March 28, 2017

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Following are the financial statements for A Ltd and T Ltd for the current financial year. Both firms operate in the same industry.

Particulars Firm A Firm B
Total current assets
Total fixed assets (net) Rs 14,00,000
10,00,000 Rs 10,00,000
Total assets 24,00,000 15,00,000
Equity capital (of Rs 10 each) 10,00,000 8,00,000
Retained earnings 2,00,000 _
14% Long-term debt 5,00,000 3,00,000
Total current liabilities 7,00,000 4,00,000
24,00,000 15,00,000


Net sales
Cost of goods sold Rs 34,50,000
27,60,000 Rs 17,00,000
Gross profit 6,90,000 3,40,000
Operating expenses 2,96,923 1,45,692
Interest 70,000 42,000
Earnings before taxes (EBT) 3,23,077 1,52,308
Taxes (0.35) 1,13,077 53,308
Earnings after taxes (EAT) 2,10,000 99,000

Additional information:

Number of equity shares
Dividend payment (D/P) ratio
Market price per share (MPS) 0.40
Rs 40 0.60
Rs 15

Assume that the two firms 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 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 of intrinsic value per share (BVPS)
(ii) Estimate future EPS growth rates for each firm.
(iii) Based on expected operating synergies, A Ltd estimates that the intrinsic value of T’s equity share would be Rs 20 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’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?
(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.
(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.

Very VEry High Priority!!!!!

  • MBA Executive : Banking & Finance - ,

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