1.
Programme :_baf hons
Course:corporate finance 2
“Topic:merger and acquisition_”

2.
formula
• EPS =( PAT – Pref Div)/No of equity shares
• P/E ratio = MPS/EPS
• Exchange ratio (no formula only cross multiplication)

3.
Q1.
A ltd acquires B ltd. Following information is available for both the co
A Ltd = no of Equity shares = 10,00,000;PAT = 50,00,000 ; MPS = 42
B Ltd = no of equity shares = 6,00,000; PAT = 18,00,000; MPS = 28
Calculates
1. EPS before merger for both companies (ans = 5 & 3)
2. EPS after merger (use no 3)
3. Exchange ratio using market price
4. P/E ratio before merger
5. Exchange ratio using EPS

4.
Answer -1
EXCHANGE RATIO USING MPS
MPS A B
MPS 42 28
6,00,000 ? (4,00,000)
EPS A B
EPS 5 3
600000 ?

5.
answer - 1
• Shares of A = 10,00000
• Shares given to B = 4,00,000
• EPS after merger = 68 00 000/1400000 = 4.857
EPS after merger =( PAT of A+B)/ (Shares of A + shares given to B)

6.
Q2
C ltd acquires D ltd. Following information is available for both the co
CLtd = no of shares = 40,000;PAT = 2,00,000 ; MPS = 15
D Ltd = no of shares = 10,000; PAT = 60,000; MPS = 12
Calculates
1. EPS before merger (ans = 5 & 6)
2. EPS after merger (use no 3) (5.417)
3. Exchange ratio using market price (8000 shares)
4. P/E ratio before merger (3 & 2)
5. Excahnge ratio using EPS (12000)
6. EPS after merger (using no 5) (5)

7.
Q3
• X ltd acquires Y ltd. Following information is available for both the co
• X Ltd = equity share capital = 450 million; PAT = 90 million ; MPS = 60
• Y Ltd = equity share capital = 180 million; PAT = 18 million ; MPS = 37
• Calculates
1. EPS before merger (2 and 1)
2. EPS after merger (use no 3)
3. Exchange ratio using market price
4. P/E ratio before merger (30 and 37)
5. Exchange ratio using EPS (What should be the exchange ratio if they want EPS
to remain same)
6. EPS after merger (using no 5)

8.
ans 3
• No of eqty shrs = 450 million/10 (X Ltd)
= 45 million
No of ety shrs of Y ltd = 180/10 = 18 million

9.
Answer -3
EXCHANGE RATIO USING MPS
MPS X Y
MPS 60 37
18 million ? (11.1)
EPS X Y
EPS 2 1
18 miilion ? (9)

10.
answer - 3
• Shares of X = 45 million
• Shares given to Y = 11.1 million
• EPS after merger = 108 million/(45+11.1) = 1.925
EPS after merger =( PAT of A+B)/ (Shares of A + shares given to B)

11.
Q4
• X ltd acquires Y ltd. Following information is available for both the co
• X Ltd = equity share capital = 20,00,000; PAT = 4,00,000 ; MPS = 25
• Y Ltd = equity share capital = 10,00,000; PAT = 1,00,000 ; MPS = 12.5
• Calculates
1. EPS before merger (2 and 1)
2. EPS after merger (use no 3)
3. Exchange ratio using market price
4. P/E ratio before merger
5. What should be the exchange ratio if they want EPS to remain same(no of
shr=50,000)
6. EPS after merger (using no 5)

12.
Q5
X ltd acquires Y ltd. Following information is available for both the co
X Ltd = equity shares = 3,00,000; PAT = 15,00,000 ; MPS = 35
Y Ltd = equity shares = 75,000; PAT = 37,500 ; MPS = 40
Calculates
1. EPS before merger (X ltd = 15,00,000/3,00,000 = 5; Y ltd = 37500/75000 = 0.5)
2. EPS after merger ; if exchange ratio is 1.6 shares for every 1 share held in Y ltd
3. P/E ratio before merger
4. Gain to shareholders assuming same P/E ratio

13.
ans to Q5
X Y
1.6 1
?(120000) 75000
EPS after merger = 1500000+37500/(300000+120000) = 3.6666
P/E ratio before merger = 35/5 = 7 (MPS/EPS)
MPS after merger = (7 = X/3.6666) X=MPS after merger = 25.6662

14.
ans to Q5
Gain to shareholder
1. Total gain
Total no of shares after merger IN X LTD = 300000+120000 = 420000
Market value of shares after merger = 420000*25.66 = 10777200
- Market value of shares before merger for X (300000*35)= 10500000
- -Market value of shares before merger for Y (75000*40)= 3000000 Gain = (2722800)
- 2. Gain to shareholders of X ltd (Market value after merger – market value before
merger)(300000*25.66 – 300000*35) = (2802000)
- 3. Gain to shareholders of Y Ltd (Market value after merger – market value before
merger)(120000*25.66 – 75000*40)= 79200

15.
Q6.
A ltd acquires B ltd. Following information is available for both the co
A Ltd = equity shares = 50000; PAT = 100000 ; MPS = 20
B Ltd = equity shares = 20,000; PAT = 20000 ; MPS = 8
Calculates
1. EPS before merger (a=2, b = 1)
2. EPS after merger (ans = 1.8) ((100000+20000)/66000) ; if exchange ratio is 0.8 (no of shares given to b ltd
= 16,000)
3. P/E ratio before merger( a=10, b= 8)
4. Gain to shareholders assuming same P/E ratio
Ans
A B
0.8 1
?(16000) 20,000
P/E ratio before merger = 10
MPS after merger = (10 = X/1.8) X=MPS after merger = 18

16.
ans to Q 6
Gain to shareholder
1. Total gain
Total no of shares after merger = 50000+16000 = 66000
Market value of shares after merger = 66000 * 18 = 1188000
Market value of shares before merger for X (50000*20)= 1000000
- -Market value of shares before merger for Y (20000*8)= 160000
- Gain = 28000
- 2. Gain to shareholders of Altd (Market value after merger – market value before merger)
(50000*18-50000*20) =(100000)
- 3. Gain to shareholders of B Ltd (Market value after merger – market value before
merger)(16000*18-20000*8) = 128000

17.
Q7
X ltd acquires Y ltd. Following information is available for both the co
X Ltd = equity shares = 20,000; PAT = 140000 ; MPS = 70
Y Ltd = equity shares = 37500; PAT = 7,500 ; MPS = 40
Calculates
1. EPS before merger
2. EPS after merger ; if exchange ratio is 1 shares for every 1.5 share held in Y ltd
3. P/E ratio before merger
4. Gain to shareholders assuming same P/E ratio
x y
1 1.5
? (25000) 37500

18.
chp 2 EVA and MVA
** NOPAT = EBIT – Tax ; EVA = NOPAT – (WACC * CE)
Q1. calculate EVA from the following
1. Investment = 10,000; life of the asset = 5 yrs; scrap value = 0; annual revenue = 8,000 p.a; annual
cost = 4,000(excluding depreciation and tax) ; tax @40%, debt equity ratio = 3:2, cost of equity=
20%, cost of debt = 8% (post tax).
2. Average debt = 25 cr ; average equity = 2,500 cr ; cost of equity = 15%, cost of debt = 8%, PAT =
12cr, interest = 4 cr..
3. Average debt = 50 cr ; average equity = 27.66 cr ; cost of equity = 14%, cost of debt( Post tax) =
12%, PAT = 15.41 cr, interest = 6 cr.. Tax rate = 40%

19.
cost of debt
COST OF DEBT = 8% - before the effect of tax and tax saving
Cost of debt = 8%(post tax)- after the effect of tax and tax saving
Cost of debt (after tax) = Int (1 – tax rate)
eg = int rate = 10%, tax rate = 40%
Cost of debt (after tax) = 10(1-0.4)
= 6%

20.
solution to q 2 of EVA
NOPAT = PAT + INTEREST= 12+4 = 16
WACC = NOPAT – (WACC *CAPITAL EMPLOYED)
particulars amount cost prop Wacc (prop *
cost)
Debt 25 8% (25/2525) =
0.009
0.08
equity 2500 15% (2500/2525) =
0.99
14.85
total 2525 14.93

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Historical cost = original purchase price
Book value = cost – dep/ value in the balance sheet
Market value
Realizable value = selling price – brokerage/commission
Intrinsic value = act value
Replacement cost = cost of replacing the asset
Current cost = cost the same asset today

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