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Questions on Mergers & Acquisition 1. Gamma Fertilizer Company is taking over Theta Petrochemical Company.

The shareholders of Theta would receive 0.8 shares of Gamma for each share held by them. The merger is not expected to yield in economies of scale and operating synergy. The relevant data for the two companies are as follows:

Gamma Net sales( Rs in crore) profit after tax (Rs in crore) Number of share (crore) Earning per share(Rs) Market value per share Price-earning ratio 335 58 12 4.83 30 6.21

Theta 118 12 3 4.00 20 5.00

For the combined company (after merger) you are required to calculate a. b. c. d. e. EPS P/E Ratio Market value per share Number of shares Total market capitalization.

2. ABC is considering merger with XYZ Ltd. There are no gains from merging. Complete the following table if ABC wishes an EPS of Rs 2.80 after the merger. ABC ltd 0.1 million 50,000 Rs 20 2 10 1000000 XYZ Ltd 0.25 million 1,00,000 Rs 12.5 2.5 5 1250000 Merged entity ? ? ? 2.80 ? ?

Earnings after tax Outstanding shares MPS EPS(Rs) P/E Total market value 1

Complete the above table Calculate the exchange ratio What is the cost of merger to ABC Ltd? Dr. Gitika Mayank, Asst Professor, Finance

3. Small company is being acquired by Large Company on a share exchange basis. Their selected data are as follows

Large Profit after tax (Rs in lakh) Number of shares (Rs) Earning per share (Rs) Price-earning ratio 56 10 5.6 12.5

Small 21 8.4 2.5 7.5

Determine a. pre-merger market value per share b. The maximum exchange ratio large company should offer without dilution of i. EPS ii. Market value per share. 4. The chief executive of a company thinks that shareholders always look for the earning per share. Therefore, he considers maximization of the earnings per share as his companys objective. His companys net profit is Rs 80 lakh and EPS is Rs 4. The current market price is Rs 42. He wants to buy another firm which has current income of Rs 15.75 lakh, EPS of Rs 10.50 and the market price per share of Rs 85.

What is the maximum exchange ratio which the chief executive should offer so that he could keep the EPS at the current level? If the chief executive borrows funds at 15% rate of interest and buys out another company by paying cash, how much should he offer to maintain his EPS? Assume a tax rate of 50%. 5. X Ltd is considering the proposal to acquire Y Ltd and their financial information is given below

Particulars Number of equity shares Market price per share (Rs) Market capitalization

X Ltd 10,00,000 30 3,00,00,000

Y Ltd 6,00,000 18 1,08,00,000

Dr. Gitika Mayank, Asst Professor, Finance

X Ltd intend to pay Rs 1,40,000 in cash for Y Ltds market price reflects only its value as a separate entity. Calculate the cost of merger: (i) when the merger is financed by cash (ii) When the merger is financed by stock 6. A Ltd is considering the acquisition of B Ltd with stock. Relevant financial information is given below A Ltd B Ltd Present earnings Rs 75 lakh Rs 40 lakh Equity (No of shares) 40,00,000 32,00,000 EPS (Rs) 1.875 1.25 P/E Ratio 10 6 Market price Rs 18.75 Rs 7.5 Answer the following questions, treating each condition stated below as separately: a. What is the ratio of exchange? b. What is the earnings per share for the surviving company immediately following the merger? c. How many new shares would be issued? i. If the exchange takes place as per market prices? ii. If A Ltd plans to offer a premium of 22% over the market price of B ltd? iii. If exchange takes place as per EPS? iv. If exchange takes place as per P/E?

7. A company manufacturing needle roller bearings is financed by debt and equity to the extent of 3:7 with the total debt of Rs 10.82 million. The companys debt is valued at 8%. The beta of the companys equity is known to be 1.4. The company generates a free cash flow of Rs 2 million with the known growth projection of 5% in perpetuity. If it is known that the market risk premium is 6% and risk free rate is 5%. What is the value of each equity share for the 1 million shareholders of the company? Assume that the company is in 40% tax bracket. 8. Ashoka Builders Ltd has an issued and paid up capital of 5, 00,000 shares of Rs 10 each. The company declared a dividend of Rs 12.50 during the last few years and expects to maintain the same level of dividend in future. The dividend yield of the company is 18%. Calculate the value of business.

9.

Kavery industries Ltd is expected to generate future profit of Rs 54, 00,000. What is the value of business if investment of this type is expected to give an annual return of 18%?

Dr. Gitika Mayank, Asst Professor, Finance

10. Apex Ltd is evaluating an investment proposal to manufacture trucks for Horizon Ltd. the project will require an initial investment of Rs 10 lakh in plant and equipment. This initial investment will be depreciated straight line to a salvage value of Rs 2 lakh at the end of 8 years. The project will generate a revenue of Rs 3 lakh and will incur operating expense of Rs 1 lakh in the first year. These revenue and expenses are expected to grow at around 5% a year over the remaining 7 years of the project. The marginal tax rate for the company is 36%. Estimate free cash flow to the firm. Assume cost of capital of 10% and also find out the NPV. 11. Sunrise India Ltd is a leading retail firm. It has posted extraordinary growth both in revenues and profits and has given a lot of return to its shareholders. Analysts assume that the EPS will grow at the rate of 35% a year for the next five years. The rate of return on the market is 12.5%. The market premium is expected to be at 5.5%. The following additional information of the firm is also available: Current earnings/dividend: EPS = Rs 10.5, DPS = Rs1.6 b. Input for high growth period Length of high growth period = 5 years Expected growth rate = 35% Beta during high growth period = 1.5 Risk free rate of return =7% Dividend payout ratio = 12% c. Input for transition period Length of high growth period = 5 year Expected growth rate = decline from 35% in year 5 to 5% in 10th year in linear increment d. Input for stable growth period Length for high growth period-forever after 10 years Expected growth rate = 5% Beta during stable growth period = 1.0 Dividend payout ratio = 50%

Dr. Gitika Mayank, Asst Professor, Finance

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