Valuation- Merger and Acquisitions

1. General Understanding of Merger and Acquisition

 Meaning of Merger
 Combination of two or more companies to form a new company

 1.2 Types of Mergers

Type of Merger Definition Purpose Example

Merger between companies Reduce competition,

Horizontal Two competing car
in the same industry and increase market share,
Merger manufacturers merging.
stage of production. economies of scale.

Merger between companies Ensure supply chain A car manufacturer

Vertical Merger at different stages of consistency, reduce costs, merging with a tire
production or distribution. control distribution. supplier.

Conglomerate Merger between companies Diversify operations, reduce A food company merging
Merger in unrelated industries. risk, explore opportunities. with a tech firm.

Market- Merger between companies A U.S. retailer merging

Expand market reach and
Extension in different markets selling with a European
customer base.
Merger similar products. retailer.

Product- Merger between companies A soft drink company

Complement product lines,
Extension offering related products in merging with a snack
increase sales.
Merger the same market. company.

Merger between companies

Congeneric Leverage shared resources, A bank merging with an
in related industries with
Merger expand offerings. insurance company.
overlapping interests.

A startup merging with a

A private company merges
Reverse Merger Gain public status quickly. dormant public
with a public company.
company.

 1.3 Acquisitions
 An acquisition occurs when one company (the acquiring or buyer company) purchases a majority or all
of another company’s (the target company) shares or assets to gain control over it. This process can
involve buying the entire company or just enough shares to hold a controlling interest.
 In Process of acquisitions all companies continue in future.

 1.4 Purpose of Acquisitions:

1. Market Expansion: Entering new markets or regions.

2. Synergy: Combining strengths for cost savings and revenue growth.
3. Diversification: Expanding into new industries to reduce risk.
4. Eliminating Competition: Removing a competitor from the market.
5. Access to New Technologies or Talent: Acquiring innovation or skilled employees.

Page 1 of 32
 1.5 Acquisition Price
 It means consideration to be paid to Acquiree [Target Company]
 Consideration may be paid in Cash/Shares.
 If consideration is paid in Cash, then either existing asset are used/debt raised
 In cash of shares Acquirer issue shares to Acquiree in exchange.

 1.6 Value (Rates)

Value Formula
Intrinsic Value [Assets-Liabilities]/No. of Shares
Or
ESC+R&S-Fictitious Assets/No. of Shares

Market Value Price in Market [IV +/- Sentiments]

Purchase Value Agreed Price [MV +/- Premium]
Synergy Value NPV of incremental CF

Page 2 of 32
Lecture-2

2. Formula for Merger and Acquisitions

 Consideration is decided after negotiation.

3. Financial Analysis for determining consideration

S No Particulars A Ltd B Ltd

a Net Assets 20,00,000.00 15,00,000.00
b No. of Shares 10,000 5,000
c Earnings 10,00,000.00 7,50,000.00
d Market Price 50.00 25.00

Evaluate assuming A Ltd wants to Acquire B Ltd.

1. Calculation of Intrinsic Value

Particulars A Ltd B Ltd
IV (a/b) 200.00 300.00

2. Calculation of EPS

Particulars A Ltd B Ltd

EPS (c/b) 100.00 150.00

Consideration
Particulars IV EPS Market Price
Swap Ratio 3:2 1.5:1 .5:1
Shares issued by A Ltd to B Ltd
5000*3/2 7500
5000*1.5/1 7500
5000*.5/1 2500

Exchange Ratio- It could be anything like, EPS, Market Price, Intrinsic Value

Swap Ratio= Value of Target Company

Value of Acquirer

A Ltd Pre and Post Merger shares price.

Particulars Pre-Merger Post-Merger

Net Assets 20,00,000.00 35,00,000.00
No. of Shares 10,000 17,500
Price of shares 200.00 200.00
Post Merger Total No. of Shares of A Ltd= 10,000 + 7500 shares issued to B Ltd= 17,500 Shares and also assets
have been combined that is 20,00,000 + 15,00,000 (B Ltd) = 35,00,000.00

Page 3 of 32
Different types of Value for Swap

Basis Formula Swap Formula Interpretation

Market Price Mkt Value Mkt Price of Target In this case pre-merger and Post-
No. of Shares Mkt Price of merger Mkt Price will be remain
Acquirer same
Or,

PE Ratio x EPS
Earning Price Per Earning EPS Price of Target In this case pre-merger and Post-
Shares No. of shares EPS Price of merger EPS will be remain same.
Acquirer
Intrinsic Value [Assets-Liabilities] IV Price of Target In this case pre-merger and Post-
No. of Shares IV Price of merger IV will be remain same.
Acquirer
Book Price Per BV of [Assets-Liabilities] BVPS of Target In this case pre-merger and Post-
Shares No. of shares BVPS of Acquirer merger Book Value will be remain
same.

 Price Earnings Ratio= Market Price Per Shares

Earing Price Per Shares

The Price-to-Earnings (P/E) Ratio is a financial metric used to evaluate a company's valuation by comparing
its stock price to its earnings per share (EPS).

In Financial Analysis Book Value Per Share and Intrinsic Value used Interchangeably

General Interpretation: -

For Acquirer IV is Best

For Acquiree MV is Best

How to calculate Post-Merger Swap Ratio

Particulars Formula
Intrinsic Value Net Assets of Acquirer + Net Assets of Acquiree
No. of Shares Acquirer + No. of Shares to be issued to Acquiree

Post Merger Market Price Option: -1

= Post Merger Mkt Value of Combined Business

Post Merger Total No. of Equity Shares

Option: -2

= Post Merger EPS x Post Merger PE Ratio

** Assumption: - If Post Merger PE Ratio is not given then assume

Acquirer Pre-Merger PE Ratio as Post-Merger PE Ratio.

Post Merger EPS

Assumption: - 1: No Synergy on Acquisitions
Post Merger EPS of Target Co.
= Earnings of Acquire + Earning of Target (Acquiree)
Jo EPS Post merger acquirer Post Merger No. of Shares
ka hog avahi target ka bhi
hoga.

Page 4 of 32
 Assumption: - 2 If there is synergy

Absolute Synergy Proportionate Synergy

Earning of Acquirer + Earning of Earning of Acquirer + Earning of

Target + Synergy_____________ Target + % of Synergy_________
Post Merger no. of shares Post Merger no. of shares

Absolute Synergy- It means direct Proportionate Synergy- It means

savings incremental savings

** Post-merger no. of equity shares=

 Pre-merger no. of ES + Pre-merger No. of ES of Target x Swap Ratio

Example: -1

Particulars A Ltd B Ltd

EAT 7,50,000.00 2,50,000.00
No of shares 4,00,000.00 2,00,000.00
EPS 1.88 1.25
PE Ratio 10.00 5.00

I. Calculate Market Price of Both Company

II. Market Capitalization of Both Company.
III. If PE ratio of A Ltd 7.5, what is market price of A Ltd.
IV. Does Market value of A Ltd Change?
V. Calculate Swap ratio considering A Ltd Revised Market Price.

1.Market Price
Particulars A Ltd B Ltd
EPS 1.88 1.25
PE Ratio 10.00 5.00
Market Price 18.75 6.25
2.Market Capitalization
Particulars A Ltd B Ltd
Market Capitalization= MP x No. of shares 75,00,000.00 12,50,000.00

3.If PE Ratio of A Ltd 7.5

Particulars A Ltd B Ltd
EPS 1.88 1.25
PE Ratio 7.50 5.00
Market Price= EPS X PE Ratio 14.06 6.25

4.Market Capitalization-Revised
Particulars A Ltd B Ltd
Market Capitalization= MP x No. of shares 56,25,000.00 12,50,000.00

5.Swap Ratio on the basis of revised market price

Particulars A Ltd B Ltd
Market Price 14.06 6.25
Swap Ratio= MP Target/ MP Acquirer 0.44

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Example: -2

Particulars Ram Ltd Sham Ltd

EAT 2,50,000.00 90,000.00
No of shares 50,000.00 30,000.00
MPS 21.00 14.00

Calculate: -

i. Calculate EPS of both companies.

ii. If Ram Ltd acquire Sham Ltd, what should be post-merger EPS if swap ratio is Market Price.
iii. What should be the exchange ratio of sham Ltd wants to ensure same EPS before merger.

i. EPS
Particulars Ram Ltd Sham Ltd
EAT 2,50,000.00 90,000.00
No of shares 50,000.00 30,000.00
EPS 5.00 3.00

ii. If Ram Ltd acquire Sham Ltd, what should be post-merger EPS if swap ratio is Market Price.

Market Price is Swap Ratio= 14/21= 2:3

No. of shares to be issued by Ram Ltd to Sham Ltd= 30,000 x 2/3=20,000 shares

Post merger shares of A Ltd= 50,000 + 20,000= 70,000 Shares

Post Merger EPS= (Earning of Acquirer + Earning of Target)/ Post merger shares

= (2,50,000 + 90,000)/70,000= 4.857

iii. What should be the exchange ratio of sham Ltd wants to ensure same EPS before merger.

If Sham Ltd wants to continue same EPS before merger, then swap ratio must be based on EPS.

Swap Ratio= EPS Target/ EPS Acquirer= 3/5= 0.6

No. of shares to be issued by Ram Ltd to Sham Ltd. 30,000 x 3/5= 18,000

Proof: -

Post merger EPS of Ram Ltd= (2,50,000 + 90,000)/(50,000 + 18,000)= 5

EPS of Sham= 5 x.3/5= 3

4. Evaluation of Gain/Loss due to Merger and Acquisition

Steps Explain
Step-1 Calculate pre-merger position
Step-2 Calculate post-merger position
Step-3 Calculate gain/loss by comparing Step-1 and Step-2

Post merger MPS of Target Co. = [Post Merger MPS x No. of shares to be issued]

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Example: -3

Particulars A Ltd B Ltd

Earnings 1,00,000.00 60,000.00
No of shares 50,000.00 60,000.00
MPS 20.00 10.00

Calculate gain/loss if swap based on Market Price.

i. Swap Ratio on the basis of MP= 10/20= 0.5

No. of shares issued by A Ltd to B Ltd= 60,000 x 10/20= 30,000 Shares

ii. Post-merger EPS= (Earning of A + Earning of B)/ (Shares of A + Shares issued to B)

= (1,00,000 + 60,000)/ (50,000 +30,000)
=2
iii. Calculation of post-merger market price (assuming PE ratio of A will continue)

Pre-merger PE ratio of A Ltd= MPS/EPS= 20/2= 10

Post Merger Market Price= Post Merger EPS x Post Merger PE Ratio=

= 10 x 2= 20

iv. Evaluation of gain/loss

Market Price EPS

Particulars A Ltd B Ltd Particulars A Ltd B Ltd
Pre-Merger 20.00 10.00 Pre-Merger 2.00 1.00
=2
=20 x10/20
Post-Merger 20.00 Post-Merger 2.00 x10/20
10.00
1.00
Gain/Loss - - Gain/Loss - -

5. Selection when target company is more then one

Step: -1 Evaluate each target separately

Step: -2 Select target where post position will improve.

Refer Q-4

6. Decomposition of Market Price

MPS= EPS X PE Ratio

a) EPS= Book Value per shares x Return on Equity

b) Book value per shares = Net Assets/ No of shares

c) Return of Equity= EPS/BVPS *100

** Net Assets= Assets-Liabilities or ESC + R&S-Fictitious Assets

Q-09

7. EPS Growth Rate

 EPS Growth Rate= ROE x Retention Ratio

 Retention Ratio= 100-Dividend Payout Ratio

Page 7 of 32
8. How to calculate deal price?

Steps Explain
Step-1 Calculate Avg (Mean) of relevant ratios
Step-2 Deal Price= [Intrinsic Value+Acquisition Premium]
Step-3 Intrinsic Value= Expected EPS x PE Multiple
Step-4 Acquisition Premium= Market Price-Deal Price
Q-24

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Page 9 of 32
 Merger and Acquisitions Solutions-Solutions
Q5. Solutions

Particulars XYZ Ltd ABC Ltd

MPS 25 12.5
No. of Shares 2,00,000.00 1,00,000.00
PAT 4,00,000.00 1,00,000.00

The merger will be affected by means of a stock swap (exchange). ABC Ltd. has agreed to a plan under which
XYZ Ltd. will offer the current market value of ABC Ltd.’s shares.

What are the pre-merger earnings per share (EPS) and P/E ratios of both the companies?

Particulars XYZ Ltd ABC Ltd

Pre-merger EPS 2.00 1.00
PE Ratio 12.50 12.50

If ABC Ltd.’s P/E ratio is 8, what is its current market price ? What is the exchange ratio ? What will XYZ
Ltd.’s post-merger EPS be?

If PE ration s 8 then current market price will be

MPS= 1 x8=8

Exchange Ratio would be: - Target Company-ABC /Acquirer Company-XYZ

= 8/25= .32

Shares to be issued by XYZ Ltd to ABC Ltd= 1,00,000 x .32= 32000 Shares

Post Merger XYZ EPS= [Earning of Target Company + Earning of Acquirer Company]/ Post merger shares

= [4,00,000 + 1,00,000]/[2,00,000 + 32,000]= 2.16

What must the exchange ratio be for XYZ Ltd.’s that prehend post-merger EPS to be the same?

If exchange ratio based on the EPS, then pre-merger EPS and post-merger EPS will be same.

It means EPS = 1/2= .5

Q6.

Company X is contemplating the purchase of Company Y

Particulars X Y
MPS 30 20
No. of Shares 3,00,000.00 2,00,000.00
EPS 4.00 2.25

Managements of both companies are discussing two alternative proposals for exchange of shares as
indicated below:

(i) In proportion to the relative earnings per share of two companies.

(ii) 0.5 share of Company X for one share of company Y (05 :1).

Page 10 of 32
Solutions:

In proportion to the relative earnings per share of two companies

Exchange ratio on the EPS of both companies

= 2.25/4= 0.5625

No. of shares to be issued by X Ltd to Y Ltd= 2,00,000 x .5625= 112500

Post-merger EPS= [Earning Target Co. + Earning Acquirer Co.]/Post-merger shares

=[12,00,000 +4,50,000]/[3,00,000 + 1,12,500]=4

0.5 Share of Company X for one share of company Y (05 :1).

No. of shares to be issued by X Ltd to Y Ltd= 2,00,000 x .5= 1,00,000

Post-merger EPS= [Earning Target Co. + Earning Acquirer Co.]/Post-merger shares

=[12,00,000 +4,50,000]/[3,00,000 + 1,00,000]=4.125

Exchange of Gain/Loss

Swap at .5 EPS
Particulars X Ltd Y Ltd Particulars X Ltd Y Ltd
Pre-Merger 4 2.25 Pre-Merger 4.00 2.25
=4
=4.125*.5
Post-Merger 4.125 Post-Merger 4.00 x.5625
2.0625
2.25
Gain/Loss .125 .1875 Gain/Loss - -

Q16.Solutions

Particulars RIL SIL

EAT 20,00,000.00 10,00,000.00
No. of Shares 10,00,000.00 10,00,000.00
EPS 2.00 1.00
PE Ratio 10.00 5.00

Reliable Industries Ltd. (RIL) is considering to takeover of Sunflower Industries Ltd. (SIL).

What is the market value of each company before merger?

Particulars RIL Ltd SIL Ltd

MPS 20.00 5.00
Market Value 2,00,00,000.00 50,00,000.00

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. If there are no synergic effects, what is the market value of the post-
merger RIL? What is the new price for share? Are the shareholders of RIL better or worse off than they
were before the merger

Exchange Ratio= 1:4

No. of shares to be issued by RIL to SIL Ltd= 10,00,000 x 1/4= 2,50,000 Shares

Page 11 of 32
Post-merger EPS = [20,00,000 + 10,00,000]/[10,00,000 + 2,50,000]= 2.40

Post-merger Market Value per shares= post-EPS merger x PE Ratio merger

= 2.40 x 10= 24

Note: - In case pf post-merger PE ratio is not given then consider pre-merger acquirer.

Revised Market Value

RIL= 10,00,000 x 24=2,40,00,000

Are the shareholders of RIL better or worse off than they were before the merger

Pre-merger market value of shares= 2,00,00,000

Post-merger market value of shares=2,40,00,000

Net gain= 40,00,000/-

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?

New post-merger EPS.

EPS= ([Earning of Target Co. + Earning of Acquirer Co] + % of Synergy)/ Post-merger no. of shares

= [20,00,000 + 10,00,000] +20% / [10,00,000 + 2,50,000]

= 36,00,000/12,50,000

=2.88

Post merger Market Price of shares= post-merger eps x PE ratio

= 2.88 x 10= 28.80

Market Value of shares= 10,00,000 x 28.80= 2,88,00,000

Are the shareholders of RIL better or worse off than they were before the merger

Pre-merger market value of shares= 2,00,00,000

Post-merger market value of shares=2,88,00,000

Net gain= 88,00,000/-

Page 12 of 32
Q4. Solutions

A Ltd. is considering takeover of B Ltd. and C Ltd.

i) Price earnings ratios

PE Ratio= MPS/EPS

EPS= Earnings/No. of shares

Particulars A Ltd B Ltd C Ltd

EPS 2.00 1.00 2.00
PE Ratio 30.00 37.00 23.00

If MPS is based of exchange ratio, then

Particulars A Ltd B Ltd C Ltd

Exchange Ratio 0.62 0.77
No. of Shares to be issued by A 11.10 6.90

ii) Earnings per share of A Ltd. after the acquisition of B Ltd. and C Ltd. separately. Will you recommend
the merger of either / both of the companies? Justify your answer.

Post-merger EPS after acquisition of B Ltd by A Ltd

Post-merger EPS= [Earning of Target Company B + Earning of Acquirer Company A]/ Post Merger no of
shares.

[18+90]/ [45+11.10] = 1.925

Post-merger EPS after acquisition of C Ltd by A Ltd

Post-merger EPS= [Earning of Target Company C + Earning of Acquirer Company A]/ Post Merger no of shares

= [18+90]/ [45+6.90] =2.08

Recommendation: - Acquisition of C Ltd is beneficial for A Ltd because there is gain in EPS.

Q1. Solutions: -

Particulars Acquiring Target

Earnings 2,50,000.00 72,500.00
No. of Shares 1,10,000.00 20,000.00
60.00
MPS 50.00
(Offer-90)

i) The purchase price premium.

Offered Price=90
Existing Market Price=60
Net Gain= 30 (50%)

ii) The exchange ratio

It is based on MSP
Exchange Ratio= 90/50= 1.8

iii) The number of new shares issued by the acquiring company

Page 13 of 32
No. of shares to be issued by Acquiring company to target company= 20,000 x 1.8= 36,000 shares
iv) Post merger EPS of acquiring firm

= [Earning of Target co. + Earning of Acquiring Co.]/ [Shares of Acquirer + Shares to be issued to Target]

= [2,50,000 + 72,500]/[1,10,000 + 36,000]

= 2.21

v) Pre-merger EPS of the Acquiring company

EPS= Earnings/ No. of shares

= 2,50,000/1,10,000= 2.27

vi) Pre-merger P/E ratio

PE Ratio = MPS/EPS
= 50/2.27
= 22

vii) Post merger market price of shares

MPS = Post merger EPS x PE Ratio

= 2.21 x 22=48.60

viii) Post-merger equity ownership distribution

Particulars Acquiring Target Total

Post Merger Shares 1,10,000.00 36,000.00 1,46,000.00
% 75.34% 24.66% 100%

Q7. Solutions

Particulars FML-Acquirer ML-Target

Earnings 200.00 40.00
No. of Shares 20.00 10.00
PE Ratio 10.00 5.00

i) Calculate Swap ratio on the basis of MPS

In Question MPS is missing so calculate it = MPS = EPS X PE Ratio

Particulars A Ltd B Ltd

EPS 10.00 4.00
MPS 100.00 20.00
Swap Ratio 20/100= .20

No. of shares to be issued= 10 x .20= 2 shares

ii) What is the EPS of Mark Limited after acquisition?

Post merger EPS= [200 + 40/ [20+2] = 10.91

iii) What is the expected market price per share of Mark Limited after acquisition assuming that P/E ratio
of Mark limited remains unchanged?

Post Merger MSP= Post Merger EPS x PE ratio of acquirer

= 10.91 x 10=109.09

Page 14 of 32
iv) Determine the market value of the merged firm.

Market Value of Merger Firm= Post merger combined no. of shares x post-merger MPS

=22 x 109.09=2,400

v) Calculate gain/loss for shareholders of the two independent companies after acquisition.

On the Basis of MPS

Particulars FML ML
Pre-Merger MPS 2,000.00 200.00
Post Merger MPS 2198 219.82
Gain 198.00 19.82

Q9.

i) Decompose the share prices 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 (BVPS) companies.

Particulars A Ltd B Ltd

Earnings 2,10,000.00 99,000.00
No. of Shares 10,000.00 8,000.00
MPS 400.00 150.00
EPS (PAT/No. of Shares) 21.00 12.38
PE Ratio (MPS/EPS) 19.05 12.12
BVPS (Assets-Liabilities) or ESC+ R&S-Fictitious Assets 120.00 100.00
ROE= EPS/BVPS 17.50 12.38

ii) Estimate future EPS growth rates for each firm

EPS Growth Rate= ROE X Retention Ratio

Retention Ratio= 100- Dividend payout ratio

Particulars A Ltd B Ltd

ROE 17.50% 12.38%
DPR 40% 60%
Retention Ratio= 100- Dividend payout ratio 60% 40%
EPS Growth Rate= EPS X Retention Ratio 10.50% 4.95%

iii) Based on expected operating synergies. A Ltd. estimates that the intrinsic value of B’s equity share
would be 200 per share on its acquisition. You are required to develop a range of justifiable equity share
exchange ratios that can be offered by A Ltd. to B Ltd.’s shareholders. Based on your analysis in parts (i)
and (ii) would you expect the negotiated terms to be closer to the upper, or the lower exchange ratio limits
?Why?

a) Based on Market Price= 150/400=.375

b) Based on IV= 200/400=.5

iv) Calculate the post-merger EPS based on an exchange ratio of 0.4:1 being offered by A Ltd. Indicate the
immediate EPS accretion or dilution, if any, that will occur for each group of shareholders.

Exchange ratio= .4:1

No. of shares issued by A Ltd to B Ltd= 8000 x.4= 3200 shares

Post Merger EPS of A Ltd = [210000+99000]/ [10000+3200] =23.41
Post Merger EPS of B Ltd= 23.41 x .4=9.364

(Post merger ke baad jo Acquirer ka EPS hog avahi Target Ka bhi hoga]

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Impact=
EPS of A= [23.41-21] 2.41 (+)
EPS of B= [9.364-12.375] 3.011 (-)

v) Based on a 0.4:1 exchange ratio and assuming that A’s pre-merger P/E ratio will continue after the
merger, estimate the post-merger market price. Show the resulting accretion or dilution in pre-merger
market prices

Post Merger Price= Post Merger EPS X PE Ratio

= 23.41 x 19.05=446

Gain/Loss Analysis

Particulars A Ltd B Ltd

Pre-Merger 400.00 150.00
Post Merger 446.00 178.40
Gain/Loss 46.00 28.40

Post merger MPS of Target Co. B Ltd= Post merger MPS X Swap Ratio.
= 446 x .4= 178.40

Q10.
 Fat Ltd. wants to acquire Lean Ltd.
 Shareholders of Lean Ltd. will get one share in Fat Ltd. for every two shares
 Exchange ratio 1:2

No of shares to be issued by Fat Ltd to Lean Ltd= 60,000 Shares x 1/2= 30,000 Shares

i) Calculation of Purchase Consideration.

Equity Shares= 30,000 x 15= 4,50,000

12% Debenture issued 2,00,000
Liabilities to be paid= 3,00,000
Less: Debtor and Inventories (1,80,000)
Less: Cash Balance (20,000)

Total Consideration= 7,50,000

S No Years Cash Flow PVF @14% PV

1 1 3,00,000.00 0.877192982 2,63,157.89
2 2 3,00,000.00 0.769467528 2,30,840.26
3 3 3,00,000.00 0.674971516 2,02,491.45
4 4 3,00,000.00 0.592080277 1,77,624.08
5 5 3,00,000.00 0.519368664 1,55,810.60
6 6 3,00,000.00 0.455586548 1,36,675.96
6 6 1,00,000.00 0.455586548 45,558.65
12,12,158.91
Analysis: NPV of acquisition [12,12,158.91-750000] = 4,62,158 so business should acquire.

Page 16 of 32
Q12.

Acquiring company X Ltd. and the target company Y Ltd

Swap ratio the weights are decided as 40%, 25% and 35% respectively for Earnings. Book value and Market
price of share of each company.

S No Particulates X Ltd Y Ltd

A Market Capitalisation 500 750.00
B No. of Shares 10 7.50
C MPS (a/b) 50 100
D PE Ratio 10 5.00
E EPS(c/d) 5 20

Calculation of Book Value Per Shares

BVPS= [Assets-Liabilities]/No. of Shares or ESC+R&S-Fictitious Assets

S No Particulates X Ltd Y Ltd

A No. of Shares 10 7.50
B R&S 300 165.00
C ESC (10 each) 100 75
D BVPS 40 32

Now Calculate SWAP Ratio on Weighted

EPS= 20/5*40%= 1.6

BVPS=32/40*25%= 0.2
MPS=100/50*35%= 0.7
Total 2.5

No. of shares to be issued by X Ltd to Y Ltd= 7.5 lakhs x 2.5= 18.75

Promoters holding percentage after acquisition.

Pre-Merger Shares Post-Merger Shares

Total Shares 17.5 28.75
Promoters 9.75 11.25
55.71% 39.13%

What is the EPS of X Ltd. after acquisition of Y Ltd

Need to find out earnings

EPS= Earnings/No of shares

X Ltd= 5x10= 50

Y Ltd=20 x 7.5=150

Post Merger EPS= [ 50 + 150]/ [28.75] = 6.95

What is the expected market price per share and market capitalisation of X Ltd. after acquisition assuming
P/ E ratio of firm X Ltd. remains unchanged?

Post-merger MPS= Post Merger EPS X PE Ratio of Acquirer

= 6.95 X10= 69.50

Post Merger Market Capitalization= 28.75 X 69.50= 2000

Page 17 of 32
Calculate free float market capitalisation of the merged fair

Post Merger No. of Shares= 28.75

Currently Promoters holding

X Ltd 4.75

Y Ltd= 5 X 2.5=12.25=17.25

Free Float= [28.75-4.75+7.25] 11.5

Q13.

Necessary shares to be issued by FI to FP??

S No Particulates Fortune India Ltd Fortune Pharma Ltd

A Profit 11400 1,470.00
B No. of Shares 3000 1500
C MPS ?? 24.5
D PE Ratio 42 25.00
E EPS 3.8 .98

We can find No. of shares by using EPS or BVPS because in both we use No. of shares

EPS= Earnings/No. of shares

MPS= EPS X PE

WN-1

EPS= MPS/PE= 24.50/25=.98

WN-2

Now we have EPS so

EPS= Earnings/ No of shares

=.98=1470/No of shares

No. of shares= 1500

Exchange Ratio= 1500/3000= .5

Shares to be issued by FI to FP= 1500 x.5= 750 shares

Expected Market Price of Fortune India Ltd

MPS= EPS X PE Ratio

= 3.8 X 42=159.60

Book value per share of both the Co’s after demerger.

Particulars Fortune India Ltd Fortune Pharma LtdFortune India FMCG

Assets 70000 25100 44900
Liabilities 25000 4100 20900
Total 45000 21000 24000
No. of shares 1,500.00 3000
BVPS 14.00 8.00
Note: - Before de=merger each division was combined but after de-merger there is only one division is
remaining in Fortune India that is FMCG and Pharma is not separate company.

Page 18 of 32
Q17.

i) Calculate total value of business

=Value of Business= Avg (Aggregate discounted cashflow @8% + Net Assets Value)

= Value of Business= (591.71+250)/2= 421.20

WN-1

Calculation of discounted cash flow @8%

Years Cash Flow PVF@8% PV

1 105 0.925925926 97.22222222
2 120 0.85733882 102.8806584
3 125 0.793832241 99.22903013
4 120 0.735029853 88.20358234
5 100 0.680583197 68.0583197
5 200 0.680583197 136.1166394
Total 591.7104522

WN-2

Calculation of Net Assets Value

Net Assets= Assets – Liabilities

[350-100] =250

ii) The number of shares to be issued by AB Ltd.

AB Ltd will issue shares equivalent to value of business of XY Ltd.

Total Value of Business of XY Ltd is =421.20

Price of shares= Avg of Higher and Lower Rate of last 6 months.

=(570+430)/2= 500

No of shares to be issued= 421.20 Lakhs /500= 84,240 shares.

iii) The basis of allocation of the shares among the shareholders of XY Ltd.

20 Lakhs equity @10 each and 10 paid= 200

10 Lakhs equity @ 5 each and 5 paid= 50

Total Shares= 250

4:1

Allocation

10 each 10 paid= 84240/5*4=67392

10 each 5 paid= 84240/5*1=16848

Page 19 of 32
Q18.

Value of Business= [EBIT (1-Tax)]

WACC- Growth Rate

i) Valuation of two firm before merger

Rajjan= [2,00,000-(1-.40)]/ [10%-6%] = 30,00,000

Rekha= [1,60,000(1-.4)]/ [12%-8%] = 24,00,000

ii) The value of the combined firm with synergy effect.

Post Merger EBIT= Sales-COGS

= 12,00,000-12,00,000 x 65%
= 12,00,000-7,80,000
= 4,20,000

Post Merger WACC= Weighted Avg (Where weight is value of business)

=10% x 30/54 + 12% x 24/54

= 5.56+5.33
=10.89% or 11% as per institute

Post-Merger Combined Growth Rate

=6% x 30/54 + 8% x 24/54
=6.89% or 7%

Value of Combined firm

= [4,20,000-(1-.4)]/ [11%-7%] = 63,00,000 Lakhs

If asked value of synergy

Value of combined firm without synergy

EBIT= 12,00,000-12,00,000 x 70%

= 3,60,000

Value of Business= [3,60,000-(1-.40)] / [11%-7%] = 54,00,000

Synergy= 63,00,000- 54,00,000= 9,00,000

Q8.

Evaluation of Price

a) P/S Ratio

Avg of price to sales ratio= .55

Coefficient of variation= .65

b) PE Ratio

Avg price= 3.29

Coefficient of variation=1.52

Page 20 of 32
From mean ratio and coefficient variation of P/S and PE Ratio analysis provides that P/S Ratio is much
lower than PE Ratio. Due to wide range of variation, it is possible to take P/S Ratio as compared to PE
Ratio.

Ask Price= 62,00,000

Annual Sales= 82,00,000
P/S Ratio= 62,00,000/82,00,000= .76
After comparing top 10 entities XY Ltd fall in between 8 and 9.
Price accordingly price will be = .85+.72/2 * 82,00,000= 64,37,000

Only for understanding

Step: -1 Settled ratio either PS/PE. In this question PS lower with ratio and variation hence better for evaluation
Step: -2 Calculate PS Ratio of Firm= Price/Sales
Step: -3 Check fall point of PS Ratio from Top Firms.
Step: -4 Price= Avg of Fall Point x Current Sales

Q22.

i) What is the maximum exchange ratio acceptable to share holder of AB Ltd. If PE ratio of combined firm
is 12 and there is no synergy gain.

Calculation of maximum exchange ratio for AB Ltd.

Note: - Question requires maximum exchange ratio acceptable to AB Ltd shareholders. It means exchange ratio
that does not affect AB Ltd market price will be acceptable. It means shareholder of AB Ltd wants to protect
Market Price of shares after merger. It means AB Ltd pre-merger MPS must be equal to Post-merger MPS.

Post Merger MPS= Post Merger EPS x PE Ratio

Post Merger EPS= [Earnings of VJ Ltd + Earnings of AB Ltd]/ [AB Ltd shares + VJ Shares x ER]

42 = [70+28]/ [20+ 10 x ER] x12

ER= 0.8

ii) What is the minimum exchange ratio acceptable to shareholder of VJ Ltd. in PE ratio is 11 and there is
synergy benefit of 5%.

Post Merger MPS= [Post Merger EPS x PE Ratio] x ER

= [70+28] x105% x 11] x ER / [20 +10 x ER]x ER

= .65

Q23.

ST Ltd. plans to offer a price for BE Ltd

i) Net consideration payable

Value of business= 7 times of EBIDAT – Debt

= 7 x 115.71-240

=569.97

ii) No. of shares to be issued by ST Ltd.

No. of shares to be issued by ST Ltd to BE Ltd= 569.97 Lakhs/220= 2,59,077 shares

Page 21 of 32
iii) EPS of ST Ltd. after acquisition

Post-merger EPS= [Earning of Target + Earning of Acquirer]/[Shares of Acquirer + Shares of Target x ER]

So, in the given question EBIDAT

Particulars ST Ltd BE Ltd Total

EBIDAT 400.86 115.71 516.57
Less: Interest
10% Debentures 58 58
12.5% Institutional loan 30 30
EBDAT 342.86 85.71 428.57
Tax@30% 102.858 25.713 128.571
EBDA 240.002 59.997 299.999

EPS= Net Earning/Net Shares

= 300/ [12+2.59] =20.56

iv) Expected market price per share of ST Ltd. after acquisition.

Post Merger MPS= Post merger EPS x PE Ratio

20.56 x 11= 226.18

PE Ratio= MPS/EPS

= 220/ [240/12] =11

v) State briefly the advantages to ST Ltd. from the acquisition.

Gain/Loss

Particulars EPS MPS

Post Merger 20.56 226.18
Pre-Merger 11 220
Gain 9.56 6.18

Since both companies are in same business hence acquisition gives synergy in the form of cost saving and
revenue process.

Q24.

Company comparable analysis to determine fair acquisition.

Steps Explain
Step-1 Calculate Avg (Mean) of relevant ratios
Step-2 Deal Price= [Intrinsic Value+Acquisition Premium]
Step-3 Intrinsic Value= Expected EPS x PE Multiple
Step-4 Acquisition Premium= Market Price-Deal Price

 Deal Price= Intrinsic Value + Acquisition Premium

= 240+ 240*25%=300
 Intrinsic Value= Expected EPS x PE Multiple
= 15 x 16= 240

Since PE multiple of mini ltd is not given hence avg of comparable company can be used
A B C
Page 22 of 32
 PE Ratio= MPS/EPS 240/14.5=16.55 150/9.57=15.67 300/19=15.79

Avg PE= [16.55+15.67+15.79]/2= 16

 Acquisition premium = Market Price- Deal Price

Companies DP MP Premium In %
P 117 92.45 24.55 24.55/92.45=26.55%
Q 425 357.5 67.5 67.5/357/5=18.88%
R 290 225 66 66/225=29.33%
Avg Premium 24.96%

Q25.

i) Calculation of Avg Value.

Name of Companies EV/LTM Sales EV/LTM EBITDA Equity/LTM PE

A 1 9 17
B 1.7 12 15
C 2.2 14.5 20
D 0.9 8.5 14
E 2.5 11 22
Avg 1.66 11 17.6

ii)Calculation of share price and premium

Name of Companies EV/LTM Sales EV/LTM EBITDA Earning multiplier

Base Value 700 125 .9

Multiplier 1.7 11 17.6
Enterprise Value 1190 1375 15.85
Debt (-) (500) (500) 0
Equity Value 690 875 0
No. of Shares 50 50 0
Market Price 13.8 17.5 15.85
Current MP 11 11 11
Premium 2.8 6.5 4.84
In % 25.45% 59.09% 44%

Q27.

i)Combined EPS

= [Post merger combined profit]/ Combined shares

= [ 2,000]/ [200+50] = 8

ii) Accretion/Dilution

Particulars Amount
Post Merger EPS 8
Pre-Merger EPS 6
Amount 2
In % 33.33%

In Final Profit means profit after tax if question is silent

Page 23 of 32
Q31.

The risk-free rate = 5.5% The market price of risk = 7% The company’s beta = 1.2 Cost of debt 8% Tax rate
= 40% Capital structure: Debt: 40% and Equity: 60%

Cost of Equity (Ke)= CAPM = Rf + (Rm-Rf) x Beta

= 5.5% +(7%-5.5%) x 1.2

=9.2%

WACC= E/(E+D) * Re + D(1-tax)/E+D * Rd

= 60/ (60+40) *9.2% + 40*(1-.40)/60+40*8%=7.66%

Q19.

Table demonstrating potential impact of alternatives

Schem Exchange Vodaphone Total Shares Ratio of Ratio of Market MV shares of MV shares
es-ES Ratio Shares of Voda Voda Idea Value Voda PA of Idea

20,000 2.00 50,000.00 70,000.00 0.71 0.29 35,00,0 10,00,000.

25,00,000.00
.00 00.00 00

25,000 2.50 50,000.00 75,000.00 0.67 0.33 35,00,0 11,66,666.

23,33,333.33
.00 00.00 67

30,000 3.00 50,000.00 80,000.00 0.63 0.38 35,00,0 13,12,500.

21,87,500.00
.00 00.00 00

 If 20,000 shares will be issued then Idea company has no profit and no loss
 If 30,000 shares will be issued then Idea get more benefits as compared to Voda
 If 25,000 shares will be issued then both companies get proportionate benefit. Hence transactions is
recommended at 25,000 shares.

Q20.

Hard Company Limited is planning to acquire Soft Company Limited and merge it with the Company

i) What is the market price of each company’s share before merger?

MPS= EPS X PE Ratio

Particulars Hard Soft

Earnings 335.9 32.61
No. of Shares 50 12.5
EPS 6.718 2.6088
PE Ratio 14.29 10.35
MPS 96.00022 27.00108

ii) Assuming that the management of Hard Company Limited (HCL) estimates that the shareholders of Soft
Company Limited (SCL) will accept an offer of one share of HCL for four shares of SCL. If there are no
synergic effects and post-merger Price/Earnings Ratio remains unchanged, then what will be the market
price of the post-merger HCL share?

Page 24 of 32
Exchange ratio= 1:4

No. of Shares issued by Hard Co. to Soft Co.= 12.5 x 1/4=3.125 shares

Combined Shares post-merger=53.125

Post-merger MPS= Post Merger EPS X PE Ratio

= 6.93 x 14.29

= 99.04

Post Merger EPS= Combined Earnings/Combined Shares

= [335.59+32.61]/53.125= 6.93

iii) Will the shareholders of HCL be better or worse off than they were before the merger?

EPS Hard Soft

Pre-Merger EPS 6.718 2.6088
Post Merger EPS 6.93 1.7325
Net 0.212 -0.8763

MPS Hard Soft

Pre-Merger EPS 96.00022 27.00108
Post Merger EPS 99.04 24.76
3.03978 -2.24108

iv) Due to synergic effects, the management of HCL estimates that the earnings will increase by 20%. In
such a case, what will be the new post-merger EPS and price per share if the new Price/Earnings Ratio of
HCL will be 15? Will the shareholders be better off or worse off than before the merger?

Post Merger EPS = [Combined Earnings] + Synergy/ Combined Shares

[= [335.59+32.61] + 20%/53.125= 8.32

Post Merger MPS= Post Merger EPS x PE Ratio

= 8.32 x 15

= 124.75

Will the shareholders be better off or worse off than before the merger?

EPS Hard Soft

Pre-Merger EPS 6.718 2.6088
Post Merger EPS 8.32 2.08
Net 1.602 -0.5288

MPS Hard Soft

Pre-Merger EPS 96.00022 27.00108
Post Merger EPS 124.75 31.1875
28.74978 4.18642

Page 25 of 32
Q21.

Particulars Deepika Alia

Share Price 12 15
PE Ratio 17 10
EPS 0.705882353 1.5

No. of shares 50,00,000.00 10,00,000.00

Earnings 35,29,411.76 15,00,000.00

Swap Ratio 1.25

Post Merger EPS= [35,30,000 + 15,00,000]/[50,00,000 +10,00,000 x1.25]

= .8048

Changes in EPS= .8048-.7056= 0.0988

Q16.

The Shareholders of A Co. have voted in favour of a buyout offer from B Co. So B Co is acquirer and A Co is
Target co.

Exchange ratio is = 1:3

a) What will the EPs of B. Co. be after the merger?

Post Merger EPS= [6.75+3]/ [1.70 + .60 x 1/3] = 5.13

b) What will the P/E ratio be if the NPV of the acquisition is zero?

If NAV of acquisition is Zero then Market price will remain unchanged, Using PE Ratio of B Company current
market price= MPS= PE X EPS [20 x 3.97] = 79.40

Post Merger PE Ratio= Post Merger MPS/ Post Merger EPS

= 79.40/5.13= 15.48

C) What must B Co. feel be the value of the synergy between these two firms?

Value of shares of Target Company = 60,000 x 25= 15,00,000

Shares issued by Acquirer to Target = 60,000 x 1/3 x 79.40= 15,88,000

Synergy Gain= 88,000

Q26.

Ace Ltd is considering the acquisition of Base Ltd. Ace’s

The Management of Ace Ltd is evaluating three options for Base Ltd.

Option-1
Particulars No. of shares Price Amount
Value of shares 35 15 525
Shares issued by Acquirer @7 35 17 595
Acquisition premium 70
Target synergy 110
Page 26 of 32
 Gain 40

Option 2: Share Exchange ratio of 0.7 shares of Ace against each share of Base Ltd.

Ace will share issue 35 x .70= 24.5

Combined shares= 80 + 24.50= 104.50 shares

Combined entity value= [ 1920 + 525+110] = 2555

Post MPS= 2555/104.50= 24.40

Pre-Merger Target Co. Value= 525

Post Merger Target Co. Value= [24.50 x 24.40] = 597.80

Acquisition Premium= [597.80-525] = 74m

Acquirer Gain= 110-74= 36M

Option 3: Share Exchange ratio of 0.5 shares of Ace against each share of Base, plus 5 per share.

Ace will share issue 35 x .50= 17.5

Cash Paid = 35 x 5= 175

Combined shares= 80 + 17.50= 97.50 shares

Combined entity value= [ 1920 + 525+110-175] = 2380

Post MPS= 2380/97.50= 24.41

Pre-Merger Target Co. Value= 525

Post Merger Target Co. Value= [24.41 x 27.5] = 427.18+ 175 (in Cash) = 602.18

Acquisition Premium= [602.18-525] = 77m

Acquirer Gain= 110-77= 33M

Conclusion: -

Option-1: For acquirer option-1 is better and Option-3 is better for Target.

Page 27 of 32
Q33.

- Current Ratio = 4
- Acid-Test Ratio = 2.8
- Gross Profit Margin = 30%
- Tax Rate = 40%
- Average Collection Period = 75 days
- EPS = ₹2.52
- Net Worth to Long-Term Debt Ratio = 3.975
- Inventory Turnover Ratio = 6.452
- Current Liability = ₹15.5 Lakh
- Financial Expenses = ₹3 Lakh
- Interest on Long-Term Debt = 15%
- Selling & Administrative Expenses = 10% of Sales
- Face Value of Shares = ₹10

Current Ratio= Current Assets/ Current Liabilities

4= CA/15.5

Current Assets= 15.5*5= 62

Acid Test Ratio= Liquid Assets/Current Liabilities

2.8= Liquid Assets/15.5

Liquid Assets= 43.4

Liquid Assets= Current Assets-Inventory

43.4= 62-Inventory

Inventory= 62-43.4

Inventory=18.6

Average Collection Period= Account Receivable/ Sales*365

75/365= AR/Sales

AR= 75/365*171.428

AR= 35.22

EPS= Earning After Taxes/No. of ES

2.52=18.77/ES

Net Worth to Long-Term Debt Ratio= Net Worth/Long-term Debt

3.975=NW/Debt

Let Assume Debt= x

Interest Paid= 3L

Interest to long term debt=15%

Interest= x * 15%

3= x15%

X= 20L
Page 28 of 32
Net Worth= 3.975*20

Net Worth= 79.5

Inventory Turnover Ratio= COGS/Avg Inventory

6.452= COGS/18.6

COGS=120.01

Sales= 120.01/70%

Sales=171.42

Gross Profit Margin= Gross Profit/Sales

30%= Gross Profit/171.42

Gross Profit=51.42

Income Statement

Sales 171.43
COGS 120.00
GP 51.43
Selling Exp 17.14
Finance Exp 3.00
EBT 31.29
Tax 12.51
EAT 18.77

Balance Sheet

Equity &
Liability Amount Assets Amount
Equity 74.49 Fixed Assets 53
R&S 5.01 Inventory 18.6
Debt 20 Account Receivable 35.22504892
Liability 15.5 Cash 8.174951076
115.00 115

Net Worth= Equity + R&S

Page 29 of 32
Q30.

Value of target Co. is 500 million

Value of the acquiring Co. is 800 million.
Present value of cost savings if the two companies are merged together is 100 million.
Acquiring company expects the cost of integration as 80 million and the shareholders of Target Co. are
expecting a deal premium to be paid of 15 percent over their company’s value.
What is the value of Combined entity? Does the merger result in a net gain for the combined entity?

Premium deal= 500 *15%= 75

Combined Value= 800+500+100= 1400 million

Gain/Loss in hand of Acquirer = [ Synergy benefit + Cost of Integration- Premium paid] [100-80-75] = -55 Loss

Q29.

Understanding HHI (Herfindahl-Hirschman Index)

The HHI (Herfindahl-Hirschman Index) is a measure of market concentration. It helps us determine how
competitive or monopolistic an industry is.

Formula for HHI:

HHI=(Market Share of Firm 1)2+(Market Share of Firm 2)2+...+(Market Share of Firm N)2HHI=(Market Share of
Firm 1)2+(Market Share of Firm 2)2+...+(Market Share of Firm N)2

Where each firm's market share is expressed as a percentage.

Interpreting HHI Values:

 HHI < 1500 → The market is highly competitive (low concentration).

 1500 ≤ HHI ≤ 2500 → The market is moderately concentrated.

 HHI > 2500 → The market is highly concentrated (risk of monopoly).

 A merger that increases HHI by more than 100 points is considered significant for antitrust
concerns.

Step-by-Step Calculation of HHI for the Given Industry

Given Market Shares:

Company A Ltd B Ltd C Ltd D Ltd E Ltd F Ltd G Ltd H Ltd Total

Market Share (%) 25.0 20.0 15.0 10.0 10.0 5.0 7.5 7.5 100.0

Step 1: Compute the Initial HHI

We square each firm's market share and sum them up:

HHI=(25.0)2+(20.0)2+(15.0)2+(10.0)2+(10.0)2+(5.0)2+(7.5)2+(7.5)2HHI=(25.0)2+(20.0)2+(15.0)2+(10.0)2+(10.0)
2+(5.0)2+(7.5)2+(7.5)2=625+400+225+100+100+25+56.25+56.25=625+400+225+100+100+25+56.25+56.25=1587.
5=1587.5

So, the initial HHI = 1587.5, which indicates a moderately concentrated market.

Page 30 of 32
Step 2: Compute the HHI After the Merger of C Ltd and D Ltd

If C Ltd (15%) and D Ltd (10%) merge, their new combined market share will be:

15.0+10.0=25.015.0+10.0=25.0

Now, the new market shares are:

Company A Ltd B Ltd (C Ltd + D Ltd) E Ltd F Ltd G Ltd H Ltd Total

Market Share (%) 25.0 20.0 25.0 10.0 5.0 7.5 7.5 100.0

Now, recalculate HHI:

HHI=(25.0)2+(25.0)2+(20.0)2+(10.0)2+(5.0)2+(7.5)2+(7.5)2HHI=(25.0)2+(25.0)2+(20.0)2+(10.0)2+(5.0)2+(7.5)2+
(7.5)2=625+625+400+100+25+56.25+56.25=625+625+400+100+25+56.25+56.25=1887.5=1887.5

So, the new HHI = 1887.5.

Step 3: Change in HHI (∆HHI) and Antitrust Concern

ΔHHI=New HHI−Old HHIΔHHI=New HHI−Old HHIΔHHI=1887.5−1587.5=300ΔHHI=1887.5−1587.5=300

Since the increase in HHI (300) is greater than 100, the government is likely to raise antitrust concerns.

Final Answer

1. Initial HHI = 1587.5

2. New HHI after the merger = 1887.5

3. Change in HHI (∆HHI) = 300

4. Since the change in HHI exceeds 100, there is likely to be an antitrust issue.

Q.28

A B C
EBIT 30,000.00 30,000.00 30,000.00
Interest on Debt 9,000.00 4,500.00
EBT 21,000.00 25,500.00 30,000.00
Taxes@25% 5,250.00 6,375.00 7,500.00
EAT 15,750.00 19,125.00 22,500.00

Opening Equity 1,00,000.00 1,50,000.00 2,00,000.00

EAT 15750 19125 22500
Current Year Equity 1,15,750.00 1,69,125.00 2,22,500.00

PE 7.35 8.84 9.89

EV 2,15,750.00 2,19,125.00 2,22,500.00

Debt 1,00,000.00 50,000.00 -
Equity 1,15,750.00 1,69,125.00 2,22,500.00

EV/EBIT 7.19 7.30 7.42

Page 31 of 32
Page 32 of 32