Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 1: Exchange Ratio

Saviruchi Ltd (has 200000 shares outstanding) wants to acquire Durgabhavan Ltd(has 100000
shares outstanding), by exchanging its 1.6 shares for every share of Durgabhavan Ltd.
Calculate the post-merger number of shares
Solution:
New Shares to be issued to Target = Exchange Ratio X Existing No. of shares of Target
New shares to be issued to Durgabhavan = 1.6 X 100000 = 160000
Existing Shares of Saviruchi = 200000
Post-Merger Number of Shares = 200000 + 160000 = 360000

Exercise 2: Exchange Ratio

Kelloggs Ltd is taking over Corn Flakes Ltd. The shareholders of Corn Flakes Ltd would receive
0.8 share of Kelloggs Ltd for each share held by them. No. of shares of Kelloggs Ltd before
Merger is 250000 and No. of shares of Corn Flakes Ltd pre-merger is 175000. Calculate the
post-merger no. of shares
Solution:
New shares to be issued to Corn Flakes = 0.8 X 175000 = 140000
Existing Shares of Kelloggs = 250000
Post-Merger Number of Shares = 250000 + 140000 = 390000

Exercise 3: Exchange Ratio

Mylari Company is acquiring Harihara Company. Mylari will pay 0.5 of its shares to the
shareholders of Harihara for each share held by them. Existing no. of Shares of Mylari is 500
Million and that of Harihara Co. is 250 Million. Calculate the post-merger number of shares
Solution:
New shares to be issued to Harihara = 0.5 X 250 = 125 Mn
Existing Shares of Mylari = 500 Mn
Post-Merger Number of Shares = 500 + 125 = 625 Mn

Exercise 4: Exchange Ratio

Rice Ltd acquires Wheat Ltd by exchanging one share for every two shares of Wheat Ltd.
Calculate the post-merger number of shares of Rice Ltd. Outstanding, if pre-merger number of
shares were as below: Rice Ltd 1000 Wheat Ltd 400
Solution:
New shares to be issued to Wheat = 0.5 X 400 = 200
Existing Shares of Rice = 1000
Post-Merger Number of Shares = 1000 + 200 = 1200
KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 5: Exchange Ratio

Based on the information given below ascertain the exchange ratio based on Net Assets Value:
Slice Ltd (Acquirer) Maaza Ltd (Target)
Total Assets 1000 Lacs 500 Lacs
External Liabilities 400 Lacs 200 Lacs
Solution:
Net Assets = Total Assets Liabilities
Net Assets of Slice Ltd = 1000 400 = 600 Lacs
Net Assets of Maaza Ltd = 500 200 = 300 Lacs
Net Assets Ratio = Net Assets of Target Co./Net Assets of Acquiring Co.
= 300/600 = 0.5
Exchange Ratio = 0.5:1
i.e., Shareholders of Maaza Ltd will get 0.5 share of Slice Ltd for every share held in Maaza Ltd

Exercise 6: Exchange Ratio

Based on the information given below determine the exchange ratio based on Net Assets Value:
Torino Ltd (Acquirer) Citra Ltd (Target)
Fixed Assets 150 100
Current Assets 100 50
13% Debentures 100 40
Creditors 100 10
Solution:
Net Assets = Total Assets Liabilities
Net Assets of Torino Ltd = (150+100) (100+100) = 50 Lacs
Net Assets of Maaza Ltd = (100+50) (40+10) = 100 Lacs
Net Assets Ratio = Net Assets of Target Co./Net Assets of Acquiring Co. = 100/50 = 2
Exchange Ratio = 2:1
i.e., Shareholders of Citra Ltd will get 2 shares of Torino Ltd for every share held in Citra Ltd

Exercise 7: Exchange Ratio

Determine the exchange ratio in case of below Merger, based on EPS proportion:
Fanta Ltd(Acquirer) Sprite Ltd(Target)
EPS Rs. 100 Rs.50
Solution
Exchange Ratio based on EPS proportion = EPS of Target Co / EPS of Acquiring Co
Exchange Ratio based on EPS proportion = 50 / 100 = 0.5
Shareholders of Sprite will get 0.5 share of Fanta Ltd for every share held in Sprite
KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 8: Exchange Ratio

Determine the exchange ratio in case of below Merger, based on EPS proportion:
Thumsup Ltd(Acquirer) Mountaindew Ltd(Target)
PAT Rs. 6700000 Rs. 5450000
No. of shares 100000 50000
Solution
EPS = Profit after Tax / No. of Shares
EPS of Thumsup Ltd = 6700000 / 100000 = Rs. 67
EPS of Mountaindew Ltd = 5450000 / 50000 = Rs. 109
Exchange Ratio based on EPS proportion = 109 / 67 = 1.63
Shareholders of Mountaindew will get 1.63 share of Thumsup for every share held in Mountaindew

Exercise 9: Exchange Ratio

Determine the Exchange Ratio in case of below takeover based on Market price
Market Price of Dominos Ltd (Acquiring Co) Rs. 83
Market Price of Pizza Hut Ltd (Target Co) Rs. 44
Solution
Exchange Ratio based on Market Price = Market Price of Target / Market Price of Acquiring
Exchange Ratio based on Market Price = 44 / 83 = 0.53
Shareholders of Pizza Hut will get 0.53 share of Dominos Ltd for every share held in Pizza Hut

Exercise 10: Exchange Ratio

Determine the Exchange Ratio in case of below takeover based on Market price
Dosa Ltd(Acquirer) Idli Ltd(Target)
P/E Ratio 5 Times 10 Times
Profit after Tax Rs. 20 Lacs Rs. 1250000
No. of Shares 100000 50000
Solution
Market Price = P/E Ratio X EPS
Market Price = P/E Ratio X (Profit after Tax/No. of Shares)
Market Price of Dosa Ltd (Acquiring Co) 5 X (2000000/100000) = 5 X 20 = 100
Market Price of Pizza Hut Ltd (Target Co) 10 X (1250000/50000) = 10 X 25 = 250
Exchange Ratio based on Market Price = 250 / 100 = 2.5
Shareholders of Idli will get 2.5 share of Dosa Ltd for every share held in Idli

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 11: Exchange Ratio (VTU, MBA, June-2010, 10 Marks)

Shanthisagar Ltd wishes to takeover Maheshprasad Ltd. The financial details of the two
companies are as under:
Particulars Shanthisagar Maheshprasad
Equity Shares (Rs. 10 per share) 100000 50000
Share Premium Account 2000
Profit and Loss Account 38000 4000
Preference Shares 20000
10% Debentures 15000 5000
Total 173000 61000
Fixed Assets 122000 35000
Net Current Assets 51000 26000
Maintainable Annual Profit After Tax 24000 15000
For Equity Shareholders
Market Price per Equity Share 24 27
Price Earnings Ratio 10 9
What offer do you think Shanthisagar Ltd could make to Maheshprasad Ltd in terms of
exchange ratio, based on (i)Net Assets Value (ii)Earnings Per Share (iii) Market Price?
Which method would you prefer from Shanthisagar Ltds point of view?
Solution
i) Exchange Ratio based on Net Assets Value
Shanthisagar Maheshprasad
Fixed Assets 122000 35000
Net Current Assets 51000 26000
Total Assets 173000 61000
Less: 10% Debentures 15000 5000
Less: Preference Shares 20000
Net Assets 138000 56000
No. of Shares 10000 5000
Net Assets per share 13.8 11.2
Exchange Ratio based on Net Assets = 11.2/13.8 = 0.81
ii) Exchange Ratio based on EPS
Profit 24000 15000
No. of Shares 10000 5000
Earnings per share 2.4 3
Exchange Ratio based on EPS = 3/2.4 = 1.25
iii) Exchange Ratio based on Market Price per share
Market Price 24 27
Exchange Ratio based on MPS = 27/24 = 1.125

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 12: Exchange Ratio (VTU, MBA, Jul-2009, 3 Marks)

Nandini Ltd is considering the acquisition of Heritage Ltd with stock. Relevant financial
information is as below:
Particulars Nandini Ltd Heritage Ltd
Present Earnings (in thousands) Rs. 4000 Rs. 1000
Common Shares (in thousands) 2000 800
Earnings Per Share Rs. 2 Rs. 1.25
Price/Earnings Ratio 12 8

Nandini Ltd plans to offer a premium of 20% over the market price of Heritage Ltd.
i) What is the ratio of exchange of stock?
ii) How many new shares will be issued?
Solution
Nandini Heritage
No. of shares (using EPS) 2000 800
Finding out Market Price through P/E ratio formula
P/E Ratio = Market Price / EPS 12 = x/2 8 = x/1.25
Solving for x, we get Market Price as 24 10
Exchange Ratio = (10 X 1.2) / 24 = 12/24 = 1.5
No. of new shares to be issued = 1.5 X 800 = 1200

Exercise 13: EPS Management

Based on the below data, calculate Pre-Merger EPS for both companies and Post-Merger EPS of
Acquiring Company
Exchange Ratio 0.5 shares of acquiring company Iyangars Ltd to be given to shareholders of
Target Company SLV Ltd for every one share of SLV Ltd held by them
Profit after Tax of Iyangars Rs. 2500000
Profit after Tax of SLV Ltd Rs. 4500000
No. of outstanding equity shares of Iyangars Ltd 250000
No. of outstanding equity shares of SLV Ltd 180000
Solution
EPS = PAT / No. Of shares
Pre-Merger EPS of Iyangars Ltd = 2500000 / 250000 = Rs. 10
Pre-Merger EPS of SLV Ltd 4500000/180000 = Rs. 25
Post-Merger PAT = (2500000+4500000) = 7000000
Post-Merger No. of Shares = 250000 + (180000 X 0.5) = 250000 + 90000 = 340000
Post-Merger EPS = 7000000/340000 = Rs. 20.58

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 14: EPS Management

Based on the below data, calculate Pre-Merger EPS for both companies and Post-Merger EPS of
Acquiring Company
Kohinoor Ltd(Acquirer) IndiaGates Ltd(Target)
Exchange Ratio 2:1
PAT Rs. 1000 Lacs Rs. 800 Lacs
Share Capital Rs. 5 Crores (Par Value Rs. 10 Each) Rs. 1 Crore (Par Value Re. 2
each)
Solution
EPS = PAT / No. Of shares = PAT / (Share Capital/Par Value)
Pre-Merger EPS of Kohinoor Ltd = 1000 / (500/10) = 1000/50 = Rs. 20
Pre-Merger EPS of IndiaGates Ltd = 800/ (100/2) = 800/50 = Rs. 16
Post-Merger PAT = (1000+800) = 1800 Lacs
Post-Merger No. of Shares = 50 Lacs + (50 Lacs X 2) = 50 lacs + 100 Lacs = 150 Lacs or 1.5
Crores
Post-Merger EPS = 1800/150 = Rs. 12

Exercise 15: EPS Management (VTU, MBA, Jun-2010, 10 Marks)

Maggi Ltd is intending to acquire Knorr Ltd (by merger). The following information is available
in respect of the companies:
Particulars Maggi Ltd Knorr Ltd
No. of Equity Shares 500000 300000
Earnings after Tax Rs. 2500000 Rs. 900000
Market Value per Share Rs. 21 Rs. 14
i) What is the present EPS of both companies?
ii) If the proposal merger takes place, what would be the new earnings per share for Maggi
Ltd? (assuming that the merger takes place by exchange of equity shares and the
exchange ratio is based on the current market prices)
iii) What should be the exchange ratio, if Knorr Ltd wants to ensure the same earnings to
members as before the merger?
Solution
i) Pre-Merger EPS
Maggi Knorr
PAT 2500000 900000
No. of shares 500000 300000
EPS 5 3

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

ii) Post-Merger EPS

Post-Merger PAT = 2500000 + 900000 = 3400000
Exchange Ratio = 14/21 = 0.6667
Post-Merger No. of shares = 500000 + (300000 X .667) = 500000 + 200000 = 700000
Post-Merger EPS = 3400000 / 700000 = 4.85
iii) Exchange Ratio to maintain Current EPS
5 = 3400000 / Post-Merger No. of shares
Therefore, Post-Merger No. of shares = 680000
Shares offered to Knorr = 680000 500000 = 180000
Exchange Ratio = 180000 / 300000 = 0.6

Exercise 16: EPS Management

Sankranthi Ltd. is intending to acquire Deepavali Ltd. by merger and the following information
is available in respect of the companies:
Sankranthi Ltd. Deepavali Ltd.
Number of equity shares 10,00,000 6,00,000
Earnings after tax (Rs.) 50,00,000 18,00,000
Market value per share (Rs.) 42 28
Required:
(i) What is the present EPS of both the companies?
(ii) If the proposed merger takes place, what would be the new earning per share for Sankranthi
Ltd.? Assume that the merger takes place by exchange of equity shares and the exchange ratio
is based on the current market price.
Solution
(i) Pre-Merger EPS
Sankranthi Ltd. = Rs. 50,00,000/10,00,000 = Rs. 5
Deepavali Ltd. = Rs. 18,00,000 / 6,00,000 = Rs. 3
(ii) Number of Shares Deepavali limiteds shareholders will get in Sankranthi Ltd. based on
market value per share = Rs. 28/ 42 X 6,00,000 = 4,00,000 shares
Post-Merger No. of shares of Sankranthi = 10,00,000 + 4,00,000 = 14,00,000 shares
Post-Merger Earnings per share = (Rs. 50,00,000 + 18,00,000) / 14,00,000 = Rs. 4.86

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 17: EPS Management (VTU, MBA, Jan-2010, 10 Marks)

Trupti Ltd is being absorbed by Dhara Ltd, on a share exchange basis. Relevant financial data
are as follows:
Particulars Dhara Ltd Trupti Ltd
PAT Rs. Lacs 56 21
No. of equity shares in lacs 10 8.40
EPS Rs./share 5.60 2.50
PER, no. of times 12.50 7.50
Determine premerger market value/share of each company and maximum exchange ratio
Dhara Ltd can offer without dilution of its EPS and MV/share.
Solution
Dhara Trupti
Pre-Merger Market Value per share 12.50 X 5.60 7.50 X 2.50
Pre-Merger Market Value per share = 70 = 18.75
Desired Exchange Ratio
Post-Merger PAT = 56 + 21 = 77 Lacs
Desired Post-Merger EPS = 5.6
Post-Merger No. of shares = ?
EPS = PAT/No. of shares
5.6 = 77/No. of Shares
Post-Merger No. of Shares = 77/5.6 = 13.75 Lacs
Existing Shares of Dhara = 10 Lacs
New shares to be issued to Kohinoor Shareholders = 13.75 10 = 3.75 Lacs
Existing Shares of Kohinoor = 8.40 Lacs
Maximum Exchange Ratio without diluting EPS and MV = 3.75 Lacs/8.40 Lacs = 0.45

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 18: EPS Management (VTU, MBA, Jan-2010, 10 Marks)

Cadburys Ltd is considering acquisition of Bourneville Ltd. Following data are available for
both:
Particulars Cadburys Ltd Bourneville Ltd
PAT Rs. 200000 60000
No. of equity shares 40000 10000
MV/share Rs. 15 12
EPS Rs./share 5
i) If merger goes through by way of exchange of equity shares when exchange ratio is
based on current market value of equity, what will be the new EPS for Cadburys Ltd?
ii) Bourneville Ltd wants to make sure that earnings available to its shareholders will not
be diluted due to merger. What should be the exchange ratio in this case?
Solution
Exchange Ratio = MV of Target Co/MV of Acquiring Co
= 12/15 = 0.8
Post-Merger No. of shares = 40000 + (0.8 X 10000) = 48000
Post-Merger Profits = 200000 + 60000 = 260000
Post-Merger EPS = 260000/48000 = 5.42
Pre-Merger EPS of Bourneville Shareholders = 60000/10000 = Rs.6
Post-Merger EPS = Post-Merger PAT / Post-Merger No. of shares
6 = 260000 / (40000 + shares issued to Bourneville shareholders)
Shares issued to Bourneville Ltd = (260000/6) 40000 = 3333
Exchange Ratio = 3333/10000 = 0.33

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 19: EPS Management (VTU, MBA, Jan-2010, 10 Marks)

Sunfeast Ltd is considering a merger with Biskfarm Ltd. Shares of Sunfeast are currently
traded at Rs. 25 each, has 2 lacs shares outstanding and a PAT of Rs. 4 lacs. Biskfarm has 1
lac shares outstanding, its current market value is Rs. 12.50 per share and PAT of Rs. 1 lac.
Merger will be effected through a stock swap. Biskfarm has agreed to a plan where Sunfeast
will offer current market value of Biskfarms shares.
i) What are the pre-merger EPS and PER of both companies?
ii) If Biskfarms PER is 8 times, what is its current market price? What is the exchange
ratio? What will be the post merger EPS of Sunfeast?
iii) What must be the exchange ratio for Sunfeast, so that its pre merger and post
merger EPS will be the same?
Solution
Sunfeast Ltd Biskfarm Ltd
Market Price Rs. 25 Rs.12.50
Outstanding No of shares 200000 100000
PAT Rs. 400000 100000

i) Pre-Merger EPS =400000/200000 =100000/100000

Pre-Merger EPS =Rs.2 =Re.1
Pre-Merger PER =25/2 = 12.5 =12.5/1 = 12.5
ii) PER = 8 times
Current Market Price = PER X EPS = 8 X 1 = Rs.8
Sunfeast will pay Biskfarm its current market value of shares, which would be Rs.8 X 100000
= 800000
No. of shares to be issued = Rs.800000/Rs. 25 = 32000
Exchange Ratio = 32000/100000 = 0.32
Post-Merger EPS = (400000+100000)/(200000 X (0.32 * 100000)) = 500000/232000 = 2.15
iii) Pre-Merger EPS of Sunfeast = Rs. 2
Post-Merger EPS = Post-Merger PAT / Post-Merger No. of shares
2 = (400000+100000)/post-merger no of share
Post-merger no of shares = 500000/2 = 250000
New shares to be issued to Biskfarm = 250000 existing shares of Sunfeast = 250000
200000 = 50000
Desired Exchange Ratio = 50000/100000 = 0.5

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 20: EPS Management (VTU, MBA, Jan-2010, 15 Marks)

Coke Ltd is considering purchase of Pepsi Ltd. Coke Ltd has 3 lac shares outstanding with a
market price of Rs. 30 per share whereas Pepsi Ltd has 2 lacs shares outstanding each selling
at Rs. 20 per share. EPS are Rs. 4 and Rs. 2.25 per share (Coke Ltd and Pepsi Ltd respectively).
Managements of both companies are discussing two proposals for exchanging shares as (i) in
proportion to relative EPS for these companies (ii) 0.5 Coke Ltd : 1 Pepsi Ltd (0.5:1).
You are required to compute:
(a) EPS, post-merger, both alternative
(b) Share impact on EPS for shareholders of two companies under both alternatives
Solution
Alternative 1: ER in EPS proportion
Exchange Ratio = EPS of Target Company / EPS of Acquiring Company
= 2.25/4 = 0.5625
Pre-Merger Profit of Coke Ltd = No. of Shares X EPS
= 300000 X Rs. 4 = Rs. 1200000
Pre-Merger Profit of Pepsi Ltd = 200000 X Rs. 2.25 = Rs. 450000
Post-Merger Profit = 1200000 + 450000 = Rs. 1650000
Post-Merger No. of Shares = 300000 + (200000 X 0.5625)
= 300000 + 112500 = 412500
Post-Merger EPS (Alt 1) = Rs.1650000/412500 = Rs.4
Impact on EPS:
Coke Ltd Pepsi Ltd
EPS before Merger 4 2.25/.5625 = 4
EPS after Merger 4 4
Impact (Alt 1) 0 0
Alternative 2: ER at 0.5:1
Exchange Ratio = 0.5
Post-Merger Profit = Rs. 1650000
Post-Merger No. of Shares = 300000 + (200000 X 0.5) = 300000 + 100000 = 400000
Post-Merger EPS (Alt 2) = Rs.1650000/400000 = Rs. 4125
Impact on EPS:
Coke Ltd Pepsi Ltd
EPS before Merger 4 2.25/.5 = 4.5
EPS after Merger 4.125 4.125
Impact (Alt 2) + 0.125 - 0.375
Increase in EPS Decrease in EPS

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 21: EPS Management

Britannia Ltd is contemplating the purchase of Parle. Britannia has 200000 shares
outstanding with Rs. 25 market value per share while Parle has 100000 shares selling at Rs.
18.75. The EPS are Rs. 3.125 for Britannia and Rs. 2.5 for Parle. Assuming that the two
managements have agreed that the shareholders of Parle will receive Britannias shares in
exchange for their shares:
(i) In proportion to the relative earnings per share of the two firms or
(ii) 0.9 share of Britannia for one share of Parle.
Find out the impact of merger on the EPS of merged firm. Also compute the EPS after merger
on the assumption that the anticipated growth rate in earnings is 8% for Britannia and 14% for
Parle.
Solution
Britannia Parle
Outstanding Shares 200000 100000
Market Value per share 25 18.75
EPS 3.125 2.5
Profit 3.125 X 200000 2.5 X 100000
= 625000 = 250000

Alternative 1 : Exchange Ratio based on EPS

Post-Merger Profit = 625000 + 250000 = 875000
Exchange Ratio = 2.5/3.125 = 0.8
Post-Merger No of shares = 200000 + (100000 X 0.8) = 200000 + 80000 = 280000
Post-Merger EPS = 875000/280000 = 3.125
Pre-Merger EPS of Britannia = 3.125
Impact of Merger on EPS (Alt 1)= 3.125 3.125 = 0 [No impact on EPS]

Post-Merger EPS when earnings grow:

Earnings growth of Britannia 8%
Post-Merger Earnings of Britannia = 625000 X 1.08 = 675000
Earnings growth of Parle 14%
Post-Merger Earnings of Parle = 250000 X 1.14 = 285000
Post-Merger Profit = 675000 + 285000 = 960000
Post-Merger No of shares = 280000 (as calculated above)
Post-Merger EPS (Alt 1) = 960000/280000 = 3.43

Alternative 2 : Exchange Ratio 0.9

KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Post-Merger Profit = 625000 + 250000 = 875000

Exchange Ratio = 0.9
Post-Merger No of shares = 200000 + (100000 X 0.9) = 200000 + 90000 = 290000
Post-Merger EPS = 875000/290000 = 3.017
Pre-Merger EPS of Britannia = 3.125
Impact of Merger on EPS (Alt 2) = 3.017 3.125 = -0.11 [EPS diluted by Re. 0.11]

Post-Merger EPS when earnings grow:

Earnings growth of Britannia 8%
Post-Merger Earnings of Britannia = 625000 X 1.08 = 675000
Earnings growth of Parle 14%
Post-Merger Earnings of Parle = 250000 X 1.14 = 285000
Post-Merger Profit = 675000 + 285000 = 960000
Post-Merger No of shares = 290000 (as calculated above)
Post-Merger EPS (Alt 2) = 960000/290000 = 3.31

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 22: EPS Management (CS, Final, Dec-1995)

Curry Ltd. Si considering takeover of Top Ramen Ltd and Foodles Ltd. The financial data for
the three companies are as follows:
Curry Top Ramen Foodles
Equity Share Capital of Rs. 10 each (Rs. Lacs) 450 180 90
Earnings (Rs. Lacs) 90 18 18
Market Price of each share (Rs.) 60 37 46
Calculate (i) P/E Ratio (ii) EPS of Curry Ltd, after the acquisition of Top Ramen and Foodles
separately. The exchange ratio would be based on the P/E Ratio. Will you recommend the
Merger of either/both of the companies? Justify your answer.
Solution
(i) Calculation of PER
Curry Top Ramen Foodles
Earnings 90 18 18
No. of shares 45 18 9
EPS 2 1 2
Market Price 60 37 46
P/E Ratio 60/2 = 30 37/1 = 37 46/2 = 23
(ii) Calculation of Post-Merger EPS
Takeover of Top Ramen Takeover of Foodles
Exchange Ratio 30/37 = 0.81 30/23 = 1.30
Post-Merger Earnings 90+18 = 108 90+18 = 108
Post-Merger Number of Shares 45 + (0.81 X 18) = 59.58 45 + (1.3 X 9) = 56.7
Post-Merger EPS 108/59.58 = 1.81 108/56.7 = 1.90
Neither of the Takeovers is recommended to Curry, as the post-merger EPS of either 1.81 or 1.9
is lower than Pre-Merger EPS of Curry, which is 2

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 23: EPS Management (CS, Final, Dec-2000)

Bread Co. is studying the possible acquisition of Bun Co. by way of a merger. The following
data are available in respect of the companies.
Bread Co. Bun Co.
Earnings after Tax Rs. 200000 60000
No. of Equity shares 40000 10000
Market Value per Share Rs. 15 12
(i) If the merger goes through exchange of equity shares and exchange ratio is based on
the current market price, what is new EPS for Bread Co?
(ii) Bun Co. 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?
Solution
Exchange Ratio = 12/15 = 0.8:1
Post-Merger No. of shares = 40000 + (0.8 X 10000) = 40000 + 8000 = 48000
Post-Merger PAT = 200000 + 60000 = 260000
Post-Merger EPS = 260000/48000 = Rs. 5.42
EPS = Profit after Tax / No. of shares
6 = 260000 / No. of shares
Solving for No. of shares, No. of Shares of Post-Merger Company = 43333
Existing shares of Bread Ltd = 40000
Additional Shares to be issued = 3333
Existing Shares of Bun Ltd = 10000
Shares to be offered at the ratio 3333/10000 = 0.33

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 24: EPS Management

More Ltd., is studying the possible acquisition of Easyday. Ltd., by way of merger. The following
data are available in respect of the companies:
Particulars More Ltd. Easyday Ltd.
Earnings after tax (Rs.) 80,00,000 24,00,000
No. of equity shares 16,00,000 4,00,000
Market value per share (Rs.) 200 160
(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 More Ltd.?
(ii) Easyday 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?
Solution
(i) Calculation of new EPS of More Ltd.
No. of shares to be issued to Easyday = 4,00,000 shares (Rs. 1.6/Rs. 2) = 3,20,000 shares
Post-Merger No of shares = 16,00,000 + 3,20,000 = 19,20,000
Post-Merger Profits = 80,00,000 + 24,00,000 = 1,04,00,000
Post-Merger EPS = Rs.1,04,00,000/19,20,000 = Rs. 5.42
(ii) Desired Exchange Ratio
Current EPS:
More Ltd. = Rs.80,00,000/16,00,000 = Rs. 5
Easyday Ltd. = Rs.24,00,000/4,00,000 = Rs. 6
Exchange ratio = 6/5 = 1.20
No. of new shares to be issued to Easyday = 4,00,000 1.20 = 4,80,000
Post-Merger No. of Shares = 16,00,000 + 4,80,000 = 20,80,000
Post-Merger EPS = Rs.1,04,00,000/20,80,000 = Rs. 5
Total earnings in M Co. Ltd. available to new shareholders of N Co. Ltd. = 4,80,000 Rs. 5 =
Rs. 24,00,000
Recommendation: The exchange ratio (6 for 5) based on market shares is beneficial to
shareholders of 'N' Co. Ltd.

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 25: EPS Management

Horlicks Ltd., is considering merger with Complan Ltd. Horlicks Ltd.s shares are currently
traded at Rs. 20. It has 2,50,000 shares outstanding and its earnings after taxes (EAT) amount
to Rs. 5,00,000. Complan Ltd., has 1,25,000 shares outstanding; its current market price is
Rs. 10 and its EAT are Rs. 1,25,000. The merger will be effected by means of a stock swap
(exchange). Complan Ltd., has agreed to a plan under which Horlicks Ltd., will offer the current
market value of Complan Ltd.s shares:
i) What is the pre-merger earnings per share (EPS) and P/E ratios of both the companies?
ii) If Complan Ltd.s P/E ratio is 6.4, what is its current market price? What is the exchange
ratio? What will Horlicks Ltd.s post-merger EPS be?
iii) What should be the exchange ratio, if Horlicks Ltd.s pre-merger and post-merger EPS are
to be the same?
Solution
(i) Pre-merger EPS and P/E ratios of Horlicks Ltd. and Complan Ltd.
Particulars Horlicks Ltd. Complan Ltd.
Earnings after taxes 5,00,000 1,25,000
Number of shares outstanding 2,50,000 1,25,000
Pre-Merger EPS 2 1
Market Price per share 20 10
P/E Ratio (times) 10 10
(ii) Current Market Price of Complan Ltd. if P/E ratio is 6.4 = Rs. 1 6.4 = Rs. 6.40
Exchange ratio = Rs.20/6.40 = 3.125
Post merger EPS = (Rs.5,00,000 + Rs.1,25,000)/[Rs.2,50,000 + (Rs.1,25,000/3.125)]
= Rs.6,25,000/Rs.2,90,000 = 2.16
(iii) Desired exchange ratio
Total number of shares in post-merged company
= Post -merger earnings / Pre -merger EPS of XYZ Ltd = Rs.6,25,000 / 2 = 3,12,500
Number of shares required to be issued = 3,12,500 2,50,000 = 62,500
Therefore, the exchange ratio is = 62,500/1,25,000 = 0.50

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 26: EPS Management

Gemini Industries Ltd. (GIL) is considering a takeover of Sunrich Industries Ltd. (SIL). The
particulars of two companies are given below:
Particulars RIL SIL
Earnings After Tax (EAT) Rs.20,00,000 Rs.10,00,000
Equity shares O/s 10,00,000 10,00,000
Earnings per share (EPS) 2 1
PE Ratio (Times) 10 5
Required:
(i) What is the market value of each Company before merger?
(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. If there are no synergic effects, what is the
market value of the Post-merger RIL? What is the new price per share? Are the shareholders of
RIL better or worse off than they were before the merger?
(iii) Due to synergic effects, the management of RIL estimates that the earnings will increase by
20%. What is the new post-merger EPS and Price per share? Will the shareholders be better off
or worse off than before the merger?
Solution
(i) Market value of Companies before Merger
RIL SIL
EPS 2 1
P/E Ratio 10 5
Market Price Per Share 20 5
Equity Shares 10,00,000 10,00,000
Pre-Merger Market Value =1000000 X 20 =1000000 X 5
= 2,00,00,000 = 50,00,000
(ii) Post Merger Effects on RIL
Post merger earnings (2 X 1000000) + (1 X 1000000) =30,00,000
Exchange Ratio (1:4) or 0.25
No. of equity shares o/s (10,00,000 + (0.25 X 1000000)) = 12,50,000
Post-Merger EPS 30,00,000/12,50,000 = 2.4
PER 10.00
Post-Merger Market Price per share 10 x 2.4 = 24
Post-Merger Market Value (12,50,000 x 24) = 3,00,00,000
Gains From Merger: Rs.
Post-Merger Market Value of the Firm 3,00,00,000
Less: Pre-Merger Market Value
KIRAN KUMAR, Asst. Professor, VVCE, Mysore
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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

RIL 2,00,00,000
SIL 50,00,000 2,50,00,000
Total gains from Merger 50,00,000
Apportionment of Gains between the Shareholders:
Particulars RIL SIL
Post Merger Market Value: Rs. Rs.
10,00,000 x 24 2,40,00,000 --
2,50,000 x 24 -- 60,00,000
Less:Pre-Merger Market Value 2,00,00,000 50,00,000
Gains from Merger: 40,00,000 10,00,000
Thus, the shareholders of both the companies (RIL + SIL) are better off than before
(iii) Post-Merger Earnings:
Increase in Earnings by 20%
New Earnings: Rs.30,00,000 x 20% = Rs.36,00,000
No. of equity shares outstanding: 12,50,000
Post-Merger EPS: Rs. 36,00,000/12,50,000 = Rs.2.88
PE Ratio = 10
Post-Merger Market Price Per Share = Rs.2.88 x 10 = Rs.28.80
So, Shareholders will be better-off than before the merger situation.

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 27: Market Value of Merged Firm (VTU, MBA, Jul-2011, 10 Marks)(Figures
Changed)
The following information is provided related to the acquiring Firm Regaalis Limited and the
target Firm Metropole Limited:
Regaalis Limited Metropole Limited
Earnings after tax (Rs.) 2,000 lakhs 400 lakhs
Number of shares outstanding 200 lakhs 100 lakhs
P/E ratio (times) 10 5
Required:
(i) What is the Swap Ratio based on current market prices?
(ii) What is the EPS of Regaalis Limited after acquisition?
(iii) What is the expected market price per share of Regaalis Limited after acquisition, assuming
P/E ratio of Regaalis Limited remains unchanged?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent companies after acquisition.
Solution
Regaalis Ltd. Metropole Ltd.
EPS Rs. 2,000 Lakhs/ 200 lakhs Rs. 400 lakhs / 100 lakhs
= Rs. 10 = Rs. 4
Market Price Rs. 10 X 10 = Rs. 100 Rs. 4 X 5 = Rs. 20
(i) The Swap ratio based on current market price = Rs. 20/Rs. 100 = 0.2
No. of shares to be issued = Rs. 100 lakh X 0.2 = Rs. 20 lakhs.
(ii) EPS after merger = (Rs.2,000 lakhs + Rs. 400 lakhs)/(200 lakhs + 20 lakhs) = Rs. 10.91
(iii) Expected market price after merger assuming P / E 10 times = Rs. 10.91 X 10 = Rs. 109.10
(iv) Market value of merged firm = Rs. 109.10 market price X 220 lakhs shares = 240.02 crores
(v) Gain from the merger
Post merger market value of the merged firm Rs. 240.02 crores
Less: Pre-merger market value
Regaalis Ltd. 200 Lakhs X Rs. 100 = 200 crores
Metropole Ltd. 100 Lakhs X Rs. 20 = 20 crores Rs. 220 crores
Gain from merger Rs. 20.02 crores
Appropriation of gains from the merger among shareholders:
Regaalis Ltd. Metropole Ltd.
Post merger value 218.20 crores 21.82 crores
Less: Pre-merger market value 200.00 crores 20.00 crores
Gain to Shareholders 18.20 crores 1.82 crores

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 28: Market Value of Merged Firm (VTU, MBA, Jul-2011, 10 Marks)
Pillsbury Ltd wants to acquire Ashirvad Ltd, by exchanging its 1.6 shares for every share of
Ashirvad Ltd. It anticipates to maintain the existing P/E Ratio subsequent to the merger also.
The relevant financial data are furnished below:
Particulars Pillsbury Ltd Ashirvad Ltd
Earnings After Tax (Rs.) 1500000 450000
Number of equity shares outstanding 300000 75000
Market Price per Share (Rs.) 35 40
i) What is the exchange ratio based on market price?
ii) What is pre-merger EPS and P/E ratio for each company?
iii) What is the P/E ratio used in acquiring Ashirvad Ltd?
iv) What will be EPS of Pillsbury Ltd after the acquisition?
v) What is the expected market price per share of the merged company?
Solution
i) Exchange Ratio based on MP =(1.6 X 35)/40 = 1.4
ii) Pre-Merger EPS and P/E Ratio
Pillsbury Ltd Ashirvad Ltd
Pre-Merger EPS 1500000/300000 = 5 450000/75000 = 6
P/E Ratio 35/5 = 7 40/6 = 6.67
iii) Implied P/E Ratio = Market price of shares offered/Current EPS
= (1.6 X 35) / 6 = 9.33
iv) EPS of Pillsbury after acquisition
Number of shares after merger = 300000 + (75000 X 1.6) = 420000
Total Profit of Merged Company = 1500000 + 450000 = 1950000
EPS post-merger = 1950000 / 420000 = 4.64
v) Post-Merger Market Price = P/E ratio X EPS = 7 X 4.64 = 32.48

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 29: Market Value of Merged Firm (VTU, MBA, Jul-2009, 7 Marks)
Sunpure Ltd is taking over Saffola Ltd. The shareholders of Saffola Ltd would receive 0.8 of
Sunpure Ltd for each share held by them. The relevant data for two companies are as below:
Sunpure Ltd Saffola Ltd
Net Sales (Rs. In crores) 335 118
Profit after Tax (Rs. In Crores) 58 12
No. of shares (Crore) 12 3
EPS (Rs.) 4.83 4
Market Value per Share (Rs.) 30 20
Price Earnings Ratio 6.21 5
For the combined company (after merger) you are required to calculate (i) EPS (ii) P/E Ratio (iii)
market value per share (iv) number of shares (v) Total Market Capitalization
Solution
i) Post-Merger EPS
Post-Merger Profit = 58 + 12 = Rs. 70 Crores
Post-Merger No. of shares = 12 + (0.8 * 3) = 12 + 2.4 = 14.4 Crore
Post-Merger EPS = 70 / 14.4 = Rs. 4.86
ii) Post-Merger or Implied P/E Ratio
Post-Merger EPS = 70 / 14.4 = Rs. 4.86
Implied P/E Ratio = 30 X 0.8 / 4 = 6
iii) Post-Merger Market Value per Share
P = 6 X 4.86 = Rs. 24
iv) Post-Merger number of shares
Post-Merger No. of shares = 12 + (0.8 * 3) = 12 + 2.4 = 14.4 Crore
v) Post-Merger Total Market Capitalization
TMC = Rs. 14.4 Crores X Rs. 24 = Rs. 345.6 Crores

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 30: Market Value of Merged Firm (VTU, MBA, Jul-2009, 10 Marks)
MTR Company is acquiring Ruchi Company. MTR will pay 0.5 of its shares to the shareholders
of Ruchi for each share held by them. The data for two companies are as below:
Particulars MTR Ruchi
Profit after Tax (Rs. In lacs) 150 30
No. of shares (in lacs) 25 8
EPS (Rs.) 6 3.75
Market Price per Share (Rs.) 78 33.75
P/E Ratio 13 9
Calculate the earnings per share of the surviving firm after merger. If the P/E ratio falls to 12
after the merger, what is the premium received by the shareholders of Ruchi (using the
surviving firms new price)? Is the merger beneficial for MTR shareholders?
Solution
Post-Merger EPS of MTR
Post-Merger Profit = 150 + 30 = Rs. 180 Lacs
Post-Merger No. of shares = 25 + (0.5 X 8) = 25 + 4 = 29 Lacs
Post-Merger EPS = 180 / 29 = Rs. 6.21
If P/E Ratio falls to 12 after Merger,
Post-Merger market price of MTR shares = 12 X 6.21 = Rs. 74.48
Gain Apportionment among shareholders
Post-Merger Value Pre-Merger Value Difference
MTR Ltd 25 X 74.48 = 1862 Lacs 25 X Rs. 78 = 1950 Lacs Minus 88 Lacs
Ruchi Ltd 4 X 74.48 = 297.92 Lacs 8 X 33.75 = 270 Lacs 27.92 Lacs
Therefore, if P/E falls to 12 after Merger, Ruchi Ltds shareholders receive a premium of Rs.
27.92 lacs (Or Rs.3.49 per share of Ruchi Ltd they held before merger)
If P/E falls to 12 after Merger, Merger is not beneficial to MTR Ltd, as the gain to shareholders
is negative 88 Lacs.

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 31: Market Value of Merged Firm (VTU, MBA, Jan-2010, 12 Marks)
Everest Ltd and Maharaja Ltd provide the following financial data:
Everest Ltd Maharaja Ltd
EAT (Rs. In lakhs) 25 3
Net Sales (Rs. In lakhs) 400 60
Number of shares 800000 300000
EPS Rs. 3 1
DPS Rs. 2 1
Market Capitalization (Rs. Lakh) 500 60
Everest Ltd planned to acquire Maharaja Ltd.
Required:
i) Calculate pre-merger market value per share for both the companies
ii) Calculate post-merger EPS, market value per share and price earnings ratio if
shareholders of Maharaja Ltd are offered a share of Rs. 60 for Rs. 40 in a share
exchange for merger
Solution
i) Pre-Merger Market Price
Everest Maharaja
Market Capitalization 500 60
Number of Shares 8 3
Market Price 500/8 = Rs. 62.5 60/3 = Rs. 20
ii) Calculation of Post-Merger EPS, MP, P/E
Exchange Ratio = 3:2
Post-Merger Profit = 25 +3 = 28 Lacs
Post-Merger Number of shares = 8 + (3 X 1.5) = 8 + 4.5 = 12.5 Lacs
Post-Merger EPS = 28 / 12.5 = Rs. 2.24
Post-Merger Market Price = 2.24 X 20.83 = 46.66
Post-Merger P/E = 46.66/2.24 = 20.83

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 32: Market Value of Merged Firm (VTU, MBA, Dec-2011, 10 Marks)
The following data concerns Prestige Ltd and Pigeon Ltd:
Prestige Ltd Pigeon Ltd
Earnings after taxes Rs. 160000 Rs. 40000
Equity shares outstanding 16000 5000
Market Price per share Rs. 75 Rs. 50
Prestige Ltd acquires Pigeon Ltd by exchanging one share for every two shares of Pigeon Ltd.
Assume that Prestige Ltd expects to have same earnings and P/E ratios after the merger as
before (no synergy). Show extent of gain accruing to the shareholders of two companies as a
result of merger. Apportion the gain among shareholders and comment.
Solution
Prestige Pigeon
Pre-Merger EPS 160000/16000 = 10 40000/5000 = 8
Pre-Merger PER 75/10 = 7.5 50/8 = 6.25
Pre-Merger Market Value of Firm 75 X 16000 = 1200000 50 X 5000 = 250000
Post-Merger EAT 160000+40000 = 200000
Exchange Ratio 1/2 = 0.5
Post-Merger No. of Shares 16000 + (0.5 X 5000) = 16000 + 2500 = 18500
Post-Merger EPS 200000/18500 = 10.81
Post-Merger P/E Ratio 7.5
Post-Merger Market Price per Share 7.5 X 10.81 = 81.075
Total Value (18500 x 81.075) = 1499887
Gains From Merger:
Post-Merger Market Value of the Firm 1499887
Less: Pre-Merger Market Value
Prestige 1200000
Pigeon 250000 1450000
Total gains from Merger 49887
Apportionment of Gains between the Shareholders:
Particulars Prestige Pigeon
Post Merger Market Value:
16000 x 81.075 1297200 --
2500 x 81.075 -- 202687
Less:Pre-Merger Market Value 1200000 250000
Gains from Merger: 97200 - 47313
Thus, the shareholders of Prestige Ltd (Acquiring Co) are better off by this Merger, as they gain
Rs. 97200 from this Merger. Whereas, shareholders of Pigeon Ltd (Target Co) are worse off from
this Merger, as they are losing Rs. 47313 from their market value because of this Merger.

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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Mergers, Acquisition and Corporate Restructuring Problems and Solutions on Exchange Ratio

Exercise 33: Market Value of Merged Firm

Mango Ltd. wants to acquire Apple Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every
one share of Apple Ltd.). Following information is provided:
Mango Ltd. Apple Ltd.
Profit after tax Rs.18,00,000 Rs.3,60,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS Rs.3 Rs.2
PE Ratio 10 times 7 times
Market price per share Rs.30 Rs.14
Required:
(i) The number of equity shares to be issued by Mango Ltd. for acquisition of Apple Ltd.
(ii) What is the EPS of Mango Ltd. after the acquisition?
(iii) Determine the equivalent earnings per share of Apple Ltd.
(iv) What is the expected market price per share of Mango Ltd. after the acquisition, assuming
its PE multiple remains unchanged?
(v) Determine the market value of the merged firm.
Solution
(i) The number of shares to be issued by Mango Ltd.:
The Exchange ratio is 0.5
So, new Shares = 1,80,000 x .5 = 90,000 shares.
(ii) EPS of Mango Ltd. After acquisition:
Total Earnings = (18,00,000+3,60,000) = Rs.21,60,000
No. of Shares = (6,00,000 + 90,000) = 6,90,000
Post-Merger EPS = (21,60,000)/6,90,000) = Rs.3.13
(iii) Equivalent EPS of Apple Ltd.:
No. of new Shares for every one share 0.5
EPS Rs.3.13
Equivalent EPS = (3.13 x .5) = Rs.1.57
(iv) New Market Price of Mango Ltd. (P/E Remaining unchanged):
Present P/E Ratio of Mango Ltd. 10 times
Expected EPS after merger Rs.3.13
Post-Merger Market Price = (3.13 x 10) = Rs.31.30
(v) Market Value of merged firm:
Total number of Shares 6,90,000
Expected Market Price Rs.31.30
Total value = (6,90,000 x 31.30) = Rs.2,15,97,000

KIRAN KUMAR, Asst. Professor, VVCE, Mysore

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