A hypothetical ltd.

Wants to acquire target ltd the B/s of trget as on march 31 2017 has following-:

Liabilities
amount
Equity ₹ 400.00
RE ₹ 100.00
10.5% ebentures ₹ 200.00
Creditors ₹ 160.00
total ₹ 860.00

Assets
Cash ₹ 10.00
debtors ₹ 65.00
inventories ₹ 135.00
plant& equipmwent ₹ 650.00
total ₹ 860.00

The sharehoders of target co. will get 1.5 share in hypothetical ltd.for every 2 shares " the shares of hypo would
the deb. Holders will get 11% deb. Of the same amount.
the external liabilities are expected to be settled at 150 lakhs
dissolution exp. Of 15 lakh are to be met by acquiring co.
the following are projected incremental FCFF expected from acquisition for 6 years

The FCFF of target ltd. Is expected to grow at 3% per annum after 6 years
given the risk complexion of target ltd., the cost of capital relevant for target ltd. Has been decided at 13%
there is unrecorded lia. Of 20 lakhs advice co. regarding financial fesiability of the acquisition

Solution
1) cal. Of cost of ac
Particulars
Sahre capital
11% deb.
settlement of ext. liabilities
unrecorded liab.
dissolution
purchase consideration /cost

2) present value of FCFF

year end
 1
2
3
4
5
6

TV
Pv of TV

PART 2
in the above case
if the FCFF after forecasted period is going to be constant "declined by 10%" what will be your suggestion to the

present value of FCFF

year end
1
2
3
4
5
6

TV6
Pv of TV

The XYZ ltd. Wants to acquire ABC ltd. By exchanging its 1.6 shares for every share of abc ltd. . It anticipates to m
the relevant fin. Data are
 Particulars XYZ ltd.
EAT ₹ 1,500,000.00
No. of equity shares 300000
MPS 35

1) what is exchange ratio based on MPS

2) What is premerger EPS and PE ratio for each company
3) What was pe ratio used in acquiring ABC ltd.(impied)
4) What is EPS of XYZ co. after acquisition
5) what is MPS of merged company

Solution
1) exchange ratio 1.6:1
based on mps 1.4

2) particulars xyz
EAT ₹ 1,500,000.00
No. of equity shares 300000
eps ₹ 5.00
pe ratio 7

3) Implied PE ratio 56

4) EPS of XYZ post merger 4.6428571429

5) MPS of merged company 32.5

A ltd. Wants to acquire T ltd. By exchangning .5 of its shares for each share of T ltd.
the relevant fin. Data are as follows

Particulars A
EAT ₹ 1,800,000.00
No. of equity shares 600000
EPS ₹ 3.00
P/E ratio 10
 MPS ₹ 30.00

A what is no. of equity shares required to be issued by the acquirer

B what is EPS of acquirer after acquisition
C Determine the equivilent Eps of acquired
D determine market value of merged firm
E what is expected mps of the acquirer after acquisitionassuming its PE multiple remains unchanged

Solution
A Equity shares 90000

b EPS 3.1304347826

c Equivilent EPS 1.5652173913

e MPS= Pe ratio*EPS 31.3043478261

d Market value of the combined firm ₹ 21,600,000

the following data concerns the acquirer and the target

Particulars A
EAT ₹ 140,000.00
No. of equity shares 20000
EPS ₹ 7.00
P/E ratio 10
MPS ₹ 70

the acquirer is exchanging its 1 share for every 1.5 share of the target. Assume that company A expects to have
after the merger as before (no synergy effect), show the extent of gain accruing to the shareholders of 2 compa
are they better or worse off than they were before the merger

Solution
EPS after merger 7.1

MPS 71

Total market value of the firm ₹ 1,775,000

has following-:

4 lakh sahres of 100 each

ry 2 shares " the shares of hypo would be issued at its current mkt. price of 180 per share

year end amt in lakhs

1 150
2 200
3 260
4 300
5 220
6 120

get ltd. Has been decided at 13%

ty of the acquisition

cal. Of cost of acquisition

Particulars amount in lakhs
300000 180 ₹ 54,000,000.00
₹ 20,000,000.00
₹ 15,000,000.00
₹ 2,000,000.00
₹ 1,500,000.00
₹ 92,500,000.00

present value of FCFF

FCFF pv factor@13% Total pv
 150 0.884955752 132.7433628319
200 0.783146683 156.6293366748
260 0.693050162 180.1930421922
300 0.613318728 183.9956183038
220 0.542759936 119.4071859199
120 0.480318527 57.638223292
Total PV till 6 years 830.6067692145

1236
593.67369991 total pv 1424.2804691219
less:PC 925
net present value 499.2804691218 this is posotive so it os viable

%" what will be your suggestion to the acquirer

present value of FCFF

FCFF pv factor@13% Total pv
150 0.884955752 132.7433628319
200 0.783146683 156.6293366748
260 0.693050162 180.1930421922
300 0.613318728 183.9956183038
220 0.542759936 119.4071859199
120 0.480318527 57.638223292
Total PV till 6 years 830.6067692145

923.07692308
443.3709484
total pv 1273.9777176143
less:PC 925
net present value 348.9777176143

ery share of abc ltd. . It anticipates to maintain the existing PE ratio subsequent to the merger also.
 ABC ltd.
₹ 450,000.00
75000
40

tio based on MPS

EPS and PE ratio for each company
used in acquiring ABC ltd.(impied)
co. after acquisition
ged company

abc
₹ 450,000.00
75000
₹ 6.00
6.6666666667

₹ 9.33

combined PE ratio cannot be used to derive a merged firms market price per share because
PE ratio can be derived only with the support of the post merger MPS and it is just an analytical value
so it always the xisting PE ratio of the acquirer is used to derive the post merger MPS

T
₹ 360,000.00
180000
₹ 2.00
7
 ₹ 14.00

ltiple remains unchanged

T
₹ 37,500.00
7500
₹ 5.00
8
₹ 40

sume that company A expects to have the same earnings and PE ratio
cruing to the shareholders of 2 companies as a result of the merger
this is posotive so it os viable
er share because
t is just an analytical value
 Q the following data concerns the acquirer and the target

Particulars A T
EAT ₹ 140,000.00 ₹ 37,500.00
No. of equity shares 20000 7500
EPS ₹ 7.00 ₹ 5.00
P/E ratio 10 8
MPS ₹ 70 ₹ 40

the acquirer is exchanging its 1 share for every 1.5 share of the target. Assume that company A expects to have t
after the merger as before (no synergy effect), show the extent of gain accruing to the shareholders of 2 compan
are they better or worse off than they were before the merger

EPS after merger 7.1

MPS 71

Total market value of the firm ₹ 1,775,000

Solution:
Gain from the merger
Particulars Amount
Post merger Mkt. value ₹ 1,775,000.00
Less: Pre merger mkt. value
A (20000 of 70 each) ₹ 1,400,000.00
B ( 7500 shares of 40 each) ₹ 300,000.00

Total gain ₹ 75,000.00

In the above case determine the range of minimum and maximum share exchnange ratio between the 2 firms al

Determination of tolerable exchange ratio for

shareholders of A based on accruing gains of B

Particulars Amount

Total market value ofmerged firm ₹ 1,775,000.00

Lsss: pre merger value/ minimum
acceptable value of "A" post merger ₹ 1,400,000.00
Max. acceptable vlaue of B post merger ₹ 375,000.00

To maintain post merger value of firm A

the MPS must be Rs.70 ₹ 70.00
 No. of equity shares to be issued to
maintain the MPS ₹ 5,357.14
No. of shares of B pre merger 7500 5357.143
share exchange ratio will be 0.7142857

Sa ltD. Is planning to purchase NSS ltd. SI ltd has 5l shares outstanding of 100 each having the current
mak. Price per shares of rs. 250.NSS has 2lakh shares of market price of 170 per share.EPS are rs.32 and RS. 24 re
A) illustrate impact of merger on EPS assuming share exchange ratio is to be in relative propotion of EPS of the 2 firm
B) The management of NSS has quoted a share exchange ratio of 1:1 for the merger. Should SI accept this ratio, eve
Ltd will remain unchanged after merger. And no synergy across dur to merger

A) 16000000
4800000
20800000

B) Effect of share exchange ratio 1:1 on valuation of firms

PRE MERGER EVALUATION
Particulars SI NSS
EAT 16000000 4800000
No. of shares 500000 200000
MPS 250 170
EPS 32 24
PE artio 7.81 7.08
Total market value ₹ 125,000,000 ₹ 34,000,000

POST MERGER EVALUATION

 Combined EAT 20800000
No. of shares 700000
EPS ₹ 29.71
PE ratio 7.81
MPS 232.1428571429
Total market value ₹ 162,500,000
GAIN from the merger ₹ 3,500,000

RESPECTIVE GAIN OR LOSS

SI
Pre merger market value ₹ 125,000,000
Post merger market value ₹ 116,071,429
Difference -₹ 8,928,571

NSS
Pre merger market value ₹ 34,000,000
Post merger market value 46428571.428572
Difference ₹ 12,428,571

In the above case what is the minimum number no. of shares/Min. exchange ratio to retain the existing wealth o

Determination of acceptable share exchnage ratio

Particulars Amount in lakhs
Total mkt. value of merged firm ₹ 1,625
Less: Min. expected post merger value of SI ₹ 1,250
Post merger value of NSS would be ₹ 375
MPS of SI ltd. in rupees ₹ 250
no. of shares to be issued to NSS 150000
Existing shares of NSS ltd. 200000
share exchange ratio 0.75

Q Company X wishes to takeover company Y the financial deails are as follows-:

X Y
Equity shares(rs.10/share) 100000 50000
Share premium 2000
profit and loss 38000 4000
prefrence shares 20000
10% debentures 15000 5000
173000 61000

Fixed assets 122000 35000

net current assets 51000 26000
Maintenable annual profit 24000 15000
 MPS 24 27
P/E ratio 10 9

What offer do you think company could make to company Y in terms of exchange ratio
based on -:

A) Net asset value

B) EPS
C) MPS
Which method would you prefer from co. X point of view

X Y
B) EPS 2.4 3 1.25

X Y
C) MPS 24 27 1.125

A)
Fixed assets 122000 35000
net current assets 51000 26000
Total assets 173000 61000
Less: External liabilities
Preference shares 20000
10% deb. 15000 5000
net assets 138000 56000
no. of equity shares 10000 5000
net asset per share 13.8 11.2
exchange ratio 0.8115942029
ompany A expects to have the same earnings and PE ratio
e shareholders of 2 companies as a result of the merger

Firm Post merger Pre merger Gain

A ₹ 1,400,000.00
T ₹ 300,000.00

ratio between the 2 firms also provide confirmation of your answer

Determination of tolerable exchange ratio

shareholders of "B" based on accruing gains of "A"

Particulars Amount

Total market value ofmerged firm ₹ 1,775,000.00

Lsss: pre merger value/ minimum
acceptable value of "B" post merger ₹ 300,000.00
Max. acceptable vlaue of A post merger ₹ 1,475,000.00

Number shares of A 20000

 Post merger MPS ₹ 73.75
MKt. vaue of firm "T" premerger ₹ 300,000.00
No. of shares issued by A 4068
premerger shares of "T" 7500
share exchange ratio will be 0.5423728814

The maximum shares exchange ratio & it benefiting in what way

Min. exchange ratio

aving the current

e.EPS are rs.32 and RS. 24 respectively
propotion of EPS of the 2 firms
ould SI accept this ratio, even through the price earning ratio of SI
 SI should not accept the ratio because their post merger market value
is reducing

Variation in MPS and EPS so 1:1 ratio is not appropriate

retain the existing wealth of the SI ltd.

the exchange ratio is most beneficial under net asset value
as they have to issue minimum no. of shares under it