td>\n<td>100 lakh<\/td>\n<\/tr>\n<tr>\n<td>Free Reserves and Surplus (\u20b9)<\/td>\n<td>800 lakh<\/td>\n<td>500 lakh<\/td>\n<\/tr>\n<tr>\n<td>Paid up Value per share (\u20b9)<\/td>\n<td>100<\/td>\n<td>10<\/td>\n<\/tr>\n<tr>\n<td>Free float Market Capitalisation (\u20b9)<\/td>\n<td>400 lakh<\/td>\n<td>128 lakh<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio (times)<\/td>\n<td>10<\/td>\n<td>4<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Trident Ltd. is interested to do justice to the shareholders of both the Companies. For the swap ratio weights are assigned to different parameters by the Board of Directors as follows:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Book Value<\/td>\n<td>25%<\/td>\n<\/tr>\n<tr>\n<td>EPS (Earning per share<\/td>\n<td>50%<\/td>\n<\/tr>\n<tr>\n<td>Market Price<\/td>\n<td>25%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(a) What is the swap ratio based on above weights?<br \/>\n(b) What is the Book Value, EPS and expected Market price of Abhiman Ltd. after acquisition of Abhishek Ltd. (assuming P.E. ratio of Abhiman Ltd. remains unchanged and all assets and liabilities of Abhishek Ltd. are taken over at book value).<br \/>\n(c) Calculate:<br \/>\n(i) Promoter\u2019s revised holding in the Abhiman Ltd.<br \/>\n(ii) Free float market capitalization<br \/>\n(iii) Also calculate No. of Shares, Earning per Share (EPS) and Book Value (B.V.), if after acquisition of Abhishek Ltd., Abhiman Ltd. decided to:<br \/>\n(1) Issue Bonus shares in the ratio of 1 : 2; and<br \/>\n(2) Split the stock (shares) as \u20b9 5 each fully paid. [May 2009] [20 Marks]<br \/>\nAnswer:<br \/>\n(a) Calculation of Book Value, Market Price and EPS<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Abhiman Ltd. (Acquirer Co.)<\/td>\n<td>Abhishek Ltd. (Target Co.)<\/td>\n<\/tr>\n<tr>\n<td>Share Capital<\/td>\n<td>200 Lakh<\/td>\n<td>100 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Free Reserves<\/td>\n<td>800 Lakh<\/td>\n<td>500 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Total<\/td>\n<td>1000 Lakh<\/td>\n<td>600 Lakh<\/td>\n<\/tr>\n<tr>\n<td>No. of Shares<\/td>\n<td>2 Lakh<\/td>\n<td>10 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Book Value per share<\/td>\n<td>\u20b9 500<\/td>\n<td>\u20b9 60<\/td>\n<\/tr>\n<tr>\n<td>Promoter\u2019s holding<\/td>\n<td>50%<\/td>\n<td>60%<\/td>\n<\/tr>\n<tr>\n<td>Non-promoter&#8217;s holding<\/td>\n<td>50%<\/td>\n<td>40%<\/td>\n<\/tr>\n<tr>\n<td>Free Float Market Cap. i.e. Relating to Public\u2019s holding<\/td>\n<td>400 Lakh<\/td>\n<td>128 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Hence Total market Cap.<\/td>\n<td>800 Lakh<\/td>\n<td>320 Lakh<\/td>\n<\/tr>\n<tr>\n<td>No.of Shares<\/td>\n<td>2 Lakh<\/td>\n<td>10 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Market Price<\/td>\n<td>\u20b9 400<\/td>\n<td>\u20b9 32<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio<\/td>\n<td>10<\/td>\n<td>4<\/td>\n<\/tr>\n<tr>\n<td>EPS<\/td>\n<td>\u20b9 40<\/td>\n<td>\u20b9 8<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Calculation of weighted Swap Ratio<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19266\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-13.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 13\" width=\"699\" height=\"154\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-13.png 699w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-13-300x66.png 300w\" sizes=\"(max-width: 699px) 100vw, 699px\" \/><br \/>\nSwap ratio is for every one share of Abhishek Ltd. to issue 0.15 shares of Abhiman Ltd.<br \/>\nHence total No. of shares to be issued 10 Lakh \u00d7 0.15 = 1,50,000 shares<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>(b) Values of Abhiman Ltd. after acquisition of Abhishek Limited<br \/>\nTotal No. of Shares = 2 Lakhs + 1.5 Lakhs = 3,50,000 shares<br \/>\nTotal Capital (in \u20b9) = 3,50,000 @ \u20b9 10 = \u20b9 350 Lakh<br \/>\nTotal Reserves (in \u20b9) = 800 Lakhs + 450 Lakhs = Rs. 1,250 Lakh<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Book Value<\/td>\n<td>(350 Lakhs + 1250 Lakhs) \u00f7 3.5 Lakhs<\/td>\n<td>\u00a0\u20b9 45.71<\/td>\n<\/tr>\n<tr>\n<td>EPS(Total Profits \u00f7 No. of Shares)<\/td>\n<td>[(2 \u00d7 40) + (10 \u00d7 8)] \u00f7 3.5 Lakhs<\/td>\n<td>\u20b9 45.71<\/td>\n<\/tr>\n<tr>\n<td>Expected Market price(P\/E Ratio \u00d7 EPS)<\/td>\n<td>10 \u00d7 45.71<\/td>\n<td>\u20b9 457.10<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(c) (1) Promoter&#8217;s holding after merger<br \/>\n= Holding in Abhiman + Holdings in Abhishek<br \/>\n= (50 + of 2,00,000)+ (60 + of 1,50,000) = 1,90,000 Shares<br \/>\n% Holding = (1,90,000 + 3,50,000) \u00d7 100 = 54.29%<\/p>\n<p>(2) Free Float Market Capitalisation after merger<br \/>\n= Non-promoters holding \u00d7 Expected Market Price<br \/>\n= (3,50,000 &#8211; 1,90,000) \u00d7 457.10 = \u20b9 731.36 Lakhs<\/p>\n<p>(3) (i) &amp; (ii)<br \/>\nRevised Share Capital after Bonus = \u20b9 350 Lakh + \u20b9 175 = \u20b9 525 Lakhs<br \/>\nNo. of Shares before Split (EV. \u20b9 100) = 525 &#8211; 100 = 5.25 Lakh<br \/>\nNo. of Shares after Split (F.V. \u20b9 5) = (5.25 Lakh \u00d7 100) \u00f7 5 = 105 Lakh<br \/>\nEPS = 160 Lakh\/105 Lakh = 1.523<br \/>\nBook Value = Total Capital \u00f7 No. of Shares<br \/>\n= (525 Lakh + 1075 Lakh) \u00f7 105 Lakh = \u00d7 15.23809 per share<\/p>\n<p>Question 25.<br \/>\nThe following information is provided relating to the acquiring company Efficient Ltd. and the target Company Healthy Ltd.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Efficient Ltd.<\/td>\n<td>Healthy Ltd.<\/td>\n<\/tr>\n<tr>\n<td>No. of shares (F.V. \u20b9 10 each)<\/td>\n<td>10.00 lakhs<\/td>\n<td>7.5 lakhs<\/td>\n<\/tr>\n<tr>\n<td>Market capitalization<\/td>\n<td>500.00 lakhs<\/td>\n<td>750.00 lakhs<\/td>\n<\/tr>\n<tr>\n<td>P\/E ratio (times)<\/td>\n<td>10.00<\/td>\n<td>5.00<\/td>\n<\/tr>\n<tr>\n<td>Reserves and Surplus<\/td>\n<td>300.00 lakhs<\/td>\n<td>165.00 lakhs<\/td>\n<\/tr>\n<tr>\n<td>Promoter\u2019s Holding (No. of shares)<\/td>\n<td>4.75 lakhs<\/td>\n<td>5.00 lakhs<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Board of Directors of both the Companies have decided to give a fair deal to the shareholders and accordingly for swap ratio the weights are decided as 40%, 25% and 35% respectively for Earning, Book Value and Market Price of share of each company:<br \/>\n(i) Calculate the swap ratio and also calculate Promoter\u2019s holding % after acquisition.<br \/>\n(ii) What is the EPS of Efficient Ltd. after acquisition of Healthy Ltd.?<br \/>\n(iii) What is the expected market price per share and market capitalization of Efficient Ltd. after acquisition, assuming P\/E ratio of Firm Efficient Ltd. remains unchanged.<br \/>\n(iv) Calculate free flat market capitalization of the merged firm. [12 Marks] [May 2005]<br \/>\nAnswer:<br \/>\nCalculation of Basic required values<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td><\/td>\n<td>Efficient Ltd.<\/td>\n<td>Healthy Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Market capitalization (Given)<\/td>\n<td>A<\/td>\n<td>500 lakhs<\/td>\n<td>750 lakhs<\/td>\n<\/tr>\n<tr>\n<td>No. of shares (Given)<\/td>\n<td>B<\/td>\n<td>10 lakhs<\/td>\n<td>7.5 lakhs<\/td>\n<\/tr>\n<tr>\n<td>Market Price per share (A\/B)<\/td>\n<td>C<\/td>\n<td>\u20b9 50<\/td>\n<td>\u20b9 100<\/td>\n<\/tr>\n<tr>\n<td>P\/E ratio (Given)<\/td>\n<td>D<\/td>\n<td>10<\/td>\n<td>5<\/td>\n<\/tr>\n<tr>\n<td>EPS(C\/D)<\/td>\n<td>E<\/td>\n<td>\u20b9 5<\/td>\n<td>\u20b9 20<\/td>\n<\/tr>\n<tr>\n<td>Profit (B X E)<\/td>\n<td>F<\/td>\n<td>\u20b9 50 lakh<\/td>\n<td>\u20b9 150 lakh<\/td>\n<\/tr>\n<tr>\n<td>Share capital (B X Face Value @ X 10)<\/td>\n<td>G<\/td>\n<td>\u20b9 100 lakh<\/td>\n<td>\u20b9 75 lakh<\/td>\n<\/tr>\n<tr>\n<td>Reserves and surplus (Given)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 .<\/td>\n<td>H<\/td>\n<td>\u20b9 300 lakh<\/td>\n<td>\u20b9 165 lakh<\/td>\n<\/tr>\n<tr>\n<td>Total (G + H)<\/td>\n<td>I<\/td>\n<td>\u20b9 400 lakh<\/td>\n<td>\u20b9 240 lakh<\/td>\n<\/tr>\n<tr>\n<td>Book Value per share (I -r B)<\/td>\n<td>J<\/td>\n<td>\u20b9 40<\/td>\n<td>\u20b9 32<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(i) Calculation of weighted Swap Ratio<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19265\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-14.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 14\" width=\"606\" height=\"174\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-14.png 606w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-14-300x86.png 300w\" sizes=\"(max-width: 606px) 100vw, 606px\" \/><br \/>\nSwap ratio is for every one share of Healthy Ltd., to issue 2.5 shares of Efficient Ltd. Hence, total no. of shares to be issued 7.5 lakh \u00d7 2.5 = 18.75 lakh shares<br \/>\nPromoter\u2019s holding = 4.75 lakh shares + (5 \u00d7 2.5 = 12.5 lakh shares) = 17.25 lakh i.e. Promoter\u2019s holding % is (17.25 lakh\/28.75 lakh) \u00d7 100 = 60%.<\/p>\n<p>Calculation of EPS, Market price, Market capitalization and free float market capitalization.<br \/>\n(ii) Total No. of shares = 10 lakh + 18.75 lakh = 28.75 lakh<br \/>\nTotal capital = 100 lakh + 187.5 lakh = \u20b9 287.5 lakh<br \/>\nEPS = \\(\\frac{\\text { Total profit }}{\\text { No.of shares }}\\) = \\(\\frac{50 \\text { lakh }+150 \\text { lakh }}{28.75 \\text { lakh }}\\) = \\(\\frac{200}{28.75}\\) = \u20b9 6.956<\/p>\n<p>(iii) Expected market price = EPS 6.956 \u00d7 P\/E 10 = \u20b9 69.56 Market capitalization= \u20b9 69.56 per share \u00d7 28.75 lakh shares<br \/>\n= \u20b9 1,999.85 lakh<\/p>\n<p>(iv) Free float of market capitalization = \u20b9 69.56 per share \u00d7 (28.75 lakh \u00d7 40%) = \u20b9 799.94 lakh<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 26.<br \/>\nAbhiman Ltd. is a subsidiary of Janam Ltd. and is acquiring Swabhi- man Ltd. which is also a subsidiary of Janam Ltd. The following information is given:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Abhiman Ltd.<\/td>\n<td>Swabhiman Ltd.<\/td>\n<\/tr>\n<tr>\n<td>% Share holding of promoter<\/td>\n<td>50%<\/td>\n<td>60%<\/td>\n<\/tr>\n<tr>\n<td>Share capital<\/td>\n<td>\u20b9 200<\/td>\n<td>100 lacs<\/td>\n<\/tr>\n<tr>\n<td>Free Reserves and surplus<\/td>\n<td>\u20b9OO<\/td>\n<td>600 lacs<\/td>\n<\/tr>\n<tr>\n<td>Paid up value per share<\/td>\n<td>\u20b9 100<\/td>\n<td>10<\/td>\n<\/tr>\n<tr>\n<td>Free float market capitalization<\/td>\n<td>\u20b9 500 lacs<\/td>\n<td>156 lacs<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio (times)<\/td>\n<td>10<\/td>\n<td>4<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Janam Ltd., is interested in doing justice to both companies. The following parameters have been assigned by the Board of Janam Ltd., for determining the swap ratio :<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Book value<\/td>\n<td>25%<\/td>\n<\/tr>\n<tr>\n<td>Earning per share<\/td>\n<td>50%<\/td>\n<\/tr>\n<tr>\n<td>Market price<\/td>\n<td>25%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>You are required to compute :<br \/>\n(i) The swap ratio.<br \/>\n(ii) The book value, Earning per share and expected market price of Swabhiman Ltd., (assuming P\/E Ratio of Abhiman ratio remains the same and all assets and liabilities of Swabhiman Ltd. are taken over at book value) [May 2011] [8 Marks]<br \/>\nAnswer:<br \/>\nCalculation of Book Value, Market Price and EPS<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Abhiman Ltd. (Acquirer Co.)<\/td>\n<td>Swabhiman Ltd. (Target Co.)<\/td>\n<\/tr>\n<tr>\n<td>Share Capital<\/td>\n<td>200 Lakh<\/td>\n<td>100 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Free Reserves<\/td>\n<td>900 Lakh<\/td>\n<td>600 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Total<\/td>\n<td>Rs. 1,100 Lakh<\/td>\n<td>Rs. 700 Lakh<\/td>\n<\/tr>\n<tr>\n<td>No. of Shares<\/td>\n<td>2 Lakh<\/td>\n<td>10 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Book Value per share<\/td>\n<td>\u20b9 550<\/td>\n<td>\u20b9 70<\/td>\n<\/tr>\n<tr>\n<td>Promoter\u2019s holding<\/td>\n<td>50%<\/td>\n<td>60%<\/td>\n<\/tr>\n<tr>\n<td>Non-promoter&#8217;s holding<\/td>\n<td>50%<\/td>\n<td>40%<\/td>\n<\/tr>\n<tr>\n<td>Free Float Market Cap. i.e. Relating to Public\u2019s holding<\/td>\n<td>500 Lakh<\/td>\n<td>156 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Hence Total market Cap.<\/td>\n<td>1,000 Lakh<\/td>\n<td>390 Lakh<\/td>\n<\/tr>\n<tr>\n<td>No. of Shares<\/td>\n<td>2 Lakh<\/td>\n<td>10 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Market Price<\/td>\n<td>\u20b9 500<\/td>\n<td>\u20b9 39<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio<\/td>\n<td>10<\/td>\n<td>4<\/td>\n<\/tr>\n<tr>\n<td>EPS<\/td>\n<td>\u20b9 50<\/td>\n<td>\u20b9 9.75<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Calculation of weighted Swap Ratio<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19264\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-15.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 15\" width=\"714\" height=\"135\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-15.png 714w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-15-300x57.png 300w\" sizes=\"(max-width: 714px) 100vw, 714px\" \/><br \/>\n(a) The swap ratio is for every one share of Swabhiman Ltd. to issue 0.148825 shares of Abhiman Ltd.<br \/>\nHence, total No. of shares to be issued by Abhiman to Swabhiman Ltd.<br \/>\n= 10 Lakh \u00d7 0.148825 = 1,48,825 shares.<\/p>\n<p>(b) Calculation of various Values of Abhiman Ltd. after merger<br \/>\nTotal No. of shares = 2,00,000 + 1,48,825 = 3,48,825 Shares<br \/>\nTotal capital = \u20b9 200 lakhs + \u20b9 148.825 lakhs = \u20b9 348.825<br \/>\nLakhs Reserves = \u20b9 900 lac + \u20b9 551.175 lakhs = \u20b9 1,451.175 Lakhs<\/p>\n<p>Book Value per share:<br \/>\n= \\(\\frac{\\text { Total Capital }+ \\text { Reserve and Surplus }}{\\text { No. of shares }}\\) = \\(\\frac{R s .348 .825+\\text { Rs. } 1451.175}{3.48825 \\text { Lakhs }}\\) = Rs. 516.02<\/p>\n<p>Earnings per share:<br \/>\n= \\(\\frac{\\text { Total Profit }}{\\text { No. of shares }}\\) = \\(\\frac{R s .100 \\text { Lakhs }+ \\text { Rs. } 97.50 \\text { Lakhs }}{3.48825 \\text { Lakhs }}\\) = Rs. 56.62<\/p>\n<p>Expected Market Price<br \/>\n= EPS \u00d7 P\/E Ratio = Rs. 56.62 \u00d7 10 = Rs. 566.20<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 27.<br \/>\nBank &#8216;R&#8217; was established in 2005 and doing banking in India. The bank is facing DO OR DIE situation. There are problems of Gross NPA (NonPerforming Assets) at 40% &amp; CAR\/CRAR (Capital Adequacy Ratio\/Capital Risk Weight Asset Ratio) at 4%. The net worth of the bank is not good. Shares are not traded regularly. Last week, it was traded @ \u20b9 8 per share.<br \/>\nRBI Audit suggested that bank has either to liquidate or to merge with other bank.<br \/>\nBank \u2018P\u2019 is professionally managed bank with low gross NPA of 5%. It has Net NPA as 0% and CAR at 16%. Its share is quoted in the market @ \u20b9 128 per share. The Board of Directors of bank \u2018P\u2019 has submitted a proposal to RBI for takeover of bank \u2018R\u2019 on the basis of share exchange ratio.<br \/>\nThe Balance Sheet details of both the banks are as follows:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Bank \u2018R\u2019 Amount in \u20b9 Lacs<\/td>\n<td>Bank P Amount in \u20b9 Lacs<\/td>\n<\/tr>\n<tr>\n<td>Paid up share capital (Face Value @ \u20b910)<\/td>\n<td>140<\/td>\n<td>500<\/td>\n<\/tr>\n<tr>\n<td>Reserves &amp; Surplus<\/td>\n<td>70<\/td>\n<td>5,500<\/td>\n<\/tr>\n<tr>\n<td>Deposits<\/td>\n<td>4,000<\/td>\n<td>40,000<\/td>\n<\/tr>\n<tr>\n<td>Other liabilities<\/td>\n<td>890<\/td>\n<td>2,500<\/td>\n<\/tr>\n<tr>\n<td>Total Liabilities<\/td>\n<td>5,100<\/td>\n<td>48,500<\/td>\n<\/tr>\n<tr>\n<td>Cash in hand &amp; with RBI<\/td>\n<td>400<\/td>\n<td>2,500<\/td>\n<\/tr>\n<tr>\n<td>Balance with other banks<\/td>\n<td>&#8211;<\/td>\n<td>2,000<\/td>\n<\/tr>\n<tr>\n<td>Investments<\/td>\n<td>1,100<\/td>\n<td>15,000<\/td>\n<\/tr>\n<tr>\n<td>Advances<\/td>\n<td>3,500<\/td>\n<td>27,000<\/td>\n<\/tr>\n<tr>\n<td>Other Assets<\/td>\n<td>100<\/td>\n<td>2,000<\/td>\n<\/tr>\n<tr>\n<td>Total Assets<\/td>\n<td>5,100<\/td>\n<td>48,500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>It was decided to issue shares at Book Value of Bank \u2018P\u2019 to the shareholders of Bank &#8216;R\u2019, AH assets and liabilities are to be taken over at Book Value.<br \/>\nFor the swap ratio, weights assigned to different parameters are as follows:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Gross NPA<\/td>\n<td>30%<\/td>\n<\/tr>\n<tr>\n<td>CAR<\/td>\n<td>20%<\/td>\n<\/tr>\n<tr>\n<td>Market Price<\/td>\n<td>40%<\/td>\n<\/tr>\n<tr>\n<td>Book Value<\/td>\n<td>10%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(a) What is the swap ratio based on above weights?<br \/>\n(b) How many shares are to be issued?<br \/>\n(c) Prepare Balance Sheet after merger.<br \/>\n(d) Calculate CAR &amp; Gross NPA % of Bank \u2018P\u2019 after merger. [May 2015] [11 Marks]<br \/>\nAnswer:<br \/>\nCalculation of Book Value per share<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Bank R\u2019 (in Lakhs)<\/td>\n<td>Bank P (in Lakhs)<\/td>\n<\/tr>\n<tr>\n<td>Paid up share capital<\/td>\n<td>140<\/td>\n<td>500<\/td>\n<\/tr>\n<tr>\n<td>Reserves &amp; Surplus<\/td>\n<td>70<\/td>\n<td>5,500<\/td>\n<\/tr>\n<tr>\n<td>Net Assets<\/td>\n<td>210<\/td>\n<td>6,000<\/td>\n<\/tr>\n<tr>\n<td>No. of Shares<\/td>\n<td>14<\/td>\n<td>50<\/td>\n<\/tr>\n<tr>\n<td>Book Value per share<\/td>\n<td>15<\/td>\n<td>120<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(a) Calculation of weighted Swap Ratio<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19263\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-16.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 16\" width=\"674\" height=\"158\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-16.png 674w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-16-300x70.png 300w\" sizes=\"(max-width: 674px) 100vw, 674px\" \/><br \/>\nSwap ratio is for every one share of Bank \u201cR\u201d, 0.125 share of Bank \u201cP\u201d shall be issued.<\/p>\n<p>(b) Calculation of number of shares to be issued by Bank \u201cP&#8221;<br \/>\n= Number of shares in Bank \u201cR&#8221; \u00d7 Exchange Ratio<br \/>\n= (140\/10) Lakh Shares \u00d7 0.125 = 1,75,000 shares.<\/p>\n<p>(c) Balance Sheet of Bank \u201cP\u201d after merger<br \/>\nCapital Reserve = Book Value of Shares &#8211; Value of shares issued<br \/>\n= Rs. 210.00 Lakhs &#8211; Rs. 17.50 Lakhs = Rs. 192.50 Lakhs<\/p>\n<p>Balance Sheet of Bank \u201cP\u201d after merger<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Amount (Rs. in Lakhs)<\/td>\n<\/tr>\n<tr>\n<td>Paid up share capital<\/td>\n<td>517.50<\/td>\n<\/tr>\n<tr>\n<td>Reserves &amp; Surplus (including capital reserve)<\/td>\n<td>5,692.50<\/td>\n<\/tr>\n<tr>\n<td>Deposits<\/td>\n<td>44,000.00<\/td>\n<\/tr>\n<tr>\n<td>Other liabilities<\/td>\n<td>3,390.00<\/td>\n<\/tr>\n<tr>\n<td>Total Liabilities<\/td>\n<td>53,600.00<\/td>\n<\/tr>\n<tr>\n<td>Cash in hand &amp; with RBI<\/td>\n<td>2,900.00<\/td>\n<\/tr>\n<tr>\n<td>Balance with other banks<\/td>\n<td>2,000.00<\/td>\n<\/tr>\n<tr>\n<td>Investments<\/td>\n<td>16,100.00<\/td>\n<\/tr>\n<tr>\n<td>Advances<\/td>\n<td>30,500.00<\/td>\n<\/tr>\n<tr>\n<td>Other Assets<\/td>\n<td>2,100.00<\/td>\n<\/tr>\n<tr>\n<td>Total Assets<\/td>\n<td>53,600.00<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(d) Calculation of CAR and Gross NPA of Bank \u201cP\u201d after merger<br \/>\nCAR\/CRWR = \\(\\frac{\\text { Total Capital }}{\\text { Risky Weighted Assets }}\\) \u00d7 100<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Bank \u201cR\u201d<\/td>\n<td>Bank \u201cP\u201d<\/td>\n<td>Merged<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>4%<\/td>\n<td>16%<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total Capital<\/td>\n<td>Rs. 210 Lacs<\/td>\n<td>Rs. 6,000 Lacs<\/td>\n<td>Rs. 6,210 Lacs<\/td>\n<\/tr>\n<tr>\n<td>Risky Weighted Assets<\/td>\n<td>Rs. 5,250 Lacs<\/td>\n<td>Rs. 37,500 Lacs<\/td>\n<td>Rs. 42,750 Lacs<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>CAR\/CRWR = \\(\\frac{\u20b9 6,210}{\u20b9 42,750}\\) \u00d7 100 = 14.53%<br \/>\nGNPA Ration = \\(\\frac{\\text { Gross NPA }}{\\text { Gross Deposits }}\\) \u00d7 100<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19262\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-17.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 17\" width=\"605\" height=\"140\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-17.png 605w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-17-300x69.png 300w\" sizes=\"(max-width: 605px) 100vw, 605px\" \/><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 28.<br \/>\nThe following information is provided relating to the acquiring company E Ltd., and the target company H Ltd:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>E Ltd. (\u20b9)<\/td>\n<td>H Ltd. (\u20b9)<\/td>\n<\/tr>\n<tr>\n<td>Number of shares (Face value \u20b9 10 each)<\/td>\n<td>20 Lakhs<\/td>\n<td>15 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>Market Capitalization<\/td>\n<td>1,000 Lakhs<\/td>\n<td>1,500 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio (times)<\/td>\n<td>10.00<\/td>\n<td>5.00<\/td>\n<\/tr>\n<tr>\n<td>Reserves and surplus in \u20b9<\/td>\n<td>600.00 Lakhs<\/td>\n<td>330.00 Lakhs<\/td>\n<\/tr>\n<tr>\n<td>Promoter\u2019s Holding (No. of shares)<\/td>\n<td>9.50 Lakhs<\/td>\n<td>10.00 Lakhs<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The Board of Directors of both the companies have decided to give a fair deal to the shareholders. Accordingly, the weights are decided as 40%, 25% and 35% respectively for earnings, book value and market price of share of each company for swap ratio.<br \/>\nCalculate the following:<br \/>\n(i) Market price per share, earnings per share and Book Value per share;<br \/>\n(ii) Swap ratio;<br \/>\n(iii) Promoter\u2019s holding percentage after acquisition;<br \/>\n(iv) EPS of E Ltd. after acquisitions of H Ltd;<br \/>\n(v) Expected market price per share and market capitalization of E Ltd.; after acquisition, assuming P\/E ratio of E Ltd. remains unchanged; and<br \/>\n(vi) Free float market capitalization of the merged firm. [Nov. 2015] [10 Marks]<br \/>\nAnswer:<br \/>\n(i) Calculation of Book Value, Market Price and EPS<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>E Ltd. (\u20b9)<br \/>\n(Acquirer Co.)<\/td>\n<td>H Ltd. (\u20b9)<br \/>\n(Target Co.)<\/td>\n<\/tr>\n<tr>\n<td>Market Capitalization<\/td>\n<td>1,000 Lakh<\/td>\n<td>1,500 Lakh<\/td>\n<\/tr>\n<tr>\n<td>No. of Shares<\/td>\n<td>20 Lakh<\/td>\n<td>15 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Market Price [Market Capitalization + No. of Shares]<\/td>\n<td>\u20b9 50<\/td>\n<td>\u20b9 100<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio<\/td>\n<td>10<\/td>\n<td>5<\/td>\n<\/tr>\n<tr>\n<td>EPS [Market Price + P\/E Ratio]<\/td>\n<td>\u20b9 5<\/td>\n<td>\u20b9 20<\/td>\n<\/tr>\n<tr>\n<td>Profit<\/td>\n<td>100 Lakh<\/td>\n<td>300 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Share capital<\/td>\n<td>200 Lakh<\/td>\n<td>150 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Reserve and Surplus<\/td>\n<td>600 Lakh<\/td>\n<td>330 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Total<\/td>\n<td>800 Lakh<\/td>\n<td>480 Lakh<\/td>\n<\/tr>\n<tr>\n<td>Book Value per share<\/td>\n<td>\u20b9 40<\/td>\n<td>\u20b9 32<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Calculation of weighted Swap Ratio<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19261\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-18.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 18\" width=\"569\" height=\"171\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-18.png 569w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-18-300x90.png 300w\" sizes=\"(max-width: 569px) 100vw, 569px\" \/><br \/>\nThe Swap ratio is for every one share of H Ltd. to issue 2.5 shares of E Ltd.<br \/>\nHence, total no. of shares to be issued = 15 Lakh \u00d7 2.5 = 37,50,000 shares<\/p>\n<p>(iii) Promoter\u2019s Holding in E Ltd. After merger<br \/>\n= Holding in E Ltd. + Due to Holdings in H Ltd.<br \/>\n= 9.5 Lakh Shares + 10 Lakhs \u00d7 2.5 (i.e. Exchange Ratio) = 34.5 Lakhs Shares<br \/>\nPromoter\u2019s Holding = 34.5 Lakhs \u00f7 57.5 Lakhs = 0.6 or 60%<\/p>\n<p>(iv) EPS of E Ltd. After acquisition of H Ltd.<br \/>\nTotal No. of Shares = 20 Lakhs + 37.5 Lakhs = 57.5 Lakhs shares<br \/>\nTotal Profits = Existing EPS \u00d7 Existing No. of shares = (5 \u00d7 20) + (20 \u00d7 15) = Rs. 400 Lakhs<br \/>\nEPS = Total Profits \u00f7 No. of Shares= Rs. 400 Lakhs \u00f7 57.5 Lakhs shares = 6.956<\/p>\n<p>(v) Expected Market Price<br \/>\n= EPS \u00d7 P\/E Ratio = 6.956 \u00d7 10 = Rs. 69.56<br \/>\nMarket Capitalisation<br \/>\n= Expected Market Price \u00d7 No. of Shares = Rs. 69.56 \u00d7 57.5 = Rs. 3,999.7 , Lakhs<\/p>\n<p>(vi) Free Float of Market Capitalisation<br \/>\n= Market Capitalisation \u00d7 Non-promoters holding<br \/>\n= Rs. 3,999.7 Lakhs \u00d7 40% = \u20b9 1,599.88 Lakhs<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 29.<br \/>\nXML Bank was established in 2001 and doing banking business in India. The bank is facing very critical situation. There are problems of Gross NPA (Non-Performing Assets) at 40% &amp; CAR\/CRAR (Capital Adequacy Ratio\/ Capital Risk Weight Asset Ratio) at 2%. The net worth of the bank is not good. Shares are not traded regularly. Last week, it was traded @ t 4 per share.<br \/>\nRBI Audit suggested that bank has either to liquidate or to merge with other bank.<br \/>\nZML Bank is professionally managed bank with low gross NPA of 5%. It has net NPA as 0% and CAR at 16%. Its share is quoted in the market @ \u20b9 64 per share. The Board of Directors of ZML Bank has submitted a proposal to RBI for takeover of bank XML on the basis of share exchange ratio.<br \/>\nThe Balance Sheet details of both the banks are as follows:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>XML Bank (\u20b9 in Crores)<\/td>\n<td>ZML Bank (\u20b9 in Crores)<\/td>\n<\/tr>\n<tr>\n<td>Liabilities<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Paid up share capital (\u20b9 10)<\/td>\n<td>70<\/td>\n<td>250<\/td>\n<\/tr>\n<tr>\n<td>Reserve and Surplus<\/td>\n<td>35<\/td>\n<td>2,750<\/td>\n<\/tr>\n<tr>\n<td>Deposits<\/td>\n<td>2,000<\/td>\n<td>20,000<\/td>\n<\/tr>\n<tr>\n<td>Other Liabilities<\/td>\n<td>445<\/td>\n<td>1,250<\/td>\n<\/tr>\n<tr>\n<td>Total Liabilities<\/td>\n<td>2,550<\/td>\n<td>24,250<\/td>\n<\/tr>\n<tr>\n<td>Assets<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash in hand and with RBI<\/td>\n<td>200<\/td>\n<td>1,250<\/td>\n<\/tr>\n<tr>\n<td>Balance with other banks<\/td>\n<td>0<\/td>\n<td>1,000<\/td>\n<\/tr>\n<tr>\n<td>Investments<\/td>\n<td>550<\/td>\n<td>7,500<\/td>\n<\/tr>\n<tr>\n<td>Advances<\/td>\n<td>1,750<\/td>\n<td>13,500<\/td>\n<\/tr>\n<tr>\n<td>Other Assets<\/td>\n<td>50<\/td>\n<td>1,000<\/td>\n<\/tr>\n<tr>\n<td>Total Assets<\/td>\n<td>2,550<\/td>\n<td>24,250<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>It was decided to issue shares at Book Value of ZML Bank to the shareholders of XML Bank. All Assets &amp; Liabilities are to be taken over at Book Value.<br \/>\nFor the Swap Ratio, weights assigned to different parameters are as follows:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Gross NPA<\/td>\n<td>40%<\/td>\n<\/tr>\n<tr>\n<td>CAR<\/td>\n<td>10%<\/td>\n<\/tr>\n<tr>\n<td>Market Price<\/td>\n<td>40%<\/td>\n<\/tr>\n<tr>\n<td>Book Value<\/td>\n<td>10%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>You are required to:<br \/>\n(i) Calculate swap ratio based on above rates.<br \/>\n(ii) Calculate number of shares is to be issued.<br \/>\n(iii) Prepare Balance Sheet after Merger. [May 2017] [12 Marks]<br \/>\nAnswer:<br \/>\nCalculation of Book Value per share<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Bank \u2018XML\u2019 (\u20b9 in Crores)<\/td>\n<td>Bank \u2018ZML\u2019 (\u20b9 in Crores)<\/td>\n<\/tr>\n<tr>\n<td>Paid up share capital<\/td>\n<td>70<\/td>\n<td>250<\/td>\n<\/tr>\n<tr>\n<td>Reserves &amp; Surplus<\/td>\n<td>35<\/td>\n<td>2,750<\/td>\n<\/tr>\n<tr>\n<td>Net Assets<\/td>\n<td>105<\/td>\n<td>3,000<\/td>\n<\/tr>\n<tr>\n<td>No. of Shares (in Crores)<\/td>\n<td>7<\/td>\n<td>25<\/td>\n<\/tr>\n<tr>\n<td>Book Value per share<\/td>\n<td>15<\/td>\n<td>120<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(a) Calculation of weighted Swap Ratio<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19260\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-19.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 19\" width=\"663\" height=\"149\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-19.png 663w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-19-300x67.png 300w\" sizes=\"(max-width: 663px) 100vw, 663px\" \/><br \/>\nNote: In case of NPA, the exchange ratio has to be calculated reciprocally since more NPA means negative factor.<br \/>\nSwap ratio is for every one share of Bank \u201cXML\u201d, 0.1 share of Bank \u201cZML&#8221; -shall be issued.<\/p>\n<p>(b) Calculation of number of shares to be issued by Bank \u201cZML\u201d<br \/>\n= Number of shares in Bank \u201cXML\u201d \u00d7 Exchange Ratio<br \/>\n= 7 Crores Shares \u00d7 0.1 = 70 Lakh<\/p>\n<p>(c) Balance Sheet of Bank \u201cP\u201d after merger<br \/>\nCapital Reserve = Net Assets &#8211; Purchase Consideration<br \/>\n= Rs. 105 &#8211; Rs. 84 = Rs. 21 Crores<\/p>\n<p>Balance Sheet of Bank \u201cZML\u201d after merger<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Amount (Rs. in Crores)<\/td>\n<\/tr>\n<tr>\n<td>Paid up share capital<\/p>\n<p>Reserves &amp; Surplus (sec Note given below)<\/p>\n<p>Deposits<\/p>\n<p>Other liabilities<\/td>\n<td>257<\/p>\n<p>2,848<\/p>\n<p>22,000<\/p>\n<p>1,695<\/td>\n<\/tr>\n<tr>\n<td>Total Liabilities<\/td>\n<td>26,800<\/td>\n<\/tr>\n<tr>\n<td>Cash in hand &amp; with RBI<\/p>\n<p>Balance with other banks<\/p>\n<p>Investments<\/p>\n<p>Advances<\/p>\n<p>Other Assets<\/td>\n<td>1,450<\/p>\n<p>1,000<\/p>\n<p>8,050<\/p>\n<p>15,250<\/p>\n<p>1,050<\/td>\n<\/tr>\n<tr>\n<td>Total Assets<\/td>\n<td>26,800<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>NOTE:<br \/>\nReserve and Surplus = Given + Capital Reserve + Securities Premium<br \/>\n= 2,750 + 21 + (0.7 \u00d7 110) = Rs. 2,848 crores<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 30.<br \/>\nSimple Ltd. and Dimple Ltd. are planning to merge. The total value of the companies is dependent on the fluctuating business conditions. The following information is given for the total value (debt + equity) structure of each of the two companies.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Business Condition<\/td>\n<td>Probability<\/td>\n<td>Simple Ltd. \u20b9 Lacs<\/td>\n<td>Dimple Ltd. \u20b9 Lacs<\/td>\n<\/tr>\n<tr>\n<td>High Growth<\/td>\n<td>0.20<\/td>\n<td>820<\/td>\n<td>1,050<\/td>\n<\/tr>\n<tr>\n<td>Medium Growth<\/td>\n<td>0.60<\/td>\n<td>550<\/td>\n<td>825<\/td>\n<\/tr>\n<tr>\n<td>Slow Growth<\/td>\n<td>0.20<\/td>\n<td>410<\/td>\n<td>590<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The current debt of Dimple Ltd. is \u20b9 65 lacs and of Simple Ltd. is \u20b9 460 lacs.<br \/>\nCalculate the expected value of debt and equity separately for the merged entity. [May 2011] [8 Marks]<br \/>\nAnswer:<br \/>\n(a) Computation of Value of Equity<br \/>\nSimple Ltd. (\u20b9 in Lacs)<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>High Growth<\/td>\n<td>Medium Growth<\/td>\n<td>Slow Growth<\/td>\n<\/tr>\n<tr>\n<td>Debt + Equity<\/td>\n<td>820<\/td>\n<td>550<\/td>\n<td>410<\/td>\n<\/tr>\n<tr>\n<td>Less: Debt<\/td>\n<td>460<\/td>\n<td>460<\/td>\n<td>460<\/td>\n<\/tr>\n<tr>\n<td>Equity<\/td>\n<td>360<\/td>\n<td>90<\/td>\n<td>-50<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Since the Company has limited liability the value of equity cannot be negative therefore the value of equity under slow growth will be taken as zero because of insolvency risk and the value of debt is taken at 410 lacs.<br \/>\nThe expected value of debt and equity can then be calculated as:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19259\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-20.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 20\" width=\"610\" height=\"431\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-20.png 610w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-20-300x212.png 300w\" sizes=\"(max-width: 610px) 100vw, 610px\" \/><\/p>\n<p>Question 31.<br \/>\nYes Ltd. wants to acquire No Ltd. and the cash flows of Yes Ltd. and the merged entity are given below: (\u20b9 in Lakhs)<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19258\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-21.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 21\" width=\"552\" height=\"74\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-21.png 552w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-21-300x40.png 300w\" sizes=\"(max-width: 552px) 100vw, 552px\" \/><br \/>\nEarnings would have witnessed 5% contestant growth rate without merger and 6% with merger on account of economies of operations after 5 years in each case. The cost of capital is 15%.<br \/>\nThe number of shares outstanding in both the companies before the merger is the same and the companies agree to an exchange ratio of 0.5 shares of Yes Ltd. for each share of No Ltd.<br \/>\nPV factor at 15% for years 1-5 are 0.870,0.756,0.658,0.572,0.497 respectively. You are required to :<br \/>\n(i) Compute the Value of Yes Ltd. before and after merger.<br \/>\n(ii) Value of Acquisition and<br \/>\n(iii) Gain to shareholders of Yes Ltd. [Nov. 2012] [8 Marks]<br \/>\nAnswer:<br \/>\n(i) Working Notes:<br \/>\nPresent Value of Cash Flows (CF) upto 5 years<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19257\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-22.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 22\" width=\"659\" height=\"197\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-22.png 659w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-22-300x90.png 300w\" sizes=\"(max-width: 659px) 100vw, 659px\" \/><br \/>\nPV of Cash Flows of Yes Ltd. after the forecast period<br \/>\nTV<sub>5<\/sub> = \\(\\frac{C F_5(1+g)}{K-g}=\\frac{350(1+0.05)}{0.15-0.05}\\) = \\(\\frac{367.50}{0.10}\\) = \u20b9 3,675 lakhs<br \/>\nPV of TV<sub>5<\/sub> = \u20b9 3,675 lakhs \u00d7 0.497 = \u20b9 1,826.475 lakhs<br \/>\nPV of Cash Flows of Merged Entity after the forecast period<br \/>\nTV<sub>5<\/sub> = \\(\\frac{C F_5(\\mathrm{I}+g)}{K_c-g}\\) = \\(\\frac{620(1+0.06)}{0.15-0.06}\\) = \\(\\frac{657.20}{0.09}\\) = \u20b9 7,302.22 lakhs<br \/>\nPV of TV<sub>5<\/sub> = \u20b9 7,302.22 lakhs \u00d7 0.497 = \u20b9 3,629.20 lakhs<\/p>\n<p>Value of Yes Ltd.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19256\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-23.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 23\" width=\"572\" height=\"115\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-23.png 572w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-23-300x60.png 300w\" sizes=\"(max-width: 572px) 100vw, 572px\" \/><\/p>\n<p>(ii) Value of Acquisition<br \/>\n= Value of Merged Entity &#8211; Value of Yes Ltd.<br \/>\n= \u20b9 5,308.47 lakhs &#8211; \u20b9 2,708.915 lakhs = \u20b9 2,599.555 lakhs<\/p>\n<p>(iii) Gain to Shareholders of Yes Ltd.<br \/>\nShare of Yes Ltd. in merged entity = \u20b9 5,308.47 lakhs \u00d7 \\(\\frac{1}{1.5}\\)<br \/>\n= \u20b9 3,538.98 lakhs<br \/>\nGain to shareholder = Share of Yes Ltd. in merged entity &#8211; Value of Yes Ltd. before merger<br \/>\n= \u20b9 3,538.98 lakhs &#8211; \u20b9 2,708.915 lakhs = \u20b9 830.065 lakhs<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 32.<br \/>\nM\/s Tiger Ltd. wants to acquire M\/s Leopard Ltd. The balance sheet of Leopard Ltd. as on 31st March, 2012 is as follows:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19255\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-24.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 24\" width=\"595\" height=\"142\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-24.png 595w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-24-300x72.png 300w\" sizes=\"(max-width: 595px) 100vw, 595px\" \/><br \/>\nAdditional information:<br \/>\n(i) Shareholders of Leopard Ltd. will get one share in Tiger Ltd. for every two shares. External liabilities are expected to be settled at \u20b9 5,00,000. Shares of Tiger Ltd. would be issued at its current price of \u20b9 15 per share. Debenture-holders will get 13% convertible debentures in the purchasing company for the same amount. Debtors and inventories are expected to realise \u20b9 2,00,000.<br \/>\n(ii) Tiger Ltd. has decided to operate the business of Leopard Ltd. as a separate division. The division is likely to give cash flows (after tax) to the extent of \u20b9 5,00,000 per year for 6 years. Tiger Ltd, has planned that, after 6 years, this division would be demerged and disposed of for \u20b9 2,00,000.<br \/>\n(iii) The company\u2019s cost of capital is 16%.<br \/>\nMake a report to the Board of the company advising them about the financial feasibility of this acquisition. [Nov. 2013] [10 Marks]<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19254\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-25.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 25\" width=\"600\" height=\"55\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-25.png 600w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-25-300x28.png 300w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><br \/>\nAnswer:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19253\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-26.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 26\" width=\"610\" height=\"188\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-26.png 610w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-26-300x92.png 300w\" sizes=\"(max-width: 610px) 100vw, 610px\" \/><\/p>\n<p>Computation of Net Present Value<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19252\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-27.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 27\" width=\"610\" height=\"126\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-27.png 610w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-27-300x62.png 300w\" sizes=\"(max-width: 610px) 100vw, 610px\" \/><br \/>\nSince NPV of the decision is positive, it is advantageous to acquire Leopard Ltd.<\/p>\n<p>Question 33.<br \/>\nThe following is the Balance-Sheet of Grape Fruit Company Ltd. as at March 31st, 2011.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19251\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-28.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 28\" width=\"600\" height=\"304\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-28.png 600w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-28-300x152.png 300w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><br \/>\nThe Company did not perform well and has suffered sizable losses during the last few years. However, it is felt that the company could be nursed back to health by proper financial restructuring. Consequently the following scheme of reconstruction has been drawn up:<br \/>\n(i) Equity shares are to be reduced to \u20b9 25 per share, fully paid up;<br \/>\n(ii) Preference shares are to be reduced (with coupon rate of 10%) to equal number of shares of \u20b9 50 each, fully paid up.<br \/>\n(iii) Debenture holders have agreed to forego the accrued interest due to them. In the future, the rate of interest on debentures is to be reduced to 9 per cent.<br \/>\n(iv) Trade creditors will forego 25 per cent of the amount due to them.<br \/>\n(v) The company issues 6 lakh of equity shares at \u20b9 25 each and the entire sum was to be paid on application. The entire amount was fully sub-scribed by promoters.<br \/>\n(vi) Land and Building was to be revalued at \u20b9 450 lakhs, Plant and Machinery was to be written down by \u20b9 120 lakhs and a provision of \u20b9 15 lakhs had to be made for bad and doubtful debts.<br \/>\nRequired:<br \/>\n(i) Show the impact of financial restructuring on the company\u2019s activities. [Nov. 2011] [6 Marks]<br \/>\n(ii) Prepare the fresh balance sheet after the reconstruction is completed on the basis of the above proposals. [4 Marks]<br \/>\nAnswer:<br \/>\n(1) Impact of Financial Restructuring<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19250\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-29.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 29\" width=\"609\" height=\"471\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-29.png 609w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-29-300x232.png 300w\" sizes=\"(max-width: 609px) 100vw, 609px\" \/><\/p>\n<p>Balance Sheet of Grape Fruit Limited (after reconstruction)<br \/>\nAs at 31st March, 2011<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19249\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-30.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 30\" width=\"609\" height=\"400\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-30.png 609w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-30-300x197.png 300w\" sizes=\"(max-width: 609px) 100vw, 609px\" \/><\/p>\n<p>Notes to Accounts<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19248\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-31.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 31\" width=\"610\" height=\"342\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-31.png 610w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-31-300x168.png 300w\" sizes=\"(max-width: 610px) 100vw, 610px\" \/><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 34.<br \/>\nThe following is the Balance Sheet of XYZ Ltd. as at 31st March, 2016:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19247\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-32.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 32\" width=\"601\" height=\"306\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-32.png 601w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-32-300x153.png 300w\" sizes=\"(max-width: 601px) 100vw, 601px\" \/><br \/>\nThe Company\u2019s performance is not good and has suffered sizable losses during the last few years. The Company can be nursed back to health with proper financial restructuring. As such, the following scheme is prepared:<br \/>\n(i) Equity Shares are to be reduced to \u20b9 2 per Share, fully paid-up.<br \/>\n(ii) Preference Shares are to be reduced (with coupon Rate of 9%) to equal number of Shares of \u20b9 5 each, fully paid-up.<br \/>\n(iii) Debenture holders have agreed to forgo the accrued interest due to them and for the future the rate of interest on Debentures to be 10%.<br \/>\n(iv) Trade Creditors will forgo 20% of the amount due to them.<br \/>\n(v) The Company to issue 50 Lakhs Shares at \u20b9 2 each to be paid fully on Application. The entire amount is fully subscribed by Promoters.<br \/>\n(vi) Land and Building to be revalued at \u20b9 350 Lakhs, Plant and Machinery value to be taken at \u20b9 150 Lakhs and a provision of D 5 Lakhs to be made for Bad and Doubtful Debts.<br \/>\nYou are required to :<br \/>\n(1) Show the impact of Financial Restructuring on the Company\u2019s activities.<br \/>\n(2) Prepare the fresh Balance Sheet after the reconstruction is completed on the basis of above proposals. [May 2017] [8 Marks]<br \/>\nAnswer:<br \/>\n(1) Impact of Financial Restructuring<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19246\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-33.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 33\" width=\"608\" height=\"382\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-33.png 608w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-33-300x188.png 300w\" sizes=\"(max-width: 608px) 100vw, 608px\" \/><\/p>\n<p>Balance Sheet of XYZ Limited (after reconstruction)<br \/>\nAs at 31st March, 2016<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19245\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-34.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 34\" width=\"610\" height=\"381\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-34.png 610w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-34-300x187.png 300w\" sizes=\"(max-width: 610px) 100vw, 610px\" \/><\/p>\n<p>Notes to Accounts<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19244\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-35.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 35\" width=\"612\" height=\"361\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-35.png 612w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-35-300x177.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>\n<p>Maximum Price to be offered for shares of Target Company<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 35.<br \/>\nThe equity shares of XYZ Ltd. are currently being traded at \u20b9 24 per share in the market. XYZ Ltd. has total 10,00,000 equity shares outstanding in number; and promoters\u2019 equity holding in the company is 40%. PQR Ltd. wishes to acquire XYZ Ltd. because of likely synergies. The estimated present value of these synergies is \u20b9 80,00,000.<br \/>\nFurther, PQR feels that management of XYZ Ltd. has been overpaid. With better motivation, lower salaries and fewer perks for the top management, will lead to savings of \u20b9 4,00,000 p.a. Top management with their families are promoters of XYZ Ltd. Present value of these savings would add \u20b9 30,00,000 in value to the acquisition.<br \/>\nFollowing additional information is available regarding PQR Ltd.:<br \/>\nEarnings per share: \u20b9 4<br \/>\nTotal number of equity shares outstanding: 15,00,000<br \/>\nMarket price of equity share: \u20b9 40<br \/>\nRequired:<br \/>\n(i) What is the maximum price per equity share which PQR Ltd. can offer to pay for XYZ Ltd.?<br \/>\n(ii) What is the minimum price per equity share at which the management of XYZ Ltd. will be willing to offer their controlling interest? [May 2014] [4 + 2 = 6 Marks]<br \/>\nAnswer:<br \/>\n(a) Calculation of maximum price per share at which PQR Ltd. can offer to pay for XYZ Ltd.\u2019s share<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Market Value (10,00,000 \u00d7 \u20b9 24)<\/p>\n<p>Synergy Gain<\/p>\n<p>Saving of Overpayment<\/td>\n<td>\u20b9 2,40,00,000<br \/>\n\u20b9 80,00,000<br \/>\n\u20b9 30,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total Benefits<\/td>\n<td>\u20b9 3,50,00,000<\/td>\n<\/tr>\n<tr>\n<td>Maximum Price (\u20b9 3,50,00,000 \u00f7 10,00,000)<\/td>\n<td>\u20b9 35<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(b) Calculation of minimum price per share at which the management of XYZ Ltd.&#8217;s will be willing to offer their controlling interest.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Amount (\u20b9)<\/td>\n<\/tr>\n<tr>\n<td>Value of XYZ Ltd.\u2019s Mgt. Holding (40% of 10,00,000 \u00d7 \u20b9 24)<\/td>\n<td>96,00,000<\/td>\n<\/tr>\n<tr>\n<td>Add: PV of loss of remuneration to top management<\/td>\n<td>30,00,000<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>1,26,00,000<\/td>\n<\/tr>\n<tr>\n<td>No. of Shares<\/td>\n<td>4,00,000<\/td>\n<\/tr>\n<tr>\n<td>Minimum Price (\u20b9 1,26,00,000\/4,00,000)<\/td>\n<td>\u20b9 31.50<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Question 36.<br \/>\nBA Ltd. and DA Ltd. both the companies operate in the same industry. The Financial statements of both the companies for the current financial year are as follows:<br \/>\nBalance Sheet<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>BA Ltd. (\u20b9)<\/td>\n<td>DA Ltd. (\u20b9)<\/td>\n<\/tr>\n<tr>\n<td>Current Assets<\/td>\n<td>14,00,000<\/td>\n<td>10,00,000<\/td>\n<\/tr>\n<tr>\n<td>Fixed Assets (Net)<\/td>\n<td>10,00,000<\/td>\n<td>5,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total (\u20b9)<\/td>\n<td>24,00,000<\/td>\n<td>15,00,000<\/td>\n<\/tr>\n<tr>\n<td>Equity capital (\u20b9 10 each)<\/td>\n<td>10,00,000<\/td>\n<td>8,00,000<\/td>\n<\/tr>\n<tr>\n<td>Retained earnings<\/td>\n<td>2,00,000<\/td>\n<td>&#8211;<\/td>\n<\/tr>\n<tr>\n<td>14% long-term debt<\/td>\n<td>5,00,000<\/td>\n<td>3,00,000<\/td>\n<\/tr>\n<tr>\n<td>Current liabilities<\/td>\n<td>7,00,000<\/td>\n<td>4,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total (\u20b9)<\/td>\n<td>24,00,000<\/td>\n<td>15,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Income Statement<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td><\/td>\n<td>DA Ltd. (\u20b9)<\/td>\n<\/tr>\n<tr>\n<td>Net Sales<\/td>\n<td>34,50,000<\/td>\n<td>17,00,000<\/td>\n<\/tr>\n<tr>\n<td>Cost of Goods sold<\/td>\n<td>27,60,000<\/td>\n<td>13,60,000<\/td>\n<\/tr>\n<tr>\n<td>Gross profit<\/td>\n<td>6,90,000<\/td>\n<td>3,40,000<\/td>\n<\/tr>\n<tr>\n<td>Operating expenses<\/td>\n<td>2,00,000<\/td>\n<td>1,00,000<\/td>\n<\/tr>\n<tr>\n<td>Interest<\/td>\n<td>70,000<\/td>\n<td>42,000<\/td>\n<\/tr>\n<tr>\n<td>Earnings before taxes<\/td>\n<td>4,20,000<\/td>\n<td>1,98,000<\/td>\n<\/tr>\n<tr>\n<td>Taxes @ 50%<\/td>\n<td>2,10,000<\/td>\n<td>99,000<\/td>\n<\/tr>\n<tr>\n<td>Earnings after taxes (EAT)<\/td>\n<td>2,10,000<\/td>\n<td>99,000<\/td>\n<\/tr>\n<tr>\n<td>Additional Information:<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>No. of Equity shares<\/td>\n<td>1,00,000<\/td>\n<td>80,000<\/td>\n<\/tr>\n<tr>\n<td>Dividend payment ratio<\/td>\n<td>40%<\/td>\n<td>60%<\/td>\n<\/tr>\n<tr>\n<td>Market price per share<\/td>\n<td>\u20b9 40<\/td>\n<td>\u20b9 15<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Assume that both companies are in the process of negotiating a merger through an exchange of equity shares. You have been asked to assist in establishing equitable exchange terms and are required to:<br \/>\n(i) Decompose the share price of both the companies into EPS and P\/E components; and also segregate their EPS figures into Return on Equity (ROE) and book value\/intrinsic value per share components.<br \/>\n(ii) Estimate future EPS growth rates for each company.<br \/>\n(iii) Based on expected operating synergies BA Ltd. estimates that the intrinsic value of DA\u2019s equity share would be C 20 per share on its acquisition. You are required to develop a range of justifiable equity share exchange ratios that can be offered by BA Ltd. to the shareholders of DA Ltd. Based on your analysis in parts (i) and (ii), would you expect the negotiated terms to be closer to the upper, or the lower exchange ratio limits and why?<br \/>\n(iv) Calculate the post-merger EPS based on an exchange ratio of 0.4: 1 being offered by BA Ltd. and indicate the immediate EPS accretion or dilution, if any, that will occur for each group of shareholders.<br \/>\n(v) Based on a 0.4:1 exchange ratio and assuming that BA Ltd.\u2019s pre-merger P\/E ratio will continue after the merger, estimate the post-merger market price. Also show the resulting accretion or dilution in pre-merger market prices. . [Nov. 2008 (M)] [12 Marks]<br \/>\nAnswer:<br \/>\nMarket price per share (MPS) = EPS \u00d7 P\/E ratio or P\/E ratio = MPS\/EPS<\/p>\n<p>(i) Determination of EPS, P\/E ratio, ROE and BVPS of BA Ltd. and DA Ltd.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td><\/td>\n<td>BA Ltd. (\u20b9)<\/td>\n<td>DA Ltd. (\u20b9)<\/td>\n<\/tr>\n<tr>\n<td>Earnings After Tax(Given)<\/td>\n<td>A<\/td>\n<td>2,10,000<\/td>\n<td>99,000<\/td>\n<\/tr>\n<tr>\n<td>No. of Shares(Given)<\/td>\n<td>B<\/td>\n<td>1,00,000<\/td>\n<td>80,000<\/td>\n<\/tr>\n<tr>\n<td>EPS(A \u00f7\u00a0 B)<\/td>\n<td>C<\/td>\n<td>2.10<\/td>\n<td>1.2375<\/td>\n<\/tr>\n<tr>\n<td>Market price per share(Given)<\/td>\n<td>D<\/td>\n<td>40<\/td>\n<td>15<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio(D \u00f7 C)<\/td>\n<td>E<\/td>\n<td>19.05<\/td>\n<td>12.12<\/td>\n<\/tr>\n<tr>\n<td>Equity Fnnds(Given)<\/td>\n<td>F<\/td>\n<td>12,00,000<\/td>\n<td>8,00,000<\/td>\n<\/tr>\n<tr>\n<td>BVPS(F \u00f7 B)<\/td>\n<td>G<\/td>\n<td>12<\/td>\n<td>10<\/td>\n<\/tr>\n<tr>\n<td>ROE(A \u00f7 F) \u00d7 100<\/td>\n<td>H<\/td>\n<td>17.50%<\/td>\n<td>12.37%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Estimation of growth rates in EPS for BA Ltd. and DA Ltd.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td><\/td>\n<td>BA Ltd.<\/td>\n<td>DA Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Retention Ratio<\/td>\n<td>(1 \u2013 D\/P\u00a0 ratio)<\/td>\n<td>0.6<\/td>\n<td>0.4<\/td>\n<\/tr>\n<tr>\n<td>Growth Rate<\/td>\n<td>(ROE \u00d7 Retention Ratio)<\/td>\n<td>10.50%<\/td>\n<td>4.59%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(iii) Justifiable Equity Shares Exchange Ratio<br \/>\n(a) Intrinsic value based = \u20b9 20\/\u20b9 40 = 0.5:1 (Upper limit)<br \/>\n(b) Market price based = MPS<sub>DA<\/sub>\/MPS<sub>BA<\/sub> = \u20b9 15\/\u20b9 40 = 0.375:1 (Lower limit)<br \/>\nSince, BA Ltd. has a higher EPS, ROE, P\/E ratio and even higher EPS growth expectations, the negotiable term should be expected to be closer to the lower limit based on the existing share prices.<\/p>\n<p>(iv) Calculation of post-merger EPS and its effects<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19243\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-36.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 36\" width=\"609\" height=\"162\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-36.png 609w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-36-300x80.png 300w\" sizes=\"(max-width: 609px) 100vw, 609px\" \/><\/p>\n<p>Working for calculation of EPS Dilution of DA Limited :<br \/>\nEPS Old = \u20b9 1.2375<br \/>\nEPS claim as per Exchange Ratio = \u20b9 2.34 \u00d7 0.4 = \u20b9 0.936<br \/>\nEPS Dilution (\u20b9 1.2375 &#8211; \u20b9 0.936) = \u20b9 0.3015<\/p>\n<p>(v) Estimation of Post-merger Market price and other effects<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>BA Ltd.<\/td>\n<td>DA Ltd.<\/td>\n<td>Combined<\/td>\n<\/tr>\n<tr>\n<td>EPS (\u20b9)<\/td>\n<td>2.1<\/td>\n<td>1.2375<\/td>\n<td>2.341<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio<\/td>\n<td>19.05<\/td>\n<td>12.12<\/td>\n<td>19.05<\/td>\n<\/tr>\n<tr>\n<td>MPS (\u20b9 ) [EPS \u00f7 P\/E Ratio]<\/td>\n<td>40<\/td>\n<td>15<\/td>\n<td>44.6<\/td>\n<\/tr>\n<tr>\n<td>MPS Accretion (\u20b9)<\/td>\n<td>4.6<\/td>\n<td>2.84 See below<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19242\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-37.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 37\" width=\"517\" height=\"75\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-37.png 517w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-37-300x44.png 300w\" sizes=\"(max-width: 517px) 100vw, 517px\" \/><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 37<br \/>\nR Ltd. and S Ltd. are companies that operate in the same industry. The financial statements of both the companies for the current financial year are as follows:<br \/>\nBalance Sheet<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>R Ltd. (\u20b9)<\/td>\n<td>S Ltd. (\u20b9)<\/td>\n<\/tr>\n<tr>\n<td>Equity &amp; Liabilities<\/p>\n<p>Shareholders Fund Equity Capital (D10 each)<\/p>\n<p>Retained earnings<br \/>\nNon-current Liabilities<br \/>\n16% Long term<br \/>\nDebt Current Liabilities<\/td>\n<td>&nbsp;<\/p>\n<p>20,00,000<\/p>\n<p>4,00,000<\/p>\n<p>10,00,000<\/p>\n<p>14,00,000<\/td>\n<td>&nbsp;<\/p>\n<p>16,00,000<\/p>\n<p>&#8211;<\/p>\n<p>6,00,000<\/p>\n<p>8,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total<\/td>\n<td>48,00,000<\/td>\n<td>30,00,000<\/td>\n<\/tr>\n<tr>\n<td>Assets<\/p>\n<p>Non-Current Assets Current Assets<\/td>\n<td>20,00,000<\/p>\n<p>28,00,000<\/td>\n<td>10,00,000<\/p>\n<p>20,00,000<\/td>\n<\/tr>\n<tr>\n<td>Total<\/td>\n<td>48,00,000<\/td>\n<td>30,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Income Statement<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>R Ltd. (\u20b9)<\/td>\n<td>S Ltd. (\u20b9)<\/td>\n<\/tr>\n<tr>\n<td>A. Net Sales<\/p>\n<p>B. Cost of Goods sold<\/td>\n<td>69,00,000<\/p>\n<p>55,20,000<\/td>\n<td>34,00,000<\/p>\n<p>27,20,000<\/td>\n<\/tr>\n<tr>\n<td>C.Gross Profit (A-B)<\/td>\n<td>13,80,000<\/td>\n<td>6,80,000<\/td>\n<\/tr>\n<tr>\n<td>D. Operating Expenses<br \/>\nE. Interest<\/td>\n<td>4,00,000<\/p>\n<p>1,60,000<\/td>\n<td>2,00,000<\/p>\n<p>96,000<\/td>\n<\/tr>\n<tr>\n<td>F. Earnings before taxes [C-(D+E)]<\/td>\n<td>8,20,000<\/td>\n<td>3,84,000<\/td>\n<\/tr>\n<tr>\n<td>G. Taxes @ 35%<\/p>\n<p>H. Earnings After Tax (EAT)<\/td>\n<td>2.87.000<\/p>\n<p>5.33.000<\/td>\n<td>1,34,400<\/p>\n<p>2,49,600<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Additional Information:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>No. of equity shares<\/td>\n<td>2,00,000<\/td>\n<td>1,60,000<\/td>\n<\/tr>\n<tr>\n<td>Dividend Payment Ratio (D\/P)<\/td>\n<td>20%<\/td>\n<td>30%<\/td>\n<\/tr>\n<tr>\n<td>Market price per share<\/td>\n<td>\u20b9 50<\/td>\n<td>\u20b9 20<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Assume that both companies are in the process of negotiating a merger through exchange of Equity shares:<br \/>\nYou are required to:<br \/>\n(i) Decompose the share price of both the companies into EPS &amp; P\/E components. Also segregate their EPS figures into Return on Equity (ROE) and Book Value\/Intrinsic Value per share components.<br \/>\n(ii) Estimate future EPS growth rates for both the companies.<br \/>\n(iii) Based on expected operating synergies, R Ltd. estimated that the intrinsic<br \/>\nvalue of S Ltd. Equity share would be D 25 per share on its acquisition. You are required to develop a range of justifiable Equity Share Exchange ratios that can be offered by R Ltd. to the shareholders of S Ltd. Based on your analysis on parts (i) and (ii), would you expect the negotiated terms to be closer to the upper or the lower exchange ratio limits and why? [May 2015]<br \/>\nAnswer:<br \/>\n(i) Determination of various values<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>R Ltd.<\/td>\n<td>S Ltd.<\/td>\n<\/tr>\n<tr>\n<td>(a) Earnings after Tax<\/td>\n<td>Rs. 5,33,000<\/td>\n<td>Rs. 2,49,600<\/td>\n<\/tr>\n<tr>\n<td>(b) No.of shares<\/td>\n<td>2,00,000<\/td>\n<td>1,60,000<\/td>\n<\/tr>\n<tr>\n<td>(c) Equity\/Net Assets (20 Lakhs + 4 Lakhs )<\/td>\n<td>Rs. 24,00,000<\/td>\n<td>Rs. 16,00,000<\/td>\n<\/tr>\n<tr>\n<td>(d) MPS<\/td>\n<td>Rs. 50<\/td>\n<td>Rs. 20<\/td>\n<\/tr>\n<tr>\n<td>(e) EPS<\/td>\n<td>Rs. 2.665<\/td>\n<td>Rs. 1.56<\/td>\n<\/tr>\n<tr>\n<td>(f) P\/E Ratio (d\/e)<\/td>\n<td>18.76 times<\/td>\n<td>12.82 times<\/td>\n<\/tr>\n<tr>\n<td>(g) ROE (a\/c x 100)<\/td>\n<td>22.21%<\/td>\n<td>15.6%<\/td>\n<\/tr>\n<tr>\n<td>(h) Book Value (c\/b)<\/td>\n<td>Rs. 12<\/td>\n<td>Rs. 10<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(ii) Determination of Growth Rate of EPS of R Ltd. and S Ltd.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>R Ltd.<\/td>\n<td>S Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Retention Ratio (1 &#8211; D\/P Ratio)<\/td>\n<td>0.80<\/td>\n<td>0.70<\/td>\n<\/tr>\n<tr>\n<td>Growth Rate (ROE \u00d7 Retention Ratio)<\/td>\n<td>0.1777<\/td>\n<td>0.1092<\/td>\n<\/tr>\n<tr>\n<td>Growth Rate (in percentage)<\/td>\n<td>17.77%<\/td>\n<td>10.92%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(iii) Justifiable equity share exchange ratio<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Market Price Based<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>MPS<sub>s<\/sub>\u00f7 MPS<sub>B<\/sub> = Rs. 20\/Rs. 50<\/td>\n<td>0.41: 1<\/td>\n<td>Lower Limit<\/td>\n<\/tr>\n<tr>\n<td>Intrinsic Value Based<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>= Rs. 25\/Rs. 50<\/td>\n<td>0.50: 1<\/td>\n<td>Max. Limit<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Since R Ltd. has higher EPS, PE, ROE and higher growth expectations the negotiated term would be expected to be closer to the lower limit, based on existing share price.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 38.<br \/>\nR Ltd, and S Ltd. operating in same industry are not experiencing any rapid growth but providing a steady stream of earnings. R Ltd.\u2019s management is interested in acquisition of S Ltd. due to its excess plant capacity. Share of S Ltd, is trading in market at \u20b9 3.20 each. Other data relating to S Ltd. is as follow:<br \/>\nBalance sheet of S Ltd.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19323\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-38-1.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 38\" width=\"599\" height=\"157\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-38-1.png 599w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-38-1-300x79.png 300w\" sizes=\"(max-width: 599px) 100vw, 599px\" \/><br \/>\nOther Information<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19322\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-39-1.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 39\" width=\"549\" height=\"115\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-39-1.png 549w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-39-1-300x63.png 300w\" sizes=\"(max-width: 549px) 100vw, 549px\" \/><br \/>\nYou are required to compute the following:<br \/>\n(a) Minimum price per share S Ltd. should accept from R Ltd.<br \/>\n(b) Maximum price per share R Ltd. shall be willing to offer to S Ltd.<br \/>\n(c) Floor value of per share of S Ltd., whether it shall play any role in decision for its acquisition by R Ltd. [May 2019 Old Syllabus] [8 Marks]<br \/>\nAnswer:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>R<\/td>\n<td>S<\/td>\n<td>Combined<\/td>\n<\/tr>\n<tr>\n<td>MP per share<\/td>\n<td><\/td>\n<td>3.2<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Number of shares<\/td>\n<td><\/td>\n<td>80 lakhs<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Paid up value per share<\/td>\n<td><\/td>\n<td>1.5<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Reserves<\/td>\n<td><\/td>\n<td>279,95,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>PAT<\/td>\n<td>86,50,000<\/td>\n<td>49,72,000<\/td>\n<td>121,85,000<\/td>\n<\/tr>\n<tr>\n<td>Net cash flows per year<\/td>\n<td>90,10,000<\/td>\n<td>54,87,000<\/td>\n<td>185,00,000<\/td>\n<\/tr>\n<tr>\n<td>Ke<\/td>\n<td>13.75<\/td>\n<td>13.05<\/td>\n<td>12.5<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>1. Minimum Price per share payable by R to S Ltd.<br \/>\nMinimum Value payable by R to S is Pre-merger value to S Ltd, But if Pre Merger value is value is less than book value, R will pay Book value to S.<br \/>\nPre Value of S Ltd. = 80,00,000 \u00d7 3.2 = \u20b9 2,56,00,000<br \/>\nBook Value of S Ltd. = (80,00,000 \u00d7 1.5) + (2,79,95,000) = \u20b9 3,99,95,000<br \/>\nMinimum price per share payable to S Ltd. = \\(\\frac{3,99,95,000}{80,00,000}\\) = \u20b9 4.99 or \u20b9 5 per share<\/p>\n<p>2. Maximum Price per share payable to S Ltd.<br \/>\nValue of combined firm after acquisition (i.e. Present value of all future<br \/>\ncash inflows of combined firm) = \\(\\frac{R s .185,00,000}{0.125}\\) = \u20b9 1480,00,000<br \/>\nPre value of R Ltd. = \\(\\frac{R s \\cdot 90,10,000}{0.1375}\\) = \u20b9 6,55,27,273<br \/>\nValue given to S Ltd. = \u20b9 8,24,72,727<br \/>\nValue Per share = \\(\\frac{R s .824,72,727}{80,00,000}\/latex] = \u20b9 10.31<br \/>\nFloor value for S Ltd. (Per share) = \u20b9 3.20<br \/>\nIt shall not play any role in decision for the acquisition of S Ltd. as it is lower than its current book value<\/p>\n<p>Question 39.<br \/>\nElrond Limited plans to acquire Doom Limited. The relevant financial details of the two firms prior to the merger announcement are:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Elrond Limited<\/td>\n<td>Doom Limited<\/td>\n<\/tr>\n<tr>\n<td>Market price per share<\/td>\n<td>\u20b9 50<\/td>\n<td>\u20b9 25<\/td>\n<\/tr>\n<tr>\n<td>Number of outstanding shares<\/td>\n<td>20 lakhs<\/td>\n<td>10 lakhs<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The merger is expected to generate gains, which have a present value of \u20b9 200 lakhs. The exchange ratio agreed to 0.5.<br \/>\nWhat is the true cost of the merger from the point of view of Elrond Limited? [Nov. 2014] [5 Marks]<br \/>\nAnswer:<br \/>\n(a) Shares to be issued by Elrond Limited:<br \/>\n= No. of shares in Doom Ltd. \u20b9 Exchange Ratio<br \/>\n= 10 Lakhs \u20b9 0.5 = 5 Lakh Shares<\/p>\n<p>(b) Percentage holding of shareholders of Doom Ltd. in Elrond Limited:<br \/>\n= [latex]\\frac{5 \\text { lakh }}{20 \\text { lakh }+5 \\text { lakh }}\\) i.e. 20%<\/p>\n<p>(c) The value of Elrond Ltd. after merger:<br \/>\n= (\u20b9 50 \u00d7 20 lakh) + (\u20b9 25 \u00d7 10 lakh) + \u20b9 200 lakh<br \/>\n= \u20b9 1,000 lakh + \u20b9 250 lakh + \u20b9 200 lakh = \u20b9 1,450 lakh<br \/>\nValue for shareholders of Doom Ltd. = \u20b9 1,450 \u00d7 20% = \u20b9 290 lakhs<\/p>\n<p>(d) True Cost of Merger will be:<br \/>\n= \u20b9 290 lakhs &#8211; \u20b9 250 lakhs = \u20b9 40 lakhs<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 40.<br \/>\nGiven is the following information:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Day Ltd.<\/td>\n<td>Night Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Net Earnings<\/td>\n<td>\u20b9 5 crores<\/td>\n<td>\u20b9 3.50 Crores<\/td>\n<\/tr>\n<tr>\n<td>No. of Equity Shares<\/td>\n<td>10,00,000<\/td>\n<td>7,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The shares of Day Ltd. and Night Ltd. are traded with P\/E ratios 20 and 15 times respectively. The Day Ltd. considers taking over Night Ltd. by paying \u20b9 55 crores considering that the market price of Night Ltd. reflects its true value. It is considering both the following options:<br \/>\n(i) Takeover is funded entirely in cash.<br \/>\n(ii) Takeover is funded entirely in stock.<br \/>\nYou are required to calculate the cost of the takeover and advise Day Ltd. on the best alternative. [May 2019] [8 Marks]<br \/>\nAnswer:<br \/>\nCalculation of EPS and MPS<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Day Ltd.<\/td>\n<td>Night Ltd.<\/td>\n<\/tr>\n<tr>\n<td>EPS<\/td>\n<td>\\(\\frac{\\text { Rs.3.5 Crores }}{7 \\text { Lakhs }}\\) = \u20b9 50<\/td>\n<td>\\(\\frac{\\text { Rs.3.5 Crores }}{7 \\text { Lakhs }}\\) = \u20b9 50<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio<\/td>\n<td>20<\/td>\n<td>15<\/td>\n<\/tr>\n<tr>\n<td>MPS (P\/E Ratio X EPS)<\/td>\n<td>\u20b9 1,000<\/td>\n<td>\u20b9 750<\/td>\n<\/tr>\n<tr>\n<td>Market Capitalisation (No. of Shares X MPS)<\/td>\n<td>10 Lakhs \u00d7 1,000 = \u20b9 100 Crores<\/td>\n<td>7 Lakhs\u00a0 750 = \u20b9 52.50 Crores<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(a) If takeover is funded entirely in CASH:<br \/>\nTrue Cost of Merger = Amount paid to Vendor Co. &#8211; Pre-Value of Vendor Company<br \/>\n= \u20b9 55 Crores &#8211; \u20b9 52.5 Crores = \u20b9 2.5 Crores<\/p>\n<p>(b) If takeover is funded entirely in STOCK:<br \/>\nAmount Payable = \u20b9 55 Crores<br \/>\nMarket Price per Share (Acquirer) = \u20b9 1,000<br \/>\nNo. of shares to be issued = \\(\\frac{\\text { Rs.55 Crores }}{R s .1,000}\\) = 5,50,000 Shares<br \/>\nTherefore, the shareholders of Night Limited will get 5,50,000 shares of Day Limited<br \/>\nMarket Value of Merged Firm = Rs. 1,00,00,00,000 + Rs. 52,50,00,000<br \/>\n= Rs. 1,52,50,00,000 i.e. Rs. 152.50 Crore<br \/>\nProportion that Night Ltd.\u2019s shareholders get in Day Ltd.\u2019s Capital Structure will be:<br \/>\n\\(\\frac{5.5 \\text { Lakhs }}{5.5 \\text { Lakhs }+10 \\text { Lakhs }}\\) = 0.3548<br \/>\nTrue Cost of Merger = Rs. 152.50 Crore \u00d7 0.3548 &#8211; Rs. 55 Crore<br \/>\n= Rs. (-) 8.93 Crore<br \/>\nSince true cost is negative in case of funding from stock, Day Ltd. would better off by funding the takeover by stock.<\/p>\n<p>Question 41.<br \/>\nB Ltd., is a highly successful company and wishes to expand by acquiring other firms. Its expected high growth in earnings and dividends is reflected in its PE ratio of 17. The Board of Directors of B Ltd. has been advised that if it were to takeover firms with a lower PE ratio than it own, using a share- for-share exchange, then it could increase its reported earnings per share. C Ltd. has been suggested as a possible target for a takeover, which has a PE ratio of 10 and 1,00,000 shares in issue with a share price of \u20b9 15. B Ltd. has<br \/>\n5,0, 000 shares in issue with a share price of \u20b9 12.<br \/>\nCalculate the change in earnings per share of B Ltd. if it acquires the whole of C Ltd. by issuing shares at its market price of \u20b9 12. Assume the price of B Ltd. shares remains constant. [Nov. 2014][8 Marks]<br \/>\nAnswer:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Total market value of C Ltd. (1,00,000 \u00d7 \u20b9 15)<\/td>\n<td>\u20b9 15,00,000<\/td>\n<\/tr>\n<tr>\n<td>PE ratio (given)<\/td>\n<td>10<\/td>\n<\/tr>\n<tr>\n<td>Therefore, earnings<\/td>\n<td>15,00,000\/10<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>1,50,000<\/td>\n<\/tr>\n<tr>\n<td>Total market value of B Ltd. (5,00,000 \u00d7 \u20b9 12)<\/td>\n<td>60,00,000<\/td>\n<\/tr>\n<tr>\n<td>PE ratio (given)<\/td>\n<td>17<\/td>\n<\/tr>\n<tr>\n<td>Therefore, earnings<\/td>\n<td>60,00,000\/17<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>3,52,941<\/td>\n<\/tr>\n<tr>\n<td>The number of shares to be issued by B Ltd.<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u20b9 15,00,000 \u00d7 12<\/td>\n<td>1,25,000<\/td>\n<\/tr>\n<tr>\n<td>Total number of shares of B Ltd.<\/td>\n<td>5,00,000 + 1,25,000 = 6,25,000<\/td>\n<\/tr>\n<tr>\n<td>The EPS of the new firm is<\/td>\n<td>(\u20b9 3,52,941 + \u20b9 l,50,000)\/6,25,000<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>0.80<\/td>\n<\/tr>\n<tr>\n<td>The present EPS of B Ltd. is<\/td>\n<td>3,52,941\/5,00,000<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>0.71<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>So the EPS affirm B will increase from \u20b9 0.71 to \u20b9 0.80 as a result of merger.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 42.<br \/>\nABC Co. is considering a new sales strategy that will be valid for the next 4 years. They want to know the value of the new strategy. Following information relating to the year which has just ended, is available:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Income Statement<\/td>\n<td>\u20b9<\/td>\n<\/tr>\n<tr>\n<td>Sales<\/td>\n<td>20,000<\/td>\n<\/tr>\n<tr>\n<td>Gross margin (20%)<\/td>\n<td>4,000<\/td>\n<\/tr>\n<tr>\n<td>Administration, Selling &amp; distribution expense (10%)<\/td>\n<td>2,000<\/td>\n<\/tr>\n<tr>\n<td>PBT<\/td>\n<td>2,000<\/td>\n<\/tr>\n<tr>\n<td>Tax (30%)<\/td>\n<td>600<\/td>\n<\/tr>\n<tr>\n<td>PAT<\/td>\n<td>1,400<\/td>\n<\/tr>\n<tr>\n<td>Balance Sheet Information<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Fixed Assets<\/td>\n<td>8,000<\/td>\n<\/tr>\n<tr>\n<td>Current Assets<\/td>\n<td>4,000<\/td>\n<\/tr>\n<tr>\n<td>Equity<\/td>\n<td>12,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>If it adopts the new strategy, sales will grow at the rate of 20% per year for three years. The gross margin ratio, Assets turnover ratio, the Capital structure and the income tax rate will remain unchanged.<br \/>\nDepreciation would be at 10% of net fixed assets at the beginning of the year. The Company&#8217;s target rate of return is 15%.<br \/>\nDetermine the incremental value due to adoption of the strategy. [May 2007] [8 Marks]<br \/>\nAnswer:<br \/>\nProjected Balance Sheet<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19238\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-41.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 41\" width=\"612\" height=\"122\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-41.png 612w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-41-300x60.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>\n<p>Projected Cash Flows<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19237\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-42.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 42\" width=\"607\" height=\"187\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-42.png 607w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-42-300x92.png 300w\" sizes=\"(max-width: 607px) 100vw, 607px\" \/><\/p>\n<p>Present Value of Projected Cash Flows<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Cash Flows<\/td>\n<td>PV at 15%<\/td>\n<td>PV<\/td>\n<\/tr>\n<tr>\n<td>-720<\/td>\n<td>0.870<\/td>\n<td>-626.40<\/td>\n<\/tr>\n<tr>\n<td>-864<\/td>\n<td>0.756<\/td>\n<td>-653.18<\/td>\n<\/tr>\n<tr>\n<td>-1,036.80<\/td>\n<td>0.658<\/td>\n<td>-682.21<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td>-1,961.79<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Residual Value = \\(\\frac{2,419.20}{0.15}\\) = \u20b9 16,128<br \/>\nPresent value of Residual value = \\(\\frac{16,128}{(1.15)^3}\\) = \\(\\frac{16,128}{1.521}\\) = 10603.55<br \/>\nTotal shareholders\u2019 value = 10,603.55 &#8211; 1,961.79 = 8,641.76<br \/>\nPre strategy value = 1,400\/0.15 = 9,333.33<br \/>\n\u2234 Value of strategy = 8,641.76 &#8211; 9,333.33 = (691.57)<\/p>\n<p>Conclusion:<br \/>\nThe strategy is not financially viable<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 43.<br \/>\nHelium Ltd. has evolved a new sales strategy for the next 4 years. The following information is given:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Income Statement<\/td>\n<td>\u20b9 in thousands<\/td>\n<\/tr>\n<tr>\n<td>Sales<\/td>\n<td>40,000<\/td>\n<\/tr>\n<tr>\n<td>Gross Margin at 30%<\/td>\n<td>12,000<\/td>\n<\/tr>\n<tr>\n<td>Accounting, administration and distribution expense at 15%<\/td>\n<td>6,000<\/td>\n<\/tr>\n<tr>\n<td>Profit before tax<\/td>\n<td>6,000<\/td>\n<\/tr>\n<tr>\n<td>Tax at 30%<\/td>\n<td>1,800<\/td>\n<\/tr>\n<tr>\n<td>Profit after tax<\/td>\n<td>4,200<\/td>\n<\/tr>\n<tr>\n<td>Balance sheet information<\/td>\n<td>\u20b9 in thousands<\/td>\n<\/tr>\n<tr>\n<td>Fixed Assets<\/td>\n<td>10,000<\/td>\n<\/tr>\n<tr>\n<td>Current Assets<\/td>\n<td>6,000<\/td>\n<\/tr>\n<tr>\n<td>Equity<\/td>\n<td>15,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>As per the new strategy, sales will grow at 30 per cent per year for the next four years. The gross margin ratio will increase to 35 per cent. The Assets turnover ratio and income tax rate will remain unchanged.<br \/>\nDepreciation is to be at 15 per cent on the value of the net fixed assets at the beginning of the year.<br \/>\nCompany\u2019s target rate of return is 14%.<br \/>\nDetermine if the strategy is financially viable in cases:<br \/>\nCase (a) C. Liabilities are \u20b9 1000 (thousands)<br \/>\nCase (b) There is no current liability &amp; equity is assumed to be \u20b9 16,000 (thousand) [Nov. 2011] [10 Marks]<br \/>\nAnswer:<br \/>\nCase I C. Liabilities are \u20b9 1000 (thousands)<br \/>\nProjected Balance Sheet<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19236\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-43.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 43\" width=\"726\" height=\"143\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-43.png 726w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-43-300x59.png 300w\" sizes=\"(max-width: 726px) 100vw, 726px\" \/><\/p>\n<p>Projected Cash Flows<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19235\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-44.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 44\" width=\"610\" height=\"291\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-44.png 610w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-44-300x143.png 300w\" sizes=\"(max-width: 610px) 100vw, 610px\" \/><\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>(In \u20b9 Thousands)<\/td>\n<\/tr>\n<tr>\n<td>Total for first 4 years (A)<\/td>\n<td>4145.35<\/td>\n<\/tr>\n<tr>\n<td>Residual value (11995.62\/0.14)<\/td>\n<td>85683<\/td>\n<\/tr>\n<tr>\n<td>Present value of Residual value [85683\/(1.14)<sup>4<\/sup>] (B)<\/td>\n<td>50731.21<\/td>\n<\/tr>\n<tr>\n<td>Total Shareholders value (C) = (A) + (B)<\/td>\n<td>54876.56<\/td>\n<\/tr>\n<tr>\n<td>Pre strategy value (4200\/0.14) (D)<\/td>\n<td>30000.00<\/td>\n<\/tr>\n<tr>\n<td>Value of strategy (C) &#8211; (D)<\/td>\n<td>24876.56<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Conclusion: The strategy is financially viable.<\/p>\n<p>Case II There is no C. Liabilities &amp; Equity is \u20b9 16,000<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19234\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-45.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 45\" width=\"612\" height=\"413\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-45.png 612w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-45-300x202.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>(In \u20b9 Thousands)<\/td>\n<\/tr>\n<tr>\n<td>Total for first 4 years (A)<\/td>\n<td>3113.03<\/td>\n<\/tr>\n<tr>\n<td>Residual value (6225.73\/0.14)<\/td>\n<td>44469.50<\/td>\n<\/tr>\n<tr>\n<td>Present value of Residual value [44469.50\/(1.14)<sup>4<\/sup>] (B)<\/td>\n<td>26329.51<\/td>\n<\/tr>\n<tr>\n<td>Total Shareholders\u2019 value (C) = (A) + (B)<\/td>\n<td>29442.54<\/td>\n<\/tr>\n<tr>\n<td>Pre strategy value (4200\/0.14) (D)<\/td>\n<td>30000.00<\/td>\n<\/tr>\n<tr>\n<td>Value of strategy (C) &#8211; (D)<\/td>\n<td>-557.46<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 44.<br \/>\nFollowing details are available for X Ltd.<br \/>\nIncome statement for the year ended 31st March, 2018<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>Amount<\/td>\n<\/tr>\n<tr>\n<td>Sales<\/td>\n<td>40,000<\/td>\n<\/tr>\n<tr>\n<td>Gross profit<\/td>\n<td>12,000<\/td>\n<\/tr>\n<tr>\n<td>Administrative Expenses<\/td>\n<td>6,000<\/td>\n<\/tr>\n<tr>\n<td>Profit before tax<\/td>\n<td>6,000<\/td>\n<\/tr>\n<tr>\n<td>Tax @ 30%<\/td>\n<td>1,800<\/td>\n<\/tr>\n<tr>\n<td>Profit After Tax<\/td>\n<td>4,200<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Balance sheet as on 31st March, 2018<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Assets<\/td>\n<td>Amount<\/td>\n<\/tr>\n<tr>\n<td>Fixed Assets<\/td>\n<td>10,000<\/td>\n<\/tr>\n<tr>\n<td>Current Assets<\/td>\n<td>6,000<\/td>\n<\/tr>\n<tr>\n<td>Total Assets<\/td>\n<td>16,000<\/td>\n<\/tr>\n<tr>\n<td>Liabilities<\/td>\n<td>Amount<\/td>\n<\/tr>\n<tr>\n<td>Equity share capital<\/td>\n<td>15,000<\/td>\n<\/tr>\n<tr>\n<td>Sundry creditors<\/td>\n<td>1,000<\/td>\n<\/tr>\n<tr>\n<td>Total liabilities<\/td>\n<td>16,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The company is contemplating for new sales strategy as follows:<br \/>\n(i) Sales to grow at 30% per year for next four years.<br \/>\n(ii) Assets turnover ratio, net profit ratio and tax rate will remain the same.<br \/>\n(iii) Depreciation will be 15% of value of net fixed assets at the beginning of the year.<br \/>\n(iv) Required rate of return for the company is 15%.<br \/>\nEvaluate the viability of new strategy. [Nov. 2018] [12 Marks]<br \/>\nAnswer:<br \/>\nStep 1 Preparation of Projected Balance Sheet of X Ltd.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19233\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-46.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 46\" width=\"608\" height=\"183\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-46.png 608w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-46-300x90.png 300w\" sizes=\"(max-width: 608px) 100vw, 608px\" \/><\/p>\n<p>Step 2 Determination of Present Value of Projected Cash Flows<br \/>\nProjected Cash Flows:-<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-19232\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-47.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material 47\" width=\"606\" height=\"187\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-47.png 606w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Mergers-Acquisitions-and-Corporate-Restructuring-\u2013-CA-Final-SFM-Study-Material-47-300x93.png 300w\" sizes=\"(max-width: 606px) 100vw, 606px\" \/><\/p>\n<p>Present value of Projected Cash Flows:-<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Cash Flows<\/td>\n<td>PVF at 15%<\/td>\n<td>PV<\/td>\n<\/tr>\n<tr>\n<td>960<\/td>\n<td>0.870<\/td>\n<td>835.20<\/td>\n<\/tr>\n<tr>\n<td>1248<\/td>\n<td>0.756<\/td>\n<td>943.49<\/td>\n<\/tr>\n<tr>\n<td>1622.40<\/td>\n<td>0.658<\/td>\n<td>1067.54<\/td>\n<\/tr>\n<tr>\n<td>2109.12<\/td>\n<td>0.572<\/td>\n<td>1206.42<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td>4,052.65<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Step 3 Determination of Value of Strategy:<\/p>\n<p>Residual Value = 11,995.62\/0.15 = 79,970.80<br \/>\nPresent value of Residual value = 79.970.80 \u00d7 PVF (15%, 4) = 79,970.80 \u00d7 0.572 = 45,743.30<br \/>\nTotal shareholders value = 45743.30 + 4052.65 = 49795.95<br \/>\nPre-strategy value = 4200\/0.15 = 28,000<br \/>\nValue of strategy = 49795.95 &#8211; 28,000 = 21795.95<br \/>\nConclusion: The strategy is financially viable.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 45.<br \/>\nThe following information is relating to Fortune India Ltd. having two divisions, viz. Pharma Division and Fast Moving Consumer Goods Division (FMCG Division). Paid up share capital of Fortune India Ltd. is consisting of 3,000 Lakhs equity shares of Re. 1 each. Fortune India Ltd. decided to de-merge Pharma Division as Fortune Pharma Ltd. w.e.f. 1.4.2009. Details of Fortune India Ltd. as on 31.3.2009 and of Fortune Pharma Ltd. as on 1.4.2009 are given below:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>Fortune Pharma Ltd. (\u20b9)<\/td>\n<td>Fortune India Ltd. (\u20b9)<\/td>\n<\/tr>\n<tr>\n<td>Outside Liabilities<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Secured Loans<\/td>\n<td>400 lakh<\/td>\n<td>3,000 lakh<\/td>\n<\/tr>\n<tr>\n<td>Unsecured Loans<\/td>\n<td>2,400 lakh<\/td>\n<td>800 lakh<\/td>\n<\/tr>\n<tr>\n<td>Current Liabilities &amp; Provisions<\/td>\n<td>1,300 lakh<\/td>\n<td>21,200 lakh<\/td>\n<\/tr>\n<tr>\n<td>Assets<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Fixed Assets<\/td>\n<td>7,740 lakh<\/td>\n<td>20,400 lakh<\/td>\n<\/tr>\n<tr>\n<td>Investments<\/td>\n<td>7,600 lakh<\/td>\n<td>12,300 lakh<\/td>\n<\/tr>\n<tr>\n<td>Current Assets<\/td>\n<td>8,800 lakh<\/td>\n<td>30,200 lakh<\/td>\n<\/tr>\n<tr>\n<td>Loans &amp; Advances<\/td>\n<td>900 lakh<\/td>\n<td>7,300 lakh<\/td>\n<\/tr>\n<tr>\n<td>Deferred tax\/Misc. Expenses<\/td>\n<td>60 lakh<\/td>\n<td>(200) lakh<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Board of Directors of the Company have decided to issue necessary equity shares of Fortune Pharma Ltd. of Re. 1 each, without any consideration to the shareholders of Fortune India Ltd. For that purpose following points are to be considered:<br \/>\n(a) Transfer of Liabilities &amp; Assets at Book value.<br \/>\n(b) Estimated Profit for the year 2009-10 is \u20b9 11,400 Lakh for Fortune India Ltd. &amp; \u20b9 1,470 lakhs for Fortune Pharma Ltd.<br \/>\n(c) Estimated Market Price of Fortune Pharma Ltd. is \u20b9 24.50 per share.<br \/>\n(d) Average P\/E Ratio of FMCG sector is 42 &amp; Pharma sector is 25, which is to be expected for both the companies.<br \/>\nCalculate:<br \/>\n1. The Ratio in which shares of Fortune Pharma are to be issued to the shareholders of Fortune India Ltd.<br \/>\n2. Expected Market price of Fortune India Ltd.<br \/>\n3. Book Value per share of both the Companies immediately after Demerger. [Nov. 2005] [8 Marks]<br \/>\nAnswer:<br \/>\nDetermination of Shareholder\u2019s funds (\u20b9 in Lakhs)<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Particulars<\/td>\n<td>Fortune India Ltd.<\/td>\n<td>Fortune Phar\u00adma Ltd.<\/td>\n<td>Fortune India (FMCG) Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Assets<\/td>\n<td>70,000<\/td>\n<td>25,100<\/td>\n<td>44,900<\/td>\n<\/tr>\n<tr>\n<td>Outside liabilities<\/td>\n<td>25,000<\/td>\n<td>4,100<\/td>\n<td>20,900<\/td>\n<\/tr>\n<tr>\n<td>Net worth<\/td>\n<td>45,000<\/td>\n<td>21,000<\/td>\n<td>24,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>1. Calculation of Shares of Fortune Pharma Ltd. to be issued to shareholders of Fortune India Ltd.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Fortune Pharma Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Estimated Profit (\u20b9 in lakhs)<\/td>\n<td>1,470<\/td>\n<\/tr>\n<tr>\n<td>Estimated market price (\u20b9)<\/td>\n<td>24.5<\/td>\n<\/tr>\n<tr>\n<td>Estimated P\/E<\/td>\n<td>25<\/td>\n<\/tr>\n<tr>\n<td>Estimated EPS (\u20b9)<\/td>\n<td>0.98<\/td>\n<\/tr>\n<tr>\n<td>No. of shares lakhs<\/td>\n<td>1,500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Hence, Ratio is 1 share of Fortune Pharma Ltd. for 2 shares of Fortune India Ltd.<\/p>\n<p>2. Expected market price of Fortune India Ltd.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Fortune India (FMCG) Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Estimated Profit (\u20b9 in lakhs)<\/td>\n<td>11,400<\/td>\n<\/tr>\n<tr>\n<td>No. of equity shares (\u20b9 in lakhs)<\/td>\n<td>3,000<\/td>\n<\/tr>\n<tr>\n<td>Estimated EPS (\u20b9)<\/td>\n<td>3.8<\/td>\n<\/tr>\n<tr>\n<td>Estimated P\/E<\/td>\n<td>42<\/td>\n<\/tr>\n<tr>\n<td>Estimated market price (\u20b9)<\/td>\n<td>159.60<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>3. Book value per share<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>Fortune Pharma Ltd.<\/td>\n<td>Fortune India (FMCG) Ltd.<\/td>\n<\/tr>\n<tr>\n<td>Net worth (\u20b9 in lakhs)<\/td>\n<td>21,000<\/td>\n<td>24,000<\/td>\n<\/tr>\n<tr>\n<td>No. of shares (\u20b9 in lakhs)<\/td>\n<td>1,500<\/td>\n<td>3,000<\/td>\n<\/tr>\n<tr>\n<td>Book value of shares<\/td>\n<td>\u20b9 14<\/td>\n<td>\u20b9 8<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 46.<br \/>\nAB Ltd. has recently approached the shareholders of CD Ltd. which is engaged in the same line of business as that of AB Ltd. with a bid of 4 news shares in AB Ltd. for every 5 CD Ltd. shares or a cash alterative of \u20b9 360 per share. Past records of earnings of CD Ltd. had been poor and the company\u2019s shares have been out of favour with the stock market for some time.<br \/>\nPre-bid information for the year ended 31.3.2006 are as follows:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td><\/td>\n<td>AB Ltd. in Lakhs<\/td>\n<td>CD Ltd. in Lakhs<\/td>\n<\/tr>\n<tr>\n<td>Equity share capital<\/td>\n<td>60<\/td>\n<td>170<\/td>\n<\/tr>\n<tr>\n<td>Number of shares<\/td>\n<td>24<\/td>\n<td>17<\/td>\n<\/tr>\n<tr>\n<td>Pre-tax profit<\/td>\n<td>125<\/td>\n<td>110<\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio<\/td>\n<td>11<\/td>\n<td>7<\/td>\n<\/tr>\n<tr>\n<td>Estimated post tax cost of Equity Capital per Annum<\/td>\n<td>12%<\/td>\n<td>10%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Both AB Ltd. and CD Ltd. pay income tax at 30%. Current earnings growth forecast is 4% for the foreseeable future of both the Companies.<br \/>\nAssuming no synergy exists, you are required to evaluate whether proposed share to share offer is likely to be beneficial to the shareholders of both the companies using merger terms available. AB Ltd.\u2019s directors might expect their own pre-bid P\/E ratio to be applied to combined earnings.<br \/>\nAlso comment on the value of the two Companies from the constant growth form of dividend valuation model assuming all earnings are paid out as dividends. [Nov. 2007] [14 Marks]<br \/>\nAnswer:<br \/>\nAlternative 1 (when number of shares are 2.4 and 1.7 lakhs respectively) Background calculations for Evaluation: (Figures in lakhs)<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td width=\"414\"><\/td>\n<td width=\"54\">AB Ltd.<\/td>\n<td width=\"60\">CD Ltd.<\/td>\n<td width=\"60\">Total<\/td>\n<\/tr>\n<tr>\n<td width=\"414\">PBT<\/td>\n<td width=\"54\">125<\/td>\n<td width=\"60\">110<\/td>\n<td width=\"60\">235<\/td>\n<\/tr>\n<tr>\n<td width=\"414\">PAT<\/td>\n<td width=\"54\">87.5<\/td>\n<td width=\"60\">77<\/td>\n<td width=\"60\">164.5<\/td>\n<\/tr>\n<tr>\n<td width=\"414\">Prc bid EPS<\/td>\n<td width=\"54\">36.45<\/td>\n<td width=\"60\">45.29<\/td>\n<td width=\"60\"><\/td>\n<\/tr>\n<tr>\n<td width=\"414\">P\/E ratio<\/td>\n<td width=\"54\">11<\/td>\n<td width=\"60\">7<\/td>\n<td width=\"60\"><\/td>\n<\/tr>\n<tr>\n<td width=\"414\">Pre-bid Price Per Share<\/td>\n<td width=\"54\">401.06<\/td>\n<td width=\"60\">317.03<\/td>\n<td width=\"60\"><\/td>\n<\/tr>\n<tr>\n<td width=\"414\">Market value of the company<\/td>\n<td width=\"54\">962.54<\/td>\n<td width=\"60\">538.95<\/td>\n<td width=\"60\">1,501.49<\/td>\n<\/tr>\n<tr>\n<td width=\"414\">No. of New Shares Post bid<\/td>\n<td width=\"54\">2.4<\/td>\n<td width=\"60\">1.36<\/td>\n<td width=\"60\">3.76<\/td>\n<\/tr>\n<tr>\n<td width=\"414\">% combined company owned by<\/td>\n<td width=\"54\">63.83%<\/td>\n<td width=\"60\">36.17%<\/td>\n<td width=\"60\"><\/td>\n<\/tr>\n<tr>\n<td width=\"414\">Value to the original Shareholders<\/td>\n<td width=\"54\">958.40<\/td>\n<td width=\"60\">543.09<\/td>\n<td width=\"60\">1,501.49<\/td>\n<\/tr>\n<tr>\n<td width=\"414\">Post bid Price per share to original shareholders i.e., 2.40 lakhs and 1.70 lakhs shareholders respectively.<\/td>\n<td width=\"54\">399.33<\/td>\n<td width=\"60\">319.46<\/td>\n<td width=\"60\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(Note: The Post bid Price per share to new shareholders as per terms of acquisition works out to \u20b9 399.33 for both the companies)<br \/>\nThese figures suggest post bid acquisition share price of \u20b9 399.33 for AB Ltd., and 319.46 for CD Ltd.\u2019s original shareholders. The price of CD Ltd. share is likely to be influenced by the value of cash alternative.<br \/>\nThe post bid share price of the new firm can be estimated by applying the P\/E ratio to the combined earnings of the two old companies.<br \/>\nIn that case,<br \/>\nMarket Value would be = 164.5 \u00d7 11 = 1809.50<br \/>\nPrice per share of the combined company would be = \\(\\frac{1,809.50}{3.76}\\) = \u20b9 481.25<br \/>\n\u2234 Therefore share of AB Ltd., shareholders would rise by \u20b9 481.25 &#8211; \u20b9 401.06 = \u20b9 80.19 i.e., 20%.<br \/>\nShare value of CD Ltd., shareholder expected to rise by<br \/>\n(\u20b9 481.25 \u00d7 \\(\\frac{4}{5}\\)) &#8211; 317.03 = \u20b9 67.97 i.e. 21.44%<br \/>\nWith the cash offer the premium is \\(\\frac{360-317.03}{317.03}\\) = 13.55% only<br \/>\nHence shareholders of CD Ltd. are gaining more from the merger in a share exchange and cash alternative is unlikely to be accepted.<br \/>\nUsing constant growth model the value of both the individual companies would be:<br \/>\nAB Ltd., share price = \\(\\frac{36.46(1.04)}{0.12-0.04}\\) = \u20b9 473.98<br \/>\nCD Ltd., share price = \\(\\frac{45.29 \\times 1.04}{0.10-0.04}\\) = \u20b9 785.03<br \/>\nOn this basis market slightly undervalues AB Ltd. share but share of CD Ltd., are highly undervalued possibly because of previous disappointments. However, if AB Ltd. forecast is believed that the AB Ltd., is getting CD Ltd. shares, it will be a cheap proposal for AB Ltd. to acquire the CD Ltd. on share exchange basis and especially if any of the shareholder of CD Ltd. Accept the cash offer.<\/p>\n<p>The shareholders of CD Ltd. would also be benefited post merger based on share exchange ratio since the value of their share would be going up from \u20b9 317.03 to \u20b9 399.33. However, their share price would still be undervalued as compared with the share price calculated by using constant growth model.<\/p>\n<p>Alternative 2 (when number of shares are 24 and 17 lakhs respectively)<br \/>\nIf we take into consideration the number of shares being 24 lakhs and 17 lakhs the Pre-bid share price works out to \u20b9 40.15 and \u20b9 31.71 respectively, which seems to be illogical against a cash offer @ \u20b9 360 per share. However, since many students may have solved this question based on the figures of 24 lakhs and 17 lakhs number of shares, an alternative solution is provided below.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Evaluation:<\/td>\n<td><\/td>\n<td>.<\/td>\n<td>Figure in lakhs<\/td>\n<\/tr>\n<tr>\n<td>Background calculations:<\/td>\n<td>AB Ltd.<\/td>\n<td>CD Ltd.<\/td>\n<td>Total<\/td>\n<\/tr>\n<tr>\n<td>PBT<\/td>\n<td>125<\/td>\n<td>110<\/td>\n<td>225<\/td>\n<\/tr>\n<tr>\n<td>PAT<\/td>\n<td>87.5<\/td>\n<td>77<\/td>\n<td>164.5<\/td>\n<\/tr>\n<tr>\n<td>Pre-bid EPS<\/td>\n<td>3.65<\/td>\n<td>4.53<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>P\/E Ratio<\/td>\n<td>11<\/td>\n<td>7<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Pre-bid Price per share<\/td>\n<td>40.15<\/td>\n<td>31.71<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Market value of the company<\/td>\n<td>963.60<\/td>\n<td>539.07<\/td>\n<td>1502.67<\/td>\n<\/tr>\n<tr>\n<td>No. of new shares Post-bid<\/td>\n<td>24<\/td>\n<td>13.6<\/td>\n<td>37.6<\/td>\n<\/tr>\n<tr>\n<td>% of combined company owned by<\/td>\n<td>63.83<\/td>\n<td>36.17<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Value to the original shareholders<\/td>\n<td>959.15<\/td>\n<td>543.52<\/td>\n<td>1502.67<\/td>\n<\/tr>\n<tr>\n<td>Post-bid Price to original shareholders i.e., 24 lakhs and 17 lakhs shareholders respectively<\/td>\n<td>39.96<\/td>\n<td>31.97<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>(Note: The Post bid price per share works out to \u20b9 39.96 for both the companies)<br \/>\nThese figures suggest Post acquisition share price of \u20b9 39.96 for AB Ltd. and \u20b9 31.97 for CD Ltd\u2019s original shareholders. The Price of CD Ltd. Share is likely to be influenced by the value of cash alternative.<br \/>\nThe Post bid share price of the new firm can be estimated by applying the P\/E ratio to the combined earnings of the two old companies.<br \/>\nIn that case,<br \/>\nMarket-value would be = 164.5 \u00d7 11 = 1809.50<br \/>\nPrice per share of the combined company<br \/>\nWould be = \\(\\frac{1809.50}{37.6}\\) = 48.13<br \/>\n\u2234 Shares of AB Ltd. shareholders would raise by \u20b9 48.13 &#8211; 40.15 = 7.98 i.e., 19.87% or 20%.<br \/>\nShare value of CD Ltd., shareholders expected to raise by (\u20b9 48.13 \u00d7 \\(\\frac{4}{5}\\)) &#8211; 31.71 = \u20b9 7.40 or 23.34%.<br \/>\nHowever, with the cash offer the premium is \\(\\frac{360-31.71}{31.71}\\) = 1035.29%<br \/>\nHence, the shareholders of CD Ltd., are substantially benefited by cash offer and they are unlikely to accept the share swap ratio.<br \/>\nUsing constant growth model the value of shares of both the individual companies would be<br \/>\nAB Ltd. Share Price = \\(\\frac{3.65(1.04)}{0.12-0.04}=\\frac{3.80}{0.08}\\) = \u20b9 47.5<br \/>\nCD Ltd. Share Price = \\(\\frac{4.53(1.04)}{0.10-0.04}=\\frac{4.71}{0.06}\\) = \u20b9 78.5<br \/>\nOn this basis market slightly undervalues AB Ltd. Share but share of CD Ltd., is highly undervalued possibly because of previous disappointments. However, if AB Ltd. forecast is believed that the AB Ltd. is getting CD Ltd. share it will be a cheap proposal for AB Ltd., to acquired CD Ltd., on share exchange basis.<\/p>\n<p>The shareholders of CD Ltd., would however be more benefited by cash offer.<br \/>\nNote: The above answer is based upon the solution given by ICAI in their suggested answers.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material\u00a0is designed strictly as per the latest syllabus and exam pattern. Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material Part-1(Theory) Question 1. Write short note on Horizontal Merger and Vertical Merger. [May 2016] [4 Marks] Answer: A merger is generally understood to &hellip;<\/p>\n<p class=\"read-more\"> <a class=\"\" href=\"https:\/\/gstguntur.com\/mergers-acquisitions-and-corporate-restructuring-ca-final-sfm-study-material\/\"> <span class=\"screen-reader-text\">Mergers, Acquisitions and Corporate Restructuring \u2013 CA Final SFM Study Material<\/span> Read More &raquo;<\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":"","footnotes":""},"categories":[169],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/19216"}],"collection":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/comments?post=19216"}],"version-history":[{"count":13,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/19216\/revisions"}],"predecessor-version":[{"id":19324,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/19216\/revisions\/19324"}],"wp:attachment":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/media?parent=19216"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/categories?post=19216"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/tags?post=19216"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}