1 QUESTION NO. 1A (Study Material)(Exam Question) Following data is available to you. Expected Earning Per Share Rs. 10 Rs.3 Expected Dividend Per Share Rs. 6 Rs.1.60 Number of Shares 20,00,000 12,00,000 Current Market Price Rs. 180 Rs. 40 As Finance Director of you are thinking of merging Your estimate indicate growth of earnings and dividend of is to the tune of six percent per year. However, under the new Management the growth rate is likely to go up to 8 percent per year. Calculate : (i) The net cost of merger of if Rs. 50 is paid for each share of (ii) The net cost of merger if one share of for every three shares of is the agreed exchange ratio. (iii) Compute synergy gain from merger. (iv) Calculate Net Cost Of Merger in case of (i) and (ii) if growth rate continues to be 6%.Also calculate MPS After Merger in this case when merger is financed by Share Exchange. QUESTION NO. 2 wants to take over and the details of both are as follows: Fixed Assets Rs. 1,22,000 Rs. 35,000 Current Assets 51,000 26,000 Total 1,73,000 61,000 Preference Share Capital Rs. 20,000 Equity Share Capital of Rs. 10 each 1,00,000 Rs. 50,000 Securities Premium 2,000 Profit and Loss A/c 38,000 4,000 10% Debentures 15,000 5,000 Total 1,73,000 61,000 Profit After Tax and Preference Dividend Rs.24,000 Rs. 15,000 Market Price 24 27 What should be share exchange ratio to be offered to the shareholders of based on (i) Net Assets Value, (ii) EPS, and (iii) Market Price. Which should be preferred from the points of view of? QUESTION NO.3A(Exam Question)(Study Material)(8 Marks) A Co. Ltd. is studying the possible acquisition of B Co. Ltd. by way of merger. The following data are available in respect of the companies: Particulars A Co. Ltd. B Co. 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 A Co. Ltd.? (ii) B 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? Or In other words Calculate SER taking EPS before Merger and Equivalent EPS after merger for? QUESTION NO.4A(Exam Question)(10 Marks) The following information is provided related to the acquiring Firm A Limited and the target Firm B Limited: Firm A Limited Firm B Limited Earning after tax (Rs.) 2,000 lakhs 400 lakhs Number of shares outstanding 200 lakhs 100 lakhs
2 P/E ratio (times) 10 5 Required: (i) What is the Swap Ratio based on current market prices? (ii) What is the EPS of A Limited after acquisition? (iii) What is the expected market price per share of A Limited after acquisition, assuming P/E ratio of A Limited remains unchanged? It means P/E ratio After Merger is given (iv) Determine the market value of the merged firm (v) Calculate gain/ loss for shareholders of the two independent companies after acquisition. QUESTION NO.5(Exam Question)(10 Marks) wants to acquire and has offered a swap ratio of 1:2 (0.5 shares for everyone share of ). Following information is provided : Profit After Tax Rs.18,00,000 Rs.3,60,000 No. Of Equity Shares 6,00,000 1,80,000 EPS Rs.3 Rs.2 P/E Ratio 10 times 7 times Market Price Per Share Rs.30 Rs.14 Required : (i) The number of equity shares to be issued by for merger of (ii) What is the EPS of after the merger? (iii) Determine the equivalent earnings per share of (iv) What is the expected market price per share of after the merger,assuming its PE multiple remains unchanged?in other words It means P/E ratio After Merger is given (v) Determine the market value of the merged firm. QUESTION NO.8A(Exam Question) The chief executive of a company thinks that shareholders always look for the earnings per share. Therefore, he considers maximization of the earnings per share as his company s objective. His company s earning after tax is Rs. 80 lakh and EPS is Rs. 4. The current market price is Rs. 42. He wants to buy another firm which has a earning of Rs. 15.75 lakhs, EPS of Rs. 10.50 and the market price per share of Rs. 85. (a) What is the maximum exchange ratio which the chief executive should offer so that he could keep EPS at the current level? (b) 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? In other words how much A ltd should pay to B Ltd so that EPS Before & After Merger is same.assume Tax Rate to be 52%. QUESTION NO.10(Exam Question)(8 Marks ) wanted to acquire The shares issued by the two companies are 10,00,000 and 5,00,000 respectively: (i) Calculate the increase in the total value of resulting from the merger on the basis of the following conditions: Current Expected Growth Rate of 7% Expected Growth Rate under control of 8% Current Market Price Per Share of Rs.100. Current Market Price Per Share of Rs.20. Expected Dividend Price Per Share of Rs.0.60. (ii) On the basis of aforesaid conditions calculate the gain or loss to shareholders of both the companies, If were to offer one of its share for every four shares of (iii) Calculate the gain to the shareholders of both the companies, if pays Rs.22 for each share of assuming the P/E Ratio of does not change after the merger. EPS of is Rs.8 and that of B is Rs.2.50. It is assumed that A Ltd. invests its cash to earn 10%.Hence if Cash is paid by,earning will be reduced to the extent of Opportunity Cost Of Interest Loss. QUESTION NO.11C is investigating the merger of Balance Sheet of is given below: 10% Cumulative Preference Capital 100 Ordinary Share Capital (30 crore shares at Rs. 10 per share) 300
3 Reserves and Surplus 150 14% Debentures 80 Current Liabilities 100 Total 730 Net Fixed Assets 275 Investments 50 Current Assets Stock 190 Book Debts 150 Cash and Bank Balance 65 Total 730 proposed to offer the following to : (a) 10% convertible preference shares of Rs. 100 crore in ALtd. for paying 10% cumulative preference capital of ; (b) 12% convertible debentures of Rs. 84 crore in to redeem 14% debentures of ; (c) One ordinary share of for every three shares held by s shareholders, the market price per share being Rs. 42 for s shares and Rs. 20 for s shares. It would pay entire current liabilities. After acquisition, is expected to dispose off B Ltd s stock (inventory) for Rs. 150 crore, book debts for Rs. 102 crore and investments for Rs. 55 crore. (i) What is the Cost Of Acquisition to A Ltd? (ii) If A Ltd s required rate of return is 20% how much should be the annual after-tax cash flows from B Ltd s acquisition to justify merger assuming a time horizon of eight years and a zero salvage value? (iii) Would your answer change if there is a salvage value of Rs. 30 crore after 8 years? QUESTION NO.15(Exam Question) (8 Marks )The following information is relating to Fortune India Ltd. having two division, 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. 1.4.2005. Details of Fortune India Ltd. as on 31.3.2005 and of Fortune Pharma Ltd. as on 1.4.2005 are given below : Particulars Fortune Pharma Ltd. Fortune India Ltd. Outside Liabilities Secured Loans 400 lakh 3,000 lakh Unsecured Loans 2,400 lakh 800 lakh Current Liabilities & Provisions 1,300 lakh 21,200 lakh Total Liability 4,100 lakhs 25,000 lakhs Assets Fixed Assets 7,740 lakh 20,400 lakh Investments 7,600 lakh 12,300 lakh Current Assets 8,800 lakh 30,200 lakh Loans & Advances 900 lakh 7,300 lakh Deferred Tax Asset 60 lakh - Misc. Expenses Outstanding - (200) lakh Asset 25,100 70,,000 NET WORTH OR SHAREHOLDER'S WORTH 21,000 45,000 For that purpose following points are to be considered 1. Transfer of Liabilities & Assets at Book value. 2. Estimated Profit for the year 2005-06 is Rs. 11,400 Lakh for Fortune India Ltd. & Rs.1,470 lakhs for Fortune Pharma Ltd. 3. Estimated Market Price of Fortune Pharma Ltd. is Rs. 24.50 per share. 4. Average P/E Ratio of FMCG sector is 42 & Pharma sector is 25, which is to be expected for both the companies. Calculate :
4 1. How many new no. of shares to be issued to new Company created on accout of Demerger.What is the required Exchange Ratio? 2. Expected Market price of Fortune(FMCG Division) India Ltd. After Demerger 3. Book Value per share of both the Companies immediately after Demerger. QUESTION NO.16(RTP) The N Ltd. has 35,000 shares of equity stock outstanding with a book value of Rs.20 per share. It owes debt Rs.15,00,000 at an interest rate of 12%. Selected financial results are as follows. Income and Cash Flow Capital EBIT Rs. 80,000 Debt Rs.1,500,000 Interest 1,80,000 Equity 7,00,000 EBT (Rs.1,00,000) Rs.2,200,000 Tax 0 EAT (Rs.1,00,000) Depreciation Rs. 50,000 Principal repayment (Rs. 75,000) Cash Flow (Rs.1,25,000) Restructure the financial line items assuming a composition in which Debt agree to convert two thirds of their debt into equity at book value. Assume N Ltd. will pay tax at a rate of 15% on income after the restructuring, and that principal repayments are reduced proportionately with debt. (a) Present Revised Income & Cash Flow Statement. (b)who will control the company and by how big a margin after the restructuring? QUESTION NO.18(Exam Question)(14 Marks) has recently approached the shareholders of which is engaged in the same line of business as that of with a bid of 4 new shares in for every 5 shares or a cash alternative of Rs.360 per share. Pre bid information for the year ended 31.3.2006 are as follows: A Ltd in lakhs in lakhs Equity Share Capital 60 170 Number of Shares 2.4 1.7 Pre-tax profit 125 110 P/E Ratio 11 7 Estimated post tax cost of Equity Capital per Annum12% 10% Both and pay income tax at 30%. Current earnings growth forecast is 4% for the foreseeable future of both the companies. Assuming 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. s directors might expect their own pre bid P/E ratio to be applied to combined earnings..it means that P/E Ratio After Merger will be same as that of Also explain whether Cash or Share to Share Offer is beneficial to B Ltd Also 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. In other words take Earning as Dividend Paid. QUESTION NO.19(Exam Question)(8 Marks) Trupti Co. Ltd promoted by a Multinational group INTERNATIONAL INC is listed on stock exchange holding 84% i.e. 63 lakhs shares. Profit after Tax is Rs.4.80 crores. Free Float Market Capitalization is Rs.19.20 crores.as per the SEBI guidelines promoters have to restrict their holding to 75% to avoid delisting from the stock exchange. Board of Directors has decided not to delist the share but to comply with the SEBI guidelines by issuing Bonus shares to minority shareholders while maintaining the same P/E ratio. Calculate : (i) P/E Ratio (ii) Bonus Ratio (iii) Market price of share before and after the issue of bonus shares (iv) Free Float Market capitalization of the company after the bonus shares QUESTION NO.20(Exam Question)(11 Marks)Bank B was established in 2005 and doing banking in India. The bank
5 is facing DO OR DIE situation. There are problems of Gross NPA (Non Performing Assets) at 40% & CAR or CRAR (Capital Adequacy Ratio or 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 @Rs. 8 per share.rbi Audit suggested that bank has either to liquidate or to merge with other bank.bank A is professionally managed bank with low gross NPA of 5%.lt has Net NPA as 0% and CAR at 16%. Its share is quoted in the market @ Rs.128 per share. The board of directors of bank A has submitted a proposal to RBI for take over of bank B on the basis of share exchange ratio. The Balance Sheet details of both the banks are as follows: Bank B Bank A Amt. In Rs.Ins Paid up share capital(face Value Rs.10) 140 500 Reserves & Surplus 70 5,500 Deposits 4,000 40,000 Other liabilities 890 2 500 Total Liabilities 5,100 48,500 Cash in hand & with RBI 400 2,500 Balance with other banks - 2,000 Investments 1,100 15,000 Advances 3,500 27,000 Other Assets 100 2 000 Total Assets 5,100 48,500 It was decided to issue shares at Book Value of Bank A to the shareholders of Bank B. All assets and liabilities are to be taken over at Book Value. For the swap ratio, weights assigned to different parameters are as follows: Gross NPA 30% CAR 20% Market price 40% Book value 10% (a) What is the swap ratio based on above weights? (b) How many shares are to be issued? (c) Prepare Balance Sheet after merger. (d) Calculate CAR & Gross NPA % of Bank A after merger. QUESTION NO.21(Exam Question)(16 Marks) A Ltd wants to acquire Important information about the two companies as per their latest financial statements is given below: A Ltd Rs.10 equity shares outstanding 12 Lakhs 6 Lakhs Debt :10%debentures Rs. 580 lakhs 12.5% Institutional Loan Rs. - 240 Lakhs EBIDT* Rs Lakhs 400.86 115.71 Market price/share (Rs.) 220 110 * Earning Before Interest, Depreciation and tax. A Ltd is planning to offer a price for, business as a whole which will be 7 times EBIDT reduced by the outstanding debt, to be discharged by own shares at market price. is planning to receive Net Consideration based on its market value. [or is planning to seek one share in for every 2 shares in based on the market price.] Tax rate for the two companies may be assumed as 30%. Calculate the following under both alternatives- A Ltd offer and s plan: (i)net consideration payable. (ii)no. of shares to be issued by A Ltd (iii)eps of A Ltd after acquisition (iv)expected market price per share of A Ltd after acquisition.assume PE Ratio of A LtdAfter Merger is same. (v)state briefly the advantages to A Ltd from the acquisition. Calculations ( except EPS) may be rounded off to two decimal places in Lakhs
6 QUESTION NO.22(Exam Question)(4 + 2 = 6 Marks)The equity shares of XYZ Ltd. are currently being traded at Rs. 24 per share in the market. XYZ Ltd. has total 10,00,000 equity shares outstanding in number; and promoters 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 Rs. 80,00,000. Further PQR feels that management of XYZ Ltd. has been over paid. With better motivation, lower salaries and fewer perks for the top management, will lead to savings of Rs. 4,00,000 p.a. Top management with their families are promoters of XYZ Ltd. Present value of these savings would add Rs. 30,00,000 in value to the acquisition. Following additional information is available regarding PQR Ltd.: Earnings per share : Rs. 4 Total number of equity shares outstanding : 15,00,000 Market price of equity share : Rs. 40 Required: (i)what is the maximum price per equity share which PQR Ltd. can offer to pay for XYZ Ltd.? (ii)what is the minimum price per equity share at which the management of XYZ Ltd. will be willing to offer their controlling interest? (iii)what is the negotiable range? QUESTION NO.27 (Exam Question)The following information relating to the acquiring Company and the target Company are available. Both the Companies are promoted by Multinational Company, Trident Ltd. The promoter's holding is 50% and 60% respectively in and : Share Capital (Rs.) 200 lakh 100 lakh Free Reserves and Surplus (Rs.) 800 lakh 500 lakh Paid up Value per share (Rs.) 100 10 Free Float Market Capitalisation (Rs.) 400 lakh 128 lakh P/E Ratio (times) 10 4 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 :Book Value : 25% ;EPS (Earning per share) : 50% ;Market Price : 25% (a)what is the swap ratio based on above weights? (b)what is the Book Value, EPS and expected Market price of after acquisition of (assuming P.E. ratio of A Ltd. remains unchanged and all assets and liabilities of are taken over at book value). (c)calculate : (i) Promoter's revised holding in the (ii) Free float market capitalization. (iii) Also calculate No. of Shares, Earning per Share (EPS) and Book Value (B.V.), if after acquisition of, decided to: (1) Issue Bonus shares in the ratio of 1: 2; and (2) Split the stock (share) as Rs.5 each fully paid.