​ Questions on Module 3

1)​ Alpha Ltd. is planning to merge with Gama Ltd. The present value of
Alpha is Rs.25 lakhs and the present value of Gama Ltd. Rs.16 lakhs.
The mergers is expected to bring a cost savings to the extent of Rs. 4
lakhs and the expenses of the mergers would be Rs. 80,000. if Alpha
agrees to pay Rs.18.25 lakhs to Gama. What is the maximum value of
synergy from the merger?
2)​ Star limited has a value of Rs.75,00,000 and moon limited has value
of
Rs.20,00,000. If the two firms merge cost savings with the present value of
Rs.30,00,000 would occur. Star Ltd proposes to offer Rs 28 lakh as
compensation to acquire Moon Limited. Calculate the net present value of the
merger of the two firms.

3)​ Two firms A & B are operating in the cement industry. Both the firms are
planning for merger. Firm A is worth Rs. 200 lakh and B is worth Rs.50 lakhs. On
merging the two would allow cost savings with a present value of Rs. 25 lakh.
Assume that B is bought by A for a cash of Rs.65 lakhs.
Estimate:
a)​ the value of the combined firm.
b)​ The cost of merger for firm A.
c)​ The NPV to A’s shareholders.
d)​ The NPV to B’s shareholders.

4)​ The relevant financial details of two firms just prior to a merger
announcement are as follows:
Day Ltd. Night Ltd.
Market price per share Rs. 65 Rs.30
No.of shares 8,00,000 5,00,000
Market value of the firm Rs. 520,00,000 Rs. 150,00,000
 The merger is expected to bring gains which have a present value of
Rs.120,00,000. Day Ltd. Offers 2,46,000 shares in exchange for 5,00,000 shares
to the shareholders of firm Night ltd. Assuming that the market values of the two
firms just before the merger announcements are equal to their present values as
separate entities. Calculate the NPV of Day Ltd. And Night Ltd. respectively.

5)​ As a finance manager of Al Hasan International you are investing the

acquisition of Starlight Company. The following facts are given:
Al Hasan Starlight
Earnings per share Rs. 6.75 Rs. 2.5
Dividend per share Rs. 3.25 Rs.1.00
Price per share Rs. 48 Rs. 15
Number of shares 60,00,000 20,00,000
Investors currently expect the dividends and earnings of starlight to grow at a
steady rate of 7%. After acquisition this growth rate would increase to 8% without
any additional investment.
Required:
a.​ What is the benefit off acquisition?
b.​ What is the cost of acquisition to Al Hasan if it pays (i) Rs. 17 per share
compensation (cash) to starlight and (ii) offers one share for every 3
shares of Starlight?

6) Companies Alpha and beta are valued as follows:

Alpha Ltd. Beta Ltd.
Earnings per share Rs.8 Rs.1.75
Price per share Rs.25 Rs.10
No. of shares 7,000 3,000
Alpha ltd. Acquires beta ltd. By offering 1 share of Alpha ltd. For every shares of
Beta ltd. If there is no economic gain from the merger, what is the price earning
ratio of Alpha’s stock after the merger
 7)​ The following is given about two firms X and Y:
Firm x Firm Y
Market price for share Rs.60 Rs.20
No. of shares 6,00,000 2,00,000
Market value of the firm Rs.360 lakh Rs.40 lakh
The firm intends to acquire Firm Y. the market price per share of Y ltd.has
increased by Rs.4 because of rumours that Y might get a favourable merger
offer. Firm X assumes that by combining the two firms it will save in costs by
Rs.20 lakh.
Firm X has two options:
i.​ Pay Rs.70 lakh cash for firm Y
ii.​ Offer 1,25,000 shares instead of Rs. 70 lakh to the shareholders of
firm Y.
Calculate:
a. The cost of cash offer if Y’s market price reflects only its value as a
separate entity.
b. Cost of cash offer if Y’s market price reflects the value of merger
announcement.
c. Apparent cost of the stock offer.
d. the true cost of the stock offer.

8)​ Two firms AB and CD corporation operate independently and have the
following financial statements:
( Amt. in Rs.)​
Particulars AB CD
Revenues 80,0000 40,000
COGS 60,000 24,000
EBIT 20,000 16,000
Expected growth rate 6% 8%
Cost of capital 10% 12%
 Both the firms are in steady state, with capital spending offset by
depreciation. No working capital is required and both the firms face a tax rate
of 40%. Combining the two firms will create economies of scale in the form of
shared distribution and advertising costs, which will reduce the COGS from
70% of revenues to 65% of revenues. Assume that the firm has no debt
capital .
Estimate:
a.​ The value of the two firms before the merger.
b.​ The value of the combined firm with synergy effect.

9) AK Ltd. Acquired SR Ltd. After a hotly contested takeover for approximately

Rs.110 per share. The deal was justified on the basis of synergy. The financial
data of the two firms prior to the mergers were as follows:
(Amount In Rs.)
SR Ltd. AK Ltd.
Current EBIT(1-t) 500 lakhs 4000 lakhs
Capital expenditure- depreciation 70 lakhs 0 (offset)
Expected growth rate-next 5years 8% 6%
Expected growth rate after 5 years 5% 5%
Debt/ Debt+ Equity 9% 21%
After tax cost of debt 6% 5.45
Beta- next 5 years 1.15 0.95
Beta- after 5 years 1 1
10. The treasury bill rate at the time of merger was 5% and market premium was
5.5%. the growth rate of the combined firm is expected to increase from 6% to
7% to next five years, as a consequence of merger. The growth rate after year 5
is unchanged the cost of equity and debt of the firms are summarized in the table
below:
Particulars SR AK Combined firm
Debt(%) 9 21 20
Cost of debt 6 5.4 5.42
Equity (%) 91 79 80

Estimate the value of the combined firm and also the value of SR to AK Ltd.

10)​ A ltd. Is acquiring company and its share price is Rs.80. it plans to acquire
B ltd. The share price offered to B Ltd. Including appropriate premium is Rs. 40.
The combined earnings of the two companies are estimated to be Rs. 9,00,000.
The costs of the company due to merger will decrease by Rs. 1,00,000. If the
acquiring company has 20,000 shares and the target company has 10,000
shares What is the post merger EPS for the combined companies?

11) Mona Ltd. is planning to acquire Sona Ltd. provided there is synergy in the
acquisition which will result in Mona Ltd. reporting an EPS of atleast Rs. 2.75.
Consider the following financial data:
Mergers & Acquisitions:​ ​ ​ ​ ​ ​ Amount in Rs.
Particulars Mona ltd. Sona Ltd.
EPS 2.25 2.25
Market price per share 18 12
P/E ratio 8 5.3
Number of shares 1,50,000 1,50,000
There is no immediate gain in the merger though there will be long term
synergies. You are required to compute the exchange ratio which will raise the
post merger EPS of Mona Ltd. to Rs. 2.75.
12)Acquiring company is considering the acquisition of Target company in a
stock-for-stock transaction in which Target co. would receive Rs.85 for each
share of its common stock. The acquiring company does not expect any change
in its P/E ratio multiple after the merger and chooses to value the target co.
conservatively by assuming no earnings growth due to synergy. Calculate-
●​ The purchase price premium.
●​ The exchange ratio
●​ The number of new shares issued by the acquiring company.
●​ Post merger EPS of the combined firms.
●​ Pre merger EPS of the acquiring company.
●​ Pre merger P/E ratio
●​ Post merger share price
●​ Post merger equity ownership distribution.
The following additional information is available:
Acquiring Target
Earnings Rs.2,50,000 Rs.72,500
Number of shares 1,10,000 20,000
Market price per RS.52 Rs.64
share
Also comment on your results.

13) ​ The following data concerns the companies ABC and XYZ:
ABC XYZ
Earnings after taxes Rs. 16,00,000 Rs. 40,000
Equity shares outstanding 16,000 5,000
Market price of the share Rs.75 Rs. 50
Company ABC is the acquiring company, exchanging its one share for
every 2 shares of XYZ ltd. Assume that company ABC expects to have the same
earnings and P/E ratios after the merger as before (no synergy effect). Show the
extent of gain accruing to the shareholders of two companies as a result of
merger. Are they better or worse off than they were before the merger?

14)​ P ltd. Wants to acquire Q ltd. by exchanging 0.5 of its shares for each
share of Q ltd. the relevant financial data are furnished below:
P ltd Q ltd
Earnings after tax Rs.9,00,000 Rs. 1,80,000
Equity shares outstanding 3,00,000 90,000
Market price of the share Rs. 36 Rs. 20
Calculate:
a.​ The EPS and P/E ratio of the firms before the merger.
b.​ The no. of equity shares required to be issued by P ltd. for the acquisition
of Q ltd.
c.​ EPS of P ltd. after the acquisition.
d.​ Market price per share of P ltd. after the acquisition assuming its P/E
multiple remains unchanged.
e.​ The market value of the merged firm.

15)​ Blue ltd. wants to acquire Green ltd. by exchanging its 1.5 shares of
Green ltd. Blue anticipates maintaining its existing P/E ratio
subsequent to the merger. The relevant financial data is given as
follows:

Blue ltd. Green Ltd.

Earnings after tax (EAT) Rs. 20,00,000 Rs.12,00,000
Number of equity shares 4,00,000 2,00,000
Market price per share Rs.35 Rs.40
Determine the following:
a.​ The exchange ratio of market prices.
 b.​ The number of equity shares to be issued by Blue Ltd. for acquisition of
Green Ltd.
c.​ Pre-merger EPS and the P/E ratio of each company.
d.​ P/E ratio used in acquiring Green ltd..
e.​ EPS of Blue Ltd after acquisition.
f.​ Expected market price per share of the merged firm.
16)​ “A” ltd is planning to acquire “B” ltd., exchanging its shares on a
one-for-one basis for crane industries.
The following financial statements of the two companies are provided:
A ltd B ltd
Earnings after tax Rs. 10,00,000 Rs.7,00,000
Equity shares outstanding 4,00,000 2,00,000
Earnings per share Rs.2.5 Rs.3.5
Market price per share Rs. 35 Rs.35
You are required to calculate:
a.​ The EPS after merger.
b.​ The change in EPS for the shareholders of companies A and B.
c.​ The market value of merged firm.
d.​ The Gain accruing to the shareholders of both the firms.
 Problems on Cash Flow Budgeting
1.​ Hypothetical Ltd wants to acquire Target Ltd. The Balance Sheet of Target Ltd as
on 31st March 200X is as follows
In Lakhs
Liabilities Amount Assets Amount
Equity Share Capital 400 Cash 10
(4,00,000 Shares @ Rs 100
each)
Retained Earnings 100 Debtors 65
10.5% Debentures 200 Inventories 135
Creditors & Other Liabilities 160 Plant & Equipment’s 650

850 850

Additional Information:
1.​ Shareholders of Target Ltd will get 1.5 per share in Hypothetical Ltd for
every 2 shares. The Shares of Hypothetical Ltd will be issued at its current
Market price of Rs 180 per share. Debenture Holders will get 11% of same
amount. External liabilities are to be settled at Rs 150 Lakhs. Dissolution
expenses of Rs 15 lakhs are to be paid by the acquiring company.
2.​ Following are the projected incremental FCFF from acquisition for 6 years
Year Cash
flows
1 150
2 200
3 260
4 300
5 220
6 120
3.​ The Free Cash Flows are expected to grow at 3% p.a. for 6 years.
4.​ Given the risk completion of Target Ltd, the cost of Capital relevant for
Target Ltd have been decided at 13%.
5.​ There is Unrecorded Liability of 20 Lakhs.
Advice the Company regarding Financial feasibility of the Acquisition.
2.​ Balance Sheet of XYZ ltd as on 31st March is as follows​ ​ In Lakhs
Liabilities Amount Assets Amount
Equity Share Capital 200 Plant & Machinery 250
(10,00,000 Shares @ Rs 20 each)
Retained Earnings 50 Furniture & Fittings 5
13% Debentures 100 Inventory 90
Creditors 30 Debtors 25
Bank 10

380 380

Adjustments
1.​ The company is to be absorbed by ABC ltd in the above date. The
consideration for absorption is the discharge of debentures at a premium
of 10%, taking over the liability in respect of Sundry creditors and other
current Liabilities. Payment of Rs 14 per share in cash and one share of
Rs 10 in ABC Ltd at Market value of Rs 16 per share in exchange for 1
share in XYZ Ltd. Cost of Dissolution of Rs 10 Lakhs is to be met by the
Purchasing company.
2.​ The expected yearly incremental Free Cash Flows from acquisition for 5
years are as follows
Year Cash
flows
1 100
2 135
3 175
4 200
5 80
3.​ The FCFF of XYZ ltd are expected to be constant after 5 years.
4.​ The Cash flow capital relevant for XYZ Ltd.’s Cash flow is to be 14%.
Based on the above information, comment on the Financial soundness of
ABC Ltd.’s decision regarding the merger.
3.​ Acquires Ltd is contemplating taking over the Business of Target Ltd. The
summarized Balance Sheet of Target Ltd as on 31st March is as follows:
Liabilities Amount Assets Amount
Equity Share Capital 500 Plant & Machinery 580
(50,00,000 Shares @ Rs 10 each)
General Reserve 250 Land & Buildings 300
13% Debentures 100 Inventory 70
Current Liabilities 30 Debtors 35
P&L a/c 120 Bank 15

1000 380

Additional Information:
1.​ Acquires Ltd agrees to take over all the current Assets at their Book value
but fixed assets were revalued as follows
Land & Buildings Rs 500 Lakhs
Plant & Machinery Rs 500 Lakhs
Acquirer Ltd is required to pay Rs 50 Lakhs as Goodwill.
2.​ Purchase consideration is to be paid as Rs 130 Lakhs to pay for 13%
Debentures and other Liabilities. The Balance is to be paid in shares of
Acquirer Ltd.
3.​ Expected FCFF accruing to the Acquires Ltd is as follows
Year Cash
flows
1 200
2 300
3 260
4 200
5 100
Further it is estimated that the FCFF are expected to grow at 5% for 5
Years
4.​ The cost of Capital for the purpose of Analysis is to be assumed at 15%.
Suggest whether Acquirer Ltd is likely to Benefit the Takeover of Target Ltd.
4.​ Consider the two firms who operate independently and have following
data
Particulars Metro Regency
Reserves 6000 3000
COGS 3500 1800
EBIT 2500 1200
Expected Growth Rate 5% 7%
Cost of Capital 8% 9%
Bothe the firms are in steady state with Capital spending by Depreciation.
Both the firms have an effective tax rate of 40% and financed by Equity
only.
Scenario 1
Assume that combining the 2 firms will create economies of scale that will
reduce the COGS to 48% of Reserves.
Scenario 2
Assume that as a consequence of the merger the combined firm is
expected to increase its future growth to 7% and while the COGS is 60%
and does not come down to 48%.
Scenario 1 and 2 are mutually exclusive. You are required to
1.​ Compute the value of both the firms as a separate unit.
2.​ Compute the value of both the firms if there was absolutely no synergy
from the merger.
3.​ Compute the cost of capital and expected growth rate for the combined
entity.
4.​ Compute value of synergy of scenario 1 and scenario 2.