Chapter 9

MERGERS, ACQUISITIONS &

CORPORATE RESTRUCTURING

LEARNING OUTCOMES

After going through the chapter student shall be able to understand

❑ Conceptual Framework
❑ Rationale
❑ Forms
❑ Financial Framework
❑ Takeover Defensive Tactics
❑ Reverse Merger
❑ Divestiture
❑ Financial Restructuring
❑ Ownership Restructuring
❑ Unlocking the value through Mergers & Acquisitions and Business Restructuring
❑ Mergers and Acquisitions Failures
❑ Cross Border Mergers
❑ Special Purpose Acquisition Companies (SPACs)

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 9.2 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT

POST MERGER EPS, MPS AND LOSS / GAIN

Question No. 1A [SM-2023] [SM-OLD] [RTP-Nov-2021] [Nov-2014-10M] [Nov-2002-10marks]
Cauliflower Limited is contemplating acquisition of Cabbage Limited. Cauliflower Limited has 5 lakh shares
having market value of 40 per share while Cabbage Limited has 3 lakh shares having market value of 25
per share. The EPS for Cabbage Limited and Cauliflower Limited are 3 per share and 5 per share
respectively. The managements of both the companies are discussing two alternatives for exchange of shares
as follows:
(i) In proportion to relative earnings per share of the two companies.
(ii) 1 share of Cauliflower Limited for two shares of Cabbage Limited.
Required:
(i) Calculate the EPS after merger under both the alternatives.
(ii) Show the impact on EPS for the shareholders of the two companies under both the alternatives.
Ans: (i) Alt-I: Post merger EPS = 5.00; No impact on EPS for shareholder of both company; Alt-II: Post merger EPS = 5.23;
(ii) Increase in EPS of Cauli ltd = 0.23 Per share; Decrease in EPS of Cabbage Ltd = 0.385

Question No. 1B [SM-2023] [Nov-2003-8M]

M Co. Ltd., is studying the possible acquisition of N Co. Ltd., by way of merger. The following data are
available in respect of the companies:
Particulars M Co. Ltd. N Co. Ltd.
Earnings after tax () 80,00,000 24,00,000
No. of equity shares 16,00,000 4,00,000
Market value per share () 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 M Co. Ltd.?
(ii) N 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?
[ICAN-Dec-2016/June-2012-10M]
Ans: (i) New EPS = 5.42; (ii) Exchange ratio = 1.20

Question No. 1C [SM-2023] [Nov-2019-8M] [SM-2016] [MTP-May-2014] [As May-2012-8M] [RTP-

June-2009] [RTP-Nov-2008] [May-2003-10M]
A Ltd., a listed company, is considering merger of B Ltd. which is also a listed company, with itself by means
of a stock swap (exchange). B Ltd. has agreed to a plan under which A Ltd. will offer the current market value
of B Ltd.'s shares. Additional Information:
Particulars A Ltd. B Ltd.
Earnings after tax () 10,00,000 2,50,000
Number of shares outstanding 4,00,000 2,00,000
Current market price () per share 50 20
On the basis of above information, you are required to calculate the following:
(i) What is the pre-merger Earnings per Share (EPS) and P/E ratio of both the companies?
(ii) If B Ltd.'s P/E is 10, what is its current market price per share?
What is the exchange ratio? What will A Ltd.'s post-merger EPS be?
(iii) What must the exchange ratio be for A Ltd.'s Pre-merger and Post-merger EPS to be the same?
Ans: (i) Pre-merger EPS= 2.50; 1.25 P/E ratio = 20;16
(ii) Current MPS =  12.50; Exchange ratio = 1:4; Post merger EPS = 2.78; (iii) Ratio = 1:2

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 MERGER & ACQUISITION 9.3
Question No. 1D [SM-2023] [SM-OLD] [RTP-June-2009]
Firm A is studying the possible acquisition of Firm B by way of merger. The following data are available:
Firm After-tax earnings No of equity shares Market Price Per share
A  10,00,000 2,00,000  75
B  3,00,000 50,000  60
(i) If the merger goes through by exchange of equity shares and the exchange ratio is set according to the current
market prices, what is the new earnings per share for Firm A.
(ii) Firm B wants to be sure that its earnings per share is not diminished by the merger. What exchange ratio is
relevant to achieve the objective?
Ans: Post merger EPS = 5.42 Per Share; Exchange ratio = 1.2

Question No. 1E [SM-2023] [MTP-May-2015-6M]

B Ltd. is a highly successful company and wishes to expand by acquiring other firms. Its expected high growth in
earnings and dividends is reflected in its PE ratio of 17. The Board of Directors of B Ltd. has been advised that if it
were to take over firms with a lower PE ratio than it own, using a share-for-share exchange, then it could increase
its reported earnings per share. C Ltd. has been suggested as a possible target for a takeover, which has a PE ratio
of 10 and 1,00,000 shares in issue with a share price of  15. B Ltd. has 5,00,000 shares in issue with a share price
of 12.
Calculate the change in earnings per share of B Ltd. if it acquires the whole of C Ltd. by issuing shares at its market
price of 12. Assume the price of B Ltd. shares remains constant.
Ans: EPS of firm B will increase from Re. 0.71 to 0.80 as a result of Merger

Question No. 1F [SM-2023] [MTP-N22-8M] [RTP-May-2019] [RTP-Nov-2012] [May-2006-8M]

Reliable Industries Ltd. (RIL) is considering a takeover of Sunflower Industries Ltd. (SIL). The particulars of 2
companies are given below:
Particulars Reliable Industries Ltd Sunflower Industries Ltd.
Earnings After Tax (EAT) 20,00,000 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) CALCULATE the market value of each Company before merger?
(ii) EVALUATE whether the shareholders of both companies will be better or worse off than they
were before the merger assuming 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 and there are no synergic effects.
(iii) ANALYSE whether the shareholders of RIL will be better off or worse off than before the merger
if due to synergic effects, the management of RIL estimates that the earnings will increase by 20%
and the shareholders of SIL will accept an offer of one share of RIL for four shares of SIL.
[CMA-Compendium] [ICAN-Dec-2011-10M]
Ans: (i) RIL: 200 Lakh; SIL: 50L; (ii) Mkt Value = 300 Lakh;
Price per share = 24 (assuming P/E ratio will not change); Gain to RIL Sh holder = 4 per share
(iii) Post-merger EPS = 2.88; Price per share = 28.80 (assuming P/E ratio = 10; Gain to RIL Sh holder = 8.80; Gain to SIL = 2.20

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 9.4 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT
Question No. 1G [SM-2023] [RTP-May-2022] [Jan-2021-8M]
B Ltd. wants to acquire S Ltd. and has offered a swap ratio of 2:3 (2 shares for every 3 share of S Ltd.) Following
information is available:
Particulars B Ltd. S Ltd.
Profit after tax (in ) 21,00,000 4,50,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS (in ) 3.5 2.5
PE Ratio 10 times 7 times
Price quoting per share on BSE before 35.00 17.50
the merger announcement
Required:
(i) The number of equity shares to be issued by B Ltd. for acquisition of S Ltd.
(ii) What is the EPS of B Ltd. after the acquisition?
(iii) Determine the equivalent earnings per share of S Ltd. and calculate per share gain or loss to shareholders of
S Ltd.
(iv) What is the expected market price per share of B Ltd. after the acquisition, assuming its PE multiple remains
unchanged?
(v) Determine the market value of the merged firm.
(vi) After the announcement of merger, price of shares of S Ltd. rose by 10% on BSE. Mr. X, an investor, having
10,000 shares of S Ltd. is having another investment opportunity, which yields annual return of 14% is seeking
your advice whether he needs to offload the shares in the market or accept the shares from B Ltd.

Question No. 1H [MTP-May-2021-8M]

C Ltd. and P Ltd. both companies operating in the same industry decided to merge and form a new entity S Ltd.
The relevant financial details of the two companies prior to merger announcement are as follows:
C Ltd. P Ltd.
Annual Earnings after Tax (Rs. lakh) 10000 5800
No. Shares Outstanding (lakh) 4000 1000
PE Ratio (No. of Times) 8 10

The merger will be affected by means of stock swap (exchange) of 3 shares of C Ltd. for 1 share of P Ltd.
After the merger it is expected that due to synergy effects, Annual Earnings (Post Tax) are expected to be 8% higher
than sum of the earnings of the two companies individually. Further, it is expected that P/E Ratio of S Ltd. shall be
average of P/E Ratios of two companies before the merger.
Evaluate the extent to which shareholders of P Ltd. will be benefitted per share from the proposed merger.
Ans: Gains to shareholders of P Ltd. =  7,818.29 Lakh
Gain Per share = 7.818

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 MERGER & ACQUISITION 9.5
Question No. 1I [May-2023-8M]
Big Ltd. (BL), a listed company, is enjoying a price earnings ratio (PER) of 15 on an Earnings Per Share (EPS) of
5. The Total number of outstanding shares are 2,00,000.
BL is proposing to acquire Small Pvt. Ltd. (SPL) an unlisted company by issuing shares in the ratio 4:5 i.e. for 5
shares of SPL 4 shares of BL will be issued. The outstanding shares of SPL are 50,000. SPL will be listed before
the actual merger to discover its value. The EPS of the merged entity will be 5.5.
No other information is available for SPL.
You are required to calculate:
(i) Pre-merger EPS of SPL.
(ii) Expected Market Price per Share of SPL at the time of listing, if it expects a PER of 10 and,
(iii) Number of shares of BL to be issued to SPL if pre-merger EPS of BL is to be maintained.

Question No. 1J
[SM-2023] [Jan-2021-12M] [SSM-2016] [First 3 points-May-2015-8M] [Nov-2008-12M]
BA Ltd. and DA Ltd. both the companies operate in the same industry. The Financial statements of both the
companies for the current financial year are as follows:
Balance Sheet
Particulars BA Ltd. () DA Ltd. ()
Current Assets 14,00,000 10,00,000
Fixed Assets (Net) 10,00,000 5,00,000
Total () 24,00,000 15,00,000
Equity capital (10 each) 10,00,000 8,00,000
Retained earnings 2,00,000 --
14% long-term debt 5,00,000 3,00,00
Current liabilities 7,00,000 4,00,000
Total () 24,00,000 15,00,000

Income Statement
BA Ltd. () DA Ltd. ()
Net Sales 34,50,000 17,00,000
Cost of Goods sold 27,60,000 13,60,000
Gross profit 6,90,000 3,40,000
Operating expenses 2,00,000 1,00,000
Interest 70,000 42,000
Earning before taxes 4,20,000 1,98,00
Taxes @ 50% 2,10,000 99,000
Earning after taxes (EAT) 2,10,000 99,000
Additional Information:
No. of Equity shares 1,00,000 80,000
Dividend payment ratio (D/P) 40% 60%
Market price per share 40 15

Assume that both companies are in the process of negotiating a merger through an exchange of equity shares. You
have been asked to assist in establishing equitable exchange terms and are required to:
(i) Decompose the share price of both the companies into EPS and P/E components; and also segregate
their EPS figures into Return on Equity (ROE) and book value/intrinsic value per share components.
(ii) Estimate future EPS growth rates for each company.
(iii) Based on expected operating synergies BA Ltd. estimates that the intrinsic value of DA’s equity share
would be 20 per share on its acquisition. You are required to develop a range of justifiable equity

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 9.6 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT
share exchange ratios that can be offered by BA Ltd. to the shareholders of DA Ltd. Based on your
analysis in part (i) and (ii), would you expect the negotiated terms to be closer to the upper, or the lower
exchange ratio limits and why?
(iv) Calculate the post-merger EPS based on an exchange ratio of 0.4: 1 being offered by BA Ltd. Indicate
the immediate EPS accretion or dilution, if any, that will occur for each group of shareholders.
(v) Based on a 0.4: 1 exchange ratio and assuming that BA Ltd.’s pre-merger P/E ratio will continue after the
merger, estimate the post-merger market price. Also show the resulting accretion or dilution in pre-merger
market prices.
[CMA-Compendium]
Ans: (i) BA Ltd: EPS = 2.10, P/E ratio = 19.05, BVPS = 12, ROE = 17.50%
DA Ltd: EPS = 1.2375, P/E ratio = 12.12, BVPS = 10, ROE = 12.37%
(ii) g (BA) = 10.50%; g (DA) = 4.95%
(iii) Range = 0.375 to 0.50; Negotation close to Lower limit
(iv) EPS = 2.341, Accretionn (BA = 0.241, Dilution (DA)= 0.301
(v) MPS = 44.60, Accretion (BA) = 4.6; Accretion (DA) = 2.84%

 TEST YOUR KNOWLEDGE

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 1.1
[SM-2023] [SM-2016] [RTP-M23] [Nov-2020-8M] [RTP-Jun-09] [May-2006-12M] [May-2005-12M]
The following information is provided relating to the acquiring company Efficient Ltd. and the target Company
Healthy Ltd.
Efficient Ltd. Healthy Ltd.
No. of shares (F.V.  10 each) 10.00 lakhs 7.5 lakhs
Market capitalization 500.00 lakhs 750.00 lakhs
P/E ratio (times) 10.00 5.00
Reserves and Surplus 300.00 lakhs 165.00 lakhs
Promoter’s Holding (No. of shares) 4.75 lakhs 5.00 lakhs
Board of Directors of both the Companies have decided to give a fair deal to the shareholders and accordingly
for swap ratio the weights are decided as 40%, 25% and 35% respectively for Earning, Book Value and Market
Price of share of each company:
(i) Calculate the swap ratio and also calculate Promoter’s holding % after acquisition.
(ii) What is the EPS of Efficient Ltd. after acquisition of Healthy Ltd.?
(iii) What is the expected market price per share and market capitalization of Efficient Ltd. after acquisition,
assuming P/E ratio of Firm Efficient Ltd. remains unchanged?
(iv) Calculate free float market capitalization of the merged firm.
[CMA-Compendium] [ICAN-June-2023/June-2017/Dec-2010-10M]
Ans: (i) Swap ratio = 2.50; Promotor holding = 60%; (ii) EPS = 6.956
(iii) MPS = 69.56; Mkt. Cap = 1999.85 Lakh (iv) Free Mkt cap = 799.94 Lakh

Question No. 1.2 [SM-2016] [Nov-22-8M] [May-2018-8M] [As Nov-2009-10M] [Nov-2007-10M]

A Ltd. wants to acquire T Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one share of T Ltd.).
Following information is provided:
A Ltd. T. Ltd.
Profit after tax 18,00,000 3,60,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS 3 2
PE Ratio 10 times 7 times
Market price per share 30 14

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 MERGER & ACQUISITION 9.7
Required:
(i) The number of equity shares to be issued by A Ltd. for acquisition of T Ltd.
(ii) What is the EPS of A Ltd. after the acquisition?
(iii) Determine the equivalent earnings per share of T Ltd.
(iv) What is the expected market price per share of A Ltd. after the acquisition, assuming its PE multiple
remains unchanged?
(v) Determine the market value of the merged firm.
[CMA-Compendium]
Ans: (i) No of equity share = 90,000 sh; (ii) EPS = 3.13
(iii) Equivalent EPS = 1.57; (iv) MPS = 31.30 (v) Value = 215,97,000

Question No. 1.3 [SM-2023]

You have been provided the following Financial data of two companies:
Krishna Ltd. Rama Ltd.
Earnings after taxes 7,00,000 10,00,000
No. of Equity shares (outstanding) 2,00,000 4,00,000
EPS 3.5 2.5
P/E ratio 10 times 14 times
Market price per share 35 35
Company Rama Ltd. is acquiring the company Krishna Ltd., exchanging its shares on a one -to-one basis for
company Krishna Ltd. The exchange ratio is based on the market prices of the shares of the two companies.
Required:
(i) What will be the EPS subsequent to merger?
(ii) What is the change in EPS for the shareholders of companies Rama Ltd. and Krishna Ltd.?
(iii) Determine the market value of the post-merger firm. PE ratio is likely to remain the same.
(iv) Ascertain the profits accruing to shareholders of both the companies.

Question No. 1.4 [SM-2023] [May-2004-8M] [RTP-Nov-2009] [RTP-Nov-2008]

ABC Ltd. is intending to acquire XYZ Ltd. by merger and the following information is available in respect of the
companies:
ABC Ltd. XYZ Ltd.
Number of equity shares 10,00,000 6,00,000
Earnings after tax () 50,00,000 18,00,000
Market value per share () 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 ABC Ltd.? Assume that
the merger takes place by exchange of equity shares and the exchange ratio is based on the current market
price.
(iii) What should be exchange ratio, if XYZ Ltd. wants to ensure the earnings to members are as before the
merger takes place?
[CMA-Compendium]
Ans: (i) EPS (ABC) = 5; EPS (XYZ) = 3; (ii) New EPS = 4.86;
(iii) Exchange ratio = 0.6; Total earning to XYZ ltd Share holder after merger = 18,00,000
Ans: (i) 6.40 (ii) 64 (iii) 64,000

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 9.8 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT
Question No. 1.5 [SM-2023] [PM-2017] [May-2022-8M]
P Ltd. is considering take-over of R Ltd. by the exchange of four new shares in P Ltd. for every five shares in R
Ltd. The relevant financial details of the two companies prior to merger announcement are as follows:
P Ltd R Ltd
Profit before Tax ( Crore) 15 13.50
No. of Shares (Crore) 25 15
P/E Ratio 12 9
Corporate Tax Rate 30%

You are required to determine:

(i) Market value of both the company.
(ii) Value of original shareholders.
(iii) Price per share after merger.
(iv) Effect on share price of both the company if the Directors of P Ltd. expect their own pre-merger P/E ratio to
be applied to the combined earnings.
[ICAN-Dec-15-6M]

Question No. 1.6 [RTP-Nov-2015]

Two companies Bull Ltd. and Bear Ltd. recently have been merged. The merger initiative has been taken by Bull
Ltd. to achieve a lower risk profile for the combined firm in spite of fact that both companies belong to different
industries and disclose a little co- movement in their profit earning streams. Though there is likely to synergy
benefits to the tune of 7 crore from proposed merger. Further both companies are equity financed and other details
are as follows:
Market Capitalization Beta
Bull Ltd 1000 Cr. 1.50
Bear Ltd 500 Cr. 0.60
Expected Market Return and Risk Free Rate of Return are 13% and 8% respectively. Shares of merged entity have
been distributed in the ratio of 2:1 i.e. market capitalization just before merger. You are required to:
(a) Calculate return on shares of both companies before merger and after merger.
(b) Calculate the impact of merger on Mr. X, a shareholder holding 4% shares in Bull Ltd. and 2% share of Bear
Ltd.
[ICAN-June-2021-10M]
Ans: (a) Bull = 15.50%; Bear = 11%; (b) Existing Value = 50 Crore; New value = 51.67 Crore.

Question No. 1.7 [Nov-2023-10M] [RTP-May-2020/Old] [June-2009-20M] [(a)&(b) As May-2011-8M]

The following information relating to the acquiring Company Abhiman Ltd. and the target Company Abhishek
Ltd. are available. Both the Companies are promoted by Multinational Company, Trident Ltd. The promoter’s
holding is 50% and 60% respectively in Abhiman Ltd. and Abhishek Ltd.:
Abhiman Ltd Abhishek Ltd.
Share Capital () 200 lakh 100 lakh
Free Reserve and Surplus () 800 lakh 500 lakh
Paid up Value per share () 100 10
Free float Market Capitalization () 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:
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 MERGER & ACQUISITION 9.9
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 Abhiman Ltd. after acquisition of Abhishek Ltd.
(assuming P.E. ratio of Abhiman Ltd. remains unchanged and all assets and liabilities of Abhishek Ltd. are
taken over at book value).
(c) Calculate:
(i) Promoter’s revised holding in the Abhiman Ltd.
(ii) Free float market capitalization.
(iii) Also calculate No. of Shares, Earning per Share (EPS) and Book Value (B.V.), if after acquisition of
Abhishek Ltd., Abhiman Ltd. decided to :
(a) Issue Bonus shares in the ratio of 1 : 2; and (b) Split the stock (share) as  5 each fully paid.
Ans: (a) Swap ratio = .15; (b) BVPS = 457.14; EPS = 45.71; MPS = 457.10;
(c) (i) Revised holding = 54.29%; (ii) Mkt Cap = 731.36 Lakh; (iii) No of sh. = 105 Lakh; EPS = 1.523; BVPS = 15.238

Question No. 1.8 [SM-2023] [MTP-Nov-2020-8M/Old] [RTP-Nov-2009] [Nov-2008-12M]

K. Ltd. is considering acquiring N. Ltd., the following information is available :
Company Profit after tax Number of Equity shares Market value per share
K. Ltd. 50,00,000 10,00,000 200.00
N. Ltd. 15,00,000 2,50,000 160.00
Exchange of equity shares for acquisition is based on current market value as above.
There is no synergy advantage available:
Find the earning per share for company K. Ltd. after merger.
Find the exchange ratio so that shareholders of N. Ltd. would not be at a loss.
Ans: Post merger EPS = 5.42 Per Share; Exchange ratio = 1.2

Question No. 1.9 [SM-2023] [MTP-N23-8M] [Nov-2019-10M] [RTP-Nov-2019] [MTP-Nov-2018-8M]

[MTP-May/Nov-2014] [June-2009-10M] [Nov-2004-8M]
The following information is provided related to the acquiring Firm Mark Limited and the target Firm Mask
Limited:
Firm Firm
Mark Limited Mask Limited
Earning after tax () 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 Mark Limited after acquisition?
(iii) What is the expected market price per share of Mark Limited after acquisition, assuming P/E ratio of Mark
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.
[CMA-Compendium] [ICAN-Dec-2020-10M]
Ans: (i) Swap ratio = 0.20 (ii) EPS = 10.91; (iii) MPS = 109.10
(iv)Value of Firm = 240.02 Crore. (v) Gain to Mark = 18.20 Crore, Gain to Mask = 1.82 crore.
Modification in question (iii) in RTP-Nov-2019:
What is the expected market price per share of Mark Limited after acquisition, assuming P/E ratio is adversely
affected by 10%?

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 9.10 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT

VALUATION OF THE TARGET COMPANY

Question No. 2A [SM-2023] [MTP-Nov-2021-10M] [RTP-Nov-2017] [Nov-2006-12M]
AB Ltd., is planning to acquire and absorb the running business of XY Ltd. The valuation is to be based on
the recommendation of merchant bankers and the consideration is to be discharged in the form of equity shares
to be issued by AB Ltd. As on 31.3.2006, the paid-up capital of AB Ltd. consists of 80 lakhs shares of 10
each. The highest and the lowest market quotation during the last 6 months were 570 and 430. For the
purpose of the exchange, the price per share is to be reckoned as the average of the highest and lowest market
price during the last 6 months ended on 31.3.06.
XY Ltd.’s Balance Sheet as at 31.3.2006 is summarized below:
 lakhs
Sources
Share Capital
20 lakhs equity shares of 10 each fully paid 200
10 lakhs equity shares of 10 each, 5 paid 50
Loans 100
Total 350
Uses
Fixed Assets (Net) 150
Net Current Assets 200
350

An independent firm of merchant bankers engaged for the negotiation, have produced the following estimates of
cash flows from the business of XY Ltd.:
Year ended By way of  Lakhs
31.3.07 after tax earnings for equity 105
31.3.08 Do 120
31.3.09 Do 125
31.3.10 Do 120
31.3.11 Do 100
terminal value estimate 200

It is the recommendation of the merchant banker that the business of XY Ltd. may be valued on the basis of the
average of (i) Aggregate of discounted cash flows at 8% and (ii) Net assets value.

Present value factors at 8% for years

1-5: 0.93 0.86 0.79 0.74 0.68

You are required to:

(i) Calculate the total value of the business of XY Ltd.
(ii) The number of shares to be issued by AB Ltd.; and
(iii) The basis of allocation of the shares among the shareholders of XY Ltd.
[CMA-Compendium] [ICAN-June-16-8M]
Ans: Total Value = 421.20;(ii) No of Share = 84,240; (iii) Distribution to fully paid up sh. holder = 67,392;
(iv) Distribution to partly paid-up sh. holder = 16,848

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 MERGER & ACQUISITION 9.11
Question No. 2B [SM-2023] [RTP-N22] [May-2007-8M]
AFC Ltd. wishes to acquire BCD Ltd. 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 BCD Ltd. resulting from the acquisition on the basis of the
following conditions:

Current expected growth rate of BCD Ltd. 7%

Expected growth rate under control of AFC Ltd., (without any additional 8%
capital investment and without any change in risk of operations)
Current Market price per share of AFC Ltd. 100
Current Market price per share of BCD Ltd. 20
Current Dividend per share of BCD Ltd. 0.60
[Expected Dividend per share: As per modified language of SM-23]
(ii) On the basis of aforesaid conditions calculate the gain or loss to shareholders of both the companies, if
AFC Ltd. were to offer one of its share for every four shares of BCD Ltd.
(iii) Calculate the gain to the shareholders of both the Companies, if AFC Ltd. pays 22 for each share of
BCD Ltd., assuming the P/E Ratio of AFC Ltd. does not change after the merger. EPS of AFC Ltd. is 8
and that of BCD is 2.50. It is assumed that AFC Ltd. invests its cash to earn 10%.
[CMA-Compendium] [ICAN-Dec-2022/Dec-2016/2014-10M]
Ans: (i) Increase in total Value = 50 Lakh [Hint (30-20)× 5 Lakh]
(ii) Gain to AFC = 22.2 Lakh; Gain to BCD = 27.75Lakh
(iii) Gain to share holder of AFC = 18.75Lakhs; BCD = 10Lakhs

Question No. 2C [Nov-2020-12M]

ICL is proposing to take over SVL with an objective to diversify. ICL's profit after tax (PAT) has grown @ 18 per
cent per annum and SVL's PAT is grown @ 15 per cent per annum. Both the companies pay dividend regularly.
The summarized Profit & Loss Account of both the companies are as follows:
 in Crores
Particulars ICL SVL
Net Sales 4,545 1,500
PBIT 2,980 720
Interest 750 25
Provision for Tax 1,440 445
PAT 790 250
Dividends 235 125
Undistributed Profits 555 125

ICL SVL
Fixed Assets
Land & Building (Net) 720 190
Plant & Machinery (Net) 900 350
Furniture & Fixtures (Net) 30 1,650 10 550
Current Assets 775 580
Less Current Liabilities:
Creditors 230 130
Overdrafts 35 10
Provision for Tax 145 50
Provision for dividends 60 470 50 240
Net Assets 1,955 890
// CA NAGENDRA SAH //WWW.NAGENDRASAH.COM
 9.12 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT
Paid up Share Capital (10 per share) 250 125
Reserves and Surplus 1,050 1,300 660 785
Borrowing Capital Employed 655 105
Capital Employed 1,955 890
Market Price Share () 52 75

ICUs Land & Buildings are stated at current prices. SVL's Land & Buildings are revalued three years ago.
There has been an increase of 30 per cent per year in the value of Land & Buildings.
SVL is expected to grow @ 18 per cent each year, after merger.
ICL's Management wants to determine the premium on the shares over the current market price which can be paid
on the acquisition of SVL.
You are required to determine the premium using:
(i) Net Worth adjusted for the current value of Land & Buildings plus the estimated average profit after tax
(PAT) for the next five years.
(ii) The dividend growth formula.
(iii) ICL will push forward which method during the course of negotiations?
Period 1 2 3 4 5
FVIF (30 %, t) 1.300 1.690 2.197 2.856 3.713
FVIF (15 %, t) 1.15 2.4725 3.9938 5.7424 7.7537

Question No. 2D [SM-2023] [Jan-2021-8M] [Nov-2013-10M]

M/s Tiger ltd. wants to acquire M/s Leopard ltd. the balance sheet of Leopard Ld. As on 31st march 2012 is as
follows:
Liabilities  Assets 
Equity capital (70000 shares) 7,00,000 Cash 50,000
Retained earnings 3,00,000 Debtors 70,000
12% debentures 3,00,000 Inventories 2,00,000
Creditors and other liabilities 3,20,000 Plants & Eqpt. 13,00,000
16,20,000 16,20,000

Additional information:
(i) Shareholders of leopard ltd. will get one share in Tiger Ltd. for every two shares. External liabilities are
expected to be settled at  500000. Shares of tiger Ltd. would be issued at its current price of  15 per share.
Debenture holders will get 13% convertible debentures in the purchasing company for same amount. Debtor
and inventories are expected to realize 2,00,000.
(ii) Tiger Ltd. has decided to operate the business of Leopard ltd. as a separate division. The division is likely to
give cash flows (after tax) to the extent of 500000 per year for 6 years. Tiger ltd. has planned that, after 6
years, this division would be demerged and disposed for 200000.
(iii) The company’s cost of capital is 16%.
Make a report to the Board of the company advising them about the financial feasibility of this acquisition.
Net present values for 16% for 1 are as follows:
Years 1 2 3 4 5 6
PV 0.862 0.743 0.641 0.552 0.476 0.410
Ans: NPV =849000

// CA NAGENDRA SAH // WWW.NAGENDRASAH.COM

 MERGER & ACQUISITION 9.13
Question No. 2E [SM-2023] [RTP-Nov-10] [As May-2011-8 Marks] [As RTP-May-2013]
The total value (equity + debt) of two companies, A Ltd and B Ltd are expected to fluctuate according to the state
of the economy.
State of the economy Probability Value of A Ltd.  in lakh Value of B Ltd.  in lakh
Rapid growth 0.30 720 1150
Slow growth 0.50 520 750
Recession 0.20 380 600
A Ltd. And B Ltd. Currently have a debt of  420 lakhs and 80 lakhs, respectively.
The two companies are deciding for merger. Assuming that no operational synergy is expected as a result of the
merger, you are required to calculate the expected value of debt and equity of the merged company.
Ans: Expected Value of Debt for merged company = 492 Lakh;
Expected Value of Equity for merged company = 900 Lakh

 TEST YOUR KNOWLEDGE

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 2.1
[SM-2023] [MTP-Nov-2018-8M] [Nov-2018-12M] [RTP-May-2018] [May-2010-16M]
T Ltd and E Ltd are in the same industry. The former is in the negotiation for acquisition of the later. Important
information about the two companies as per their latest financial statements is given below:
T Ltd E Ltd
10 equity shares outstanding 12 Lakhs 6 Lakhs
Debt:
10%debentures lakhs 580 ---
12.5% Institutional Loan Lakhs --- 240
Earnings before interest, depreciation and
Tax (EBIDTA) ( Lakhs) 400.86 115.71
Market Price/ Shares () 220 110
T Ltd is planning to offer a price for E Ltd, business as a whole which will be 7 times EBIDTA reduced by the
outstanding debt, to be discharged by own shares at market price.
E Ltd is planning to seek one share in T Ltd for every two shares in E Ltd based on the market price. Tax rate for
the two companies may be assumed as 30%.
Calculate and show the following under both alternatives- T Ltd’s offer and E Ltd’s plan:
(i) Net consideration payable.
(ii) No. of shares to be issued by T Ltd.
(iii) EPS of T Ltd after acquisition
(iv) Expected market price per share of T Ltd after acquisition
(v) State briefly the advantages to T Ltd from the acquisition.
Calculations (except EPS) may be rounded off to two decimal places in Lakhs
[ICAN-July-15-11M]
Ans:
T Ltd offer E Ltd Plan
Net consideration payable 569.97 660
No of shares to be issued 2,59,000 3,00,000
EPS of T Ltd after acquisition 20.56 20
Expected market price per share of T Ltd after acquisition 226.16 220

// CA NAGENDRA SAH //WWW.NAGENDRASAH.COM

 9.14 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT
Question No.-2.2 [RTP-May-2010/Nov-2010]
AB Ltd. is a firm of recruitment and selection consultants. It has been providing consultancy for 10 years and
obtained a stock market listing 4 years ago. It has pursued a policy of aggressive growth and specializes in providing
services to companies in high- technology and high growth sectors. It is all-equity financed by ordinary share capital
of 500 lakh in shares of  20 nominal (or par) value. The company’s results to the end of March 2009 have just
been announced. Profits before tax were 1,266 lakh. The Chairman’s statement included a forecast that earnings
might be expected to rise by 4%, which is a lower annual rate than in recent years. This is blamed on economic
factors that have had a particularly adverse effect on information technology companies.
YZ Ltd. is in the same business but has been established much longer. It serves more traditional service sectors and
its earnings record has been erratic. Press comment has frequently blamed this on poor management and the
company’s shares have been out of favour with the stock market for some time. Its current earnings growth forecast
is also 4% for the foreseeable future. YZ Ltd. has an issued ordinary share capital of 1800 lakh in 100 shares.
Pre-tax profits for the year to 31 March 2009 were 1,125 lakh.
AB Ltd. has recently approached the shareholders of YZ Ltd. with a bid of 5 new shares in AB Ltd. for every 6 YZ
Ltd. shares. There is a cash alternative of  345 per share. Following the announcement of the bid, the market price
of AB Ltd. shares fell 10% while the price of YZ Ltd. shares rose 14%. The P/E ratio and dividend yield for AB
Ltd. and YZ Ltd. immediately prior to the bid announcement are shown below.
2009
High Low Company P/E Dividend yield %
425 325 AB Ltd. 11 2.4
350 285 YZ Ltd. 7 3.1

Both AB Ltd. and YZ Ltd. pay tax at 30%.

AB Ltd.’s post-tax cost of equity capital is estimated at 13% per annum and YZ Ltd.’s at 11% per annum.
Assuming that you are a shareholder in YZ Ltd. You have a large, but not controlling interest.
You bought the shares some years ago and have been very disappointed with their performance. Based on the
information and merger terms available, plus appropriate assumptions, to forecast post-merger values, evaluate
whether the proposed share-for- share offer is likely to be beneficial to shareholders in both AB Ltd. and YZ
Ltd. Also identify why the price of share of AB Ltd. fell following the announcement of bid.
Note: As a benchmark, you should then value the two companies AB Ltd. and YZ Ltd. using the constant growth
form of the dividend valuation model.
Ans: Value of share: AB = 409.64; YZ = 650

Question No. 2.3 [Nov-2007-14M]

AB Ltd. has recently approached the shareholders of CD Ltd. which is engaged in the same line of business as
that of AB Ltd. with a bid of 4 new shares in AB Ltd. for every 5 CD Ltd. shares or a cash alternative of 360 per
share. Past records of earnings of CD Ltd. had been poor and the company’s shares have been out of favour with
the stock market for some time.
Pre bid information for the year ended 31.3.2006 are as follows:
AB Ltd in lakhs CD Ltd. in lakhs
Equity share capital 60 170
Number of shares 24 17
Pre-tax profit 125 110
P/E Ratio 11 7
Estimated post tax cost of Equity
Capital per Annum 12% 10%
Both AB Ltd. and CD Ltd. pay income tax at 30%. Current earnings growth forecast is 4% for the foreseeable
future of both the Companies.

// CA NAGENDRA SAH // WWW.NAGENDRASAH.COM

 MERGER & ACQUISITION 9.15
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. AB Ltd.’s directors might
expect their own pre bid P/E ratio to be applied to combined earnings.
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.

Question No. 2.4 [RTP-May-2015] [RTP-Nov-2013]

A Ltd.’s (Acquirer company) equity capital is 20000000. Both A Ltd. and T Ltd. (Target Company) have arrived
at an understanding to maintain debt equity ratio at 0.30:1 of the merged company. Pre-merger debt outstanding of
A Ltd. stood at 2000000 and T Ltd. at 1000000 and marketable securities of both companies stood at 4000000.
You are required to determine whether liquidity of merged company shall remain comfortable if A Ltd. acquires T
Ltd. against cash payment at mutually agreed price of 65,00,000.
Ans: 30,00,000

RANGE OF THE VALUE OF COMPANIES

Question No. 3A [MTP-May-2021-5M] [MTP-May-2014] [May-2013-5M]
ABC Limited is considering acquisition of DEF Ltd. which has 3.10 crore shares issued and outstanding. The market
price per share is  440.00 at present. ABC Ltd.’ s average cost of capital is 12% the cash inflows of DEF Ltd. for
the next three years are as under:
Year  in Crores
1 460.00
2 600.00
3 740.00
You are required to calculate the range of valuation that ABC Ltd. has to consider.
Take P.V.F. (12%,3) = 0.893, 0.797, 0.712
Ans: Range: 440 to 456.73 per share; 1364 to 1415.86 total

 TEST YOUR KNOWLEDGE

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 3.1 [MTP-Nov-2021-6M]
Snake Ltd. is taking over Lizard Ltd, both are listed companies. The PE Ratio of Lizard Ltd. has been low as 4 and
high as 7 and is currently 5. Lizard Ltd.’s previous year EPS was  3.40 and current expected EPS this year to be
 4.00.
Determine the different range of Values of Shares using P/E Model.
Ans:
EPS Value () P/E Ratio Value Value of
Shares
Historic 3.40 Lowest 4 13.60
Historic 3.40 Current 5 17.00
Historic 3.40 Highest 7 23.80
Expected 4.00 Lowest 4 16.00
Expected 4.00 Current 5 20.00
Expected 4.00 Highest 7 28.00

// CA NAGENDRA SAH //WWW.NAGENDRASAH.COM

 9.16 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT
Question No. 3.2 [May-2010-8M]
ABC, a large business house is planning to sell its wholly owned subsidiary KLM. Another large business entity
XYZ has expressed its interest in making a bid for KLM. XYZ expects that after acquisition the annual earning of
KLM will increase by 10%.
Following information, ignoring any potential synergistic benefit arising out of possible acquisitions, are
available:
(i) Profit after tax for KLM for the financial year which has just ended is estimated to be 10 Crore.
(ii) KLM’s after tax profit has an increasing trend of 7% each year and the same is expected to continue.
(iii) Estimated post tax market return is 10% and risk free rate is 4%. These rates are expected to continue.
(iv) Corporate tax rate is 30%
XYZ ABC Proxy entity for KLM in
the same line of business
No of shares 100 Lakh 80 Lakh ---
Current share price 287 375 ---
Dividend pay out 40% 50% 50%
Debt : Equity at market values 1:2 1:3 1:4
P/E ratio 10 13 12
Equity beta 1 1.1 1.1
Assume gearing level of KLM to be the same as for ABC and a debt beta of zero.
You are required to calculate:
(a) Appropriate cost of equity for KLM based on the date available for proxy entity.
(b) A range of values for KLM both before and after any potential synergistic benefits of XYZ of the acquisition.
Ans: (a) Cost of equity = 10.93%;
(b) Pre-synergic range = 100 crore to 136.13 crore; post synergic range = 110 crore to 149.75 crore

COST OF ACQUISITION
Question No. 4A [SM-2023] [RTP-Nov-2018] [MTP-May-2014] [RTP-Nov-2014] [Nov-2012-8M]
Yes Ltd. wants to acquire No Ltd. and the cash flows of Yes Ltd. and the merged entity are given below
 in Lakh
Year 1 2 3 4 5
Yes Ltd. 175 200 320 340 350
Merged Entity 400 450 525 590 620
Earnings would have witnessed 5% constant growth rate without merger and 6% with merger on account of
economies of operations after 5 years in each case. The cost of capital is 15%.
The number of shares outstanding in both the companies before the merger is the same and the companies agree to
an exchange ratio of 0.5 shares of Yes Ltd. for each share of No Ltd. PV factor at 15% for years 1-5 are 0.870,
0.756; 0.658, 0.572, 0.497 respectively.
You are required to:
(i) Compute the Value of Yes Ltd. before and after merger;
(ii) Value of Acquisition and
(iii) Gain to shareholders of Yes Ltd.
Ans: (i) 2708.915 & 5308.47; (ii) 2599.555; (iii) 830.065

// CA NAGENDRA SAH // WWW.NAGENDRASAH.COM

 MERGER & ACQUISITION 9.17
Question No. 4B [SM-2023] [SSM-2016] [Dec-2021-5M] [Nov-2014-5M]
Elrond Limited plans to acquire Doom Limited. The relevant financial details of the two firms prior to the merger
announcement are:
Elrond Limited Doom Limited
Market price per share  50 25
Number of outstanding shares 20 lakhs 10 lakhs
The merger is expected to generate gains, which have a present value of 200 lakhs. The exchange ratio agreed to
is 0.5. What is the true cost of the merger from the point of view of Elrond Limited?

Question No. 4C [May-2019-8M]

Given is the following information:
Day Ltd. Night Ltd.
Net Earnings ₹ 5 crores ₹ 3.50 crores
No. of Equity Shares 10,00,000 7,00,000

The Shares of Day Ltd. And Night Ltd. Trade at 20 and 15 times their respective P/E ratios.
Day Ltd. Considers taking over Night Ltd. By paying ₹ 55 crores considering that the market price of Night Ltd.
Reflects its true value. It is considering both the following options:
(i) Takeover is funded entirely in cash.
(ii) Takeover is funded entirely in stock.
You are required to calculate the cost of the takeover and advise day limited on the best alternative.

 TEST YOUR KNOWLEDGE

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 4.1 [MTP-M23-8M] [July-2021-8M]
Long Ltd., is planning to acquire Tall Ltd., with the following data available for both the companies:
Long Ltd Tall Ltd
Expected EPS  12 5
Expected DPS  10 3
No. of Shares 30,00,000 18,00,000
Current Market Price of Share  180  50

As per an estimate Tall Ltd., is expected to have steady growth of earnings and dividends to the tune of 6% per
annum. However, under the new management the growth rate is likely to be enhanced to 8% per annum without
additional investment.
You are required to:
(i) Calculate the net cost of acquisition by Long Ltd., if  60 is paid for each share of Tall Ltd.
(ii) If the agreed exchange ratio is one share of Long Ltd., for every three shares of Tall Ltd., in lieu of the cash
acquisition as per (i) above, what will be the net cost of acquisition?
(iii) Calculate Gain from acquisition.
[ICAN-Dec-2011-10M]

// CA NAGENDRA SAH //WWW.NAGENDRASAH.COM

 9.18 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT

MAXIMUM / MINIMUM EXCHANGE RATIO

Question No. 5A [SM-2023] [As May-2013-8M]
Longitude Limited is in the process of acquiring Latitude Limited on a share exchange basis. Following
relevant data are available:
Longitude Limited Latitude Limited
Profit after Tax (PAT)  in Lakhs 120 80
Number of Shares Lakhs 15 16
Earning per Share (EPS)  8 5
Price Earnings Ratio (P/E Ratio) 15 10
(Ignore Synergy)
You are required to determine:
(i) Pre-merger Market Value per Share, and
(ii) The maximum exchange ratio Longitude Limited can offer without the dilution of
(1) EPS and (2) Market Value per Share
Calculate Ratio/s up to four decimal points and amounts and number of shares up to two decimal points
Ans: (i) Pre- merger MPS: Ball = 60; Bat = 15; (ii) Exchange ratio: (i) 0.5; (ii) 0.25

Question No. 5B [SM-2023] [PM-2017] [MTP-N22-8M]

The equity shares of XYZ Ltd. are currently being traded at  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  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  4,00,000 p.a. Top management with their families
are promoters of XYZ Ltd. Present value of these savings would add  30,00,000 in value to the acquisition.
Following additional information is available regarding PQR Ltd.:
Earnings per share :4
Total number of equity shares outstanding : 15,00,000
Market price of equity share :  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?
[ICAN-June-23-5M]
Ans: (i)  35; (ii) 31.5
Question No. 5C [RTP-May-2021] [MTP-May-2021-12M] [Nov-2018-12M]
C Ltd & D Ltd are contemplating a merger deal in which C Ltd will acquire D Ltd. The relevant information
about the firms are given as follows:
Particulars C Ltd D Ltd
Total Earnings (E) (in millions) ₹96 ₹30
Number of outstanding shares (S) (in millions) 20 14
Earnings per shares (EPS) (₹) 4.8 2.143
Price Earnings Ratio (P/E) 8 7
Market Price Per Share (P) (₹) 38.4 15
(i) What is the maximum exchange ratio acceptable to the shareholders of C Ltd., if the P/E ratio of the
combined firm is 7?
(ii) What is the minimum exchange ratio acceptable to the shareholder of D Ltd., if the P/E ratio of the combined
firm is 9?

// CA NAGENDRA SAH // WWW.NAGENDRASAH.COM

 MERGER & ACQUISITION 9.19
Question No. 5D [Dec-2021-8M] [RTP-May-2012]
AXE Ltd. is interested to acquire PB Ltd. AXE has 50,00,000 shares of 10 each, which are presently being
quoted at  25 per share. On the other hand PB has 20,00,000 share of10 each currently selling at 17. AXE
and PB have EPS of 3.20 and 2.40 respectively.
You are required to:
a. Show the impact of merger on EPS, in case if exchange ratio is based on relative proportion of EPS.
b. Suppose, if AXE quote an offer of share exchange ratio of 1:1, then should PB accept the offer or not,
assuming that there will be no change in PE ratio of AXE after the merger.
c. The maximum ratio likely to acceptable to management of AXE.

 TEST YOUR KNOWLEDGE

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 5.1 [SM-2023]
XYZ Ltd. wants to purchase ABC Ltd. by exchanging 0.7 of its share for each share of ABC Ltd. Relevant financial
data are as follows:
Equity shares outstanding 10,00,000 4,00,000
EPS () 40 28
Market price per share () 250 160

(i) Illustrate the impact of merger on EPS of both the companies.

(ii) The management of ABC Ltd. has quoted a share exchange ratio of 1:1 for the merger. Assuming that
P/E ratio of XYZ Ltd. will remain unchanged after the merger, what will be the gain from merger for
ABC Ltd.?
(iii) What will be the gain/loss to shareholders of XYZ Ltd.?
(iv) Determine the maximum exchange ratio acceptable to shareholders of XYZ Ltd.

Question No. 5.2 [May-2019-8M] [RTP-May-2015]

M plc and C plc operating in same industry are not experiencing any rapid growth but providing a steady stream
of earnings. M plc’s management is interested in acquisition of C plc due to its excess plant capacity. Share of C
plc is trading in market at £4 each. Other date relating to C plc is as follows:
Particulars M plc C plc Combined Entity
Profit after tax £4,800,000 £3,000,000 £9,200,000
Residual Net Cash Flow per year £6,000,000 £4,000,000 £12,000,000
Required return on Equity 12.5% 11.25% 12.00%

Balance Sheet of C plc

Assets Amount Liabilities Amount
Current Assets 27,300,000 Current Liabilities 13,450,000
Other Assets 5,500,000 Long term Liabilities 11,100,000
Property Plants & Equipments 21,500,000 Reserve and surplus 24,750,000
Share Capital 5,000,000
(5 Mill Common Shares at £1 each)
54,300,000 54,300,000
You are required to compute:
(i) Minimum price per share C plc should accept from M plc.
(ii) Maximum price per share M plc shall be willing to offer to C plc.
(iii) Floor Value of per share of C plc. Whether it shall play any role in decision for its acquisition by M plc.

// CA NAGENDRA SAH //WWW.NAGENDRASAH.COM

 9.20 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT
Question No. 5.3 [SM-2023] [MTP-May-2022-8M]
The CEO of a company thinks that shareholders always look for EPS. Therefore, he considers maximization of EPS
as his company's objective. His company's current Net Profits are  80.00 lakhs and P/E multiple is 10.5.
He wants to buy another firm which has current income of  15.75 lakhs & P/E multiple of 10. The current market
price of both the acquirer and the target company are  42 and  105 respectively.
ADVISE:
(i) The maximum exchange ratio which the CEO should offer so that he could keep EPS at the current level.
(ii) Cash that CEO should offer to buy out the Target Company by paying cash so that he could maintain its
current EPS. The CEO can borrow funds at 15%.
Assume tax rate of 30%.
[ICAN-Dec-2014/June-2011-8M]
Question No. 5.4 [RTP-Nov-2017]
Teer Ltd. is considering acquisition of Nishana Ltd. CFO of Teer Ltd. is of opinion that Nishana Ltd. will be able
to generate operating cash flows (after deducting necessary capital expenditure) of 10 crore per annum for 5
years.
The following additional information was not considered in the above estimations.
(i) Office premises of Nishana Ltd. can be disposed of and its staff can be relocated in Teer Ltd.’s office not
impacting the operating cash flows of either businesses. However, this action will generate an immediate
capital gain of 20 crore.
(ii) Synergy Gain of 2 crore per annum is expected to be accrued from the proposed acquisition.
(iii) Nishana Ltd. has outstanding Debentures having a market value of 15 crore. It has no other debts.
(iv) It is also estimated that after 5 years if necessary, Nishana Ltd. can also be disposed of for an amount equal
to five times its operating annual cash flow.
Calculate the maximum price to be paid for Nishana Ltd. if cost of capital of Teer Ltd. is 20%.
Ignore any type of taxation.

Question No. 5.5 [RTP-Nov-2013] [RTP-May-2015]

Hankey Ltd. and shanky Ltd. operate in the same field, manufacturing newly born babies clothes. Although shanky
Ltd. also has interest in communication equipments, Hanky Ltd. is planning to take over Shanky Ltd. and the
shareholders of Shanky Ltd. do not regard it as a hostile bid.
The following information is available about the two companies.
Hanky Ltd. Shanky Ltd.
Current earnings 650,00,000 240,00,000
Number of share 50,00,000 15,00,000
Percentage of retained earnings 20% 80%
Return on new investment 15% 15%
Return required by equity 21% 24%
shareholders
Dividends have just been paid and the retained earnings have already been reinvested in new projects. Hanky Ltd.
plans to adopt a policy of retaining 35% of earnings after the takeover and expects to achieve a 175 return on new
investment. Saving due to economies of scale are expected to be 8500000 per annum.
Required return to equity shareholders will fall to 20% due to portfolio effects.
Requirements:
(a) Calculate the existing share prices of Hanky Ltd. and Shanky Ltd.
(b) Find the value of Hanky Ltd. after the takeover
(c) Advise Hanky Ltd. on the maximum amount it should pay for Shanky Ltd.

// CA NAGENDRA SAH // WWW.NAGENDRASAH.COM

 MERGER & ACQUISITION 9.21
Question No.-5.6 [RTP-May-2011]
The market value of two companies Sun Ltd. and Moon Ltd. are 175 lac and 75 lac respectively. The share
capital of Sun Ltd. consists of 3.5 lac  10/- ordinary shares and that of Moon Ltd. consist of 2.2 lac ordinary shares
of  10/- each Sun Ltd. is proposing to takeover Moon Ltd.
The pre-merger earnings are 19 lac for Sun Ltd. and  10 lac for Moon Ltd. The merger is expected to result into
a synergy gains of 4 lac in the form of Post tax cost savings. The Pre-merger P/E Ratios are 10 for Sun Ltd. and
8 for Moon Ltd. The possible combined P/E Ratios are 9 and 10.
You are required to calculate.
(i) Minimum combined P/E ratio to justify the merger.
(ii) Exchange ratio of shares if combined P/E ratio is 9.
(iii) Exchange ratio of shares if combined P/E ratio is 10.

MERGER OF BANKS
Question No. 6A [SM-2023] [MTP-II-May-2022-10M] [MTP-Nov-2019-8M] [May-2018-8M] [SSM-
2016] [May-2017-8M] [May-2015-11M]
Bank 'R' was established in 2005 and doing banking in India. The bank is facing DO OR DIE situation. There are
problems of Gross NPA (Non-Performing Assets) at 40% & CAR/CRAR (Capital Adequacy Ratio/ 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 @8 per share RBI Audit suggested that bank has either to liquidate or to merge with other bank.
Bank 'P' is professionally managed bank with low gross NPA of 5%. It has Net NPA as 0% and CAR at 16%. Its
share is quoted in the market @ 128 per share. The board of directors of bank 'P' has submitted a proposal to
RBI for takeover of bank 'R' on the basis of share exchange ratio.
The Balance Sheet details of both the banks are as follows:
Bank ‘R’ Bank ‘P’
Amount in  in Lacs Amount in  in Lacs
Paid up share capital 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 'P' to the shareholders of Bank 'R'. 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?
// CA NAGENDRA SAH //WWW.NAGENDRASAH.COM
 9.22 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT
(b) How many shares are to be issued?
(c) Prepare Balance Sheet after merger.
(d) Calculate CAR & Gross NPA % of Bank 'P' after merger.
[ICAN-June-18-9M]
Ans: Swap Ratio = 0.125; (b) 1.75 Lakh Shares; (c) …. (d) CAR = 14.53%; Gross NPA: 2750 Lakhs
[Note: In May-2018 Exam, one additional information of “Preliminary expenses” for vendor Bank was given]

DEMERGER OF A COMPANY
Question No. 7A [SM-2023] [MTP-May-2015-10M] [Nov-2005-8M]
The following information is relating to Fortune India Ltd. having two divisions, 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
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/Misc. Expenses 60 lakh (200) lakh
Boards of Directors of the Company have decided to issue necessary equity shares of Fortune Pharma Ltd. of
Re. 1 each, without any consideration to the shareholders of Fortune India Ltd. For that purposes following
points are to be considered:
1. Transfer of Liabilities & Assets at Book value.
2. Estimated Profit for the year 2005-06 is  11,400 Lakh for Fortune India Ltd. &  1,470 lakhs for Fortune
Pharma Ltd.
3. Estimated Market Price of Fortune Pharma Ltd. is  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:
1. The Ratio in which shares of Fortune Pharma are to be issued to the shareholders of Fortune India Ltd.
2. Expected Market price of Fortune India Ltd.
3. Book Value per share of both the Companies immediately after Demerger.
[CMA-Compendium]
Ans: (1) Exchange ratio = 0.50 (2) MPS = 159.60 (3) BVPS (Pharma) = 14, BVPS (FMCG) = 8

// CA NAGENDRA SAH // WWW.NAGENDRASAH.COM

 MERGER & ACQUISITION 9.23

FINANCIAL RESTRUCTURING
Question No. 8A [SM-2023] [RTP-N23] [MTP-M23-10M] [MTP-N18-8M] [SM-OLD] [May-2017-8M]
[N11-10M] [RTP-N14] [May-2015-Nepal-10M] [RTP-Nov-2020 New/Old]
The following is the Balance-sheet of XYZ Company Ltd as on March 31st, 2006.
Liabilities  (lakh) Assets  (lakh)
6 lakhs equity shares of 100/- each 600 Land & Building 200
2 lakhs 14% Preference shares of 100/- each 200 Plant & Machinery 300
13% Debentures 200 Furnitures & Fixtures 50
Debenture Interest accrued and Payable 26 Inventory 150
Loan from Bank 74 Sundry debtors 70
Trade Creditors 300 Cash at Bank 130
Preliminary Expenses 10
Cost of Issue of debentures 5
Profit & Loss A/c 485
1,400 1,400
The XYZ Company did not perform well and has suffered sizable losses during the last few years. However, it is
now felt that the company can be nursed back to health by proper financial restructuring and consequently the
following scheme of reconstruction has been devised:
(i) Equity shares are to be reduced to 25/- per share, fully paid up;
(ii) Preference shares are to be reduced (with coupon rate of 10%) to equal number of shares of 50 each, fully
paid up.
(iii) Debenture holders have agreed to foregone interest accrued to them. Beside this, they have agreed to accept
new debentures carrying a coupon rate of 9%.
(iv) Trade creditors have agreed to forgo 25 per cent of their existing claim; for the balance sum they have agreed
to convert their claims into equity shares of 25/- each.
(v) In order to make payment for bank loan and augment the working capital, the company issues 6 lakh equity
shares at 25/- each; the entire sum is required to be paid on application. The existing shareholders have agreed
to subscribe to the new issue.
(vi) While Land and Building is to be revalued at 250 lakhs, Plant & Machinery is to be written down to 104
lakhs. A provision amounting to 5 lakhs is to be made for bad and doubtful debts.
You are required to show the impact of financial restructuring/re-construction. Also, prepare the new balance
sheet assuming the scheme of re-construction is implemented in latter and spirit.
Ans:
Impact of Financial Restructuring:
(i) Benefits to XYZ Ltd.
(a) Reduction of liabilities payable  in lakhs  in Lakhs
Reduction in equity share capital (6 lakh shares x 75 per share) 450
Reduction in preference share capital (2 lakh shares x 50 per share) 100
Waiver of outstanding debenture Interest 26
Waiver from trade creditors (300 lakhs x 0.25) 75
651
(b) Revaluation of Assets
Appreciation of Land and Building (250 lakhs - 200 Lakhs 50

(ii) Amount of 701/- lakhs utilized to write off losses, fictious assets and over-valued assets.
Writing off profit and loss account 485
Cost of issue of debentures 5
Preliminary expenses 10
Provision for bad and doubtful debts 5
Revaluation of Plant and Machinery (300 lakhs – 104 lakhs) 196

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 9.24 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT
701
Balance sheet of XYZ Ltd as at_______ (after re-construction)
Liabilities Amount Assets Amount
12 lakhs equity shares of 25/- each 300 Land & Building 250
2 lakhs 10% Preference shares of 50/- each 100 Plant & Machinery 104
9% debentures 200 Furnitures & Fixtures 50
Trade creditors 225 Inventory 150
Sundry debtors 70
-5 65
Cash-at-Bank 206
(Balancing figure)*
825 825

 TEST YOUR KNOWLEDGE

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 8.1 [MTP-May-2019-8M]
The Nishan Ltd. has 35,000 shares of equity stock outstanding with a book value of 20 per share. It owes debt
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. 15,00,000
Interest 1,80,000 Equity 7,00,000
EBT (Rs. 1,00,000) Rs. 22,00,000
Tax 0
EAT (Rs. 1,00,000)
Depreciation Rs. 50,000
Principal Repayment (Rs. 75,000)
Cash Flow (Rs. 1,25,000)
Evaluate and Restructure the financial line items shown assuming a composition in which creditors agree to convert
two thirds of their debt into equity at book value. Assume Nishan will pay tax at a rate of 15% on income after the
restructuring, and that principal repayments are reduced proportionately with debt. Demonstrate as to who will
control the company and by how big a margin after the restructuring?

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