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Pinnacle Academy
Solutions of Tests of
April 2015 Batch
201-202, Florence Classic, Besides Unnati Vidhyalay,
Jain Derasar Road, Ashapuri Society, Akota, Vadodara-20. ph: 98258 561 55
Solution of Test of
M&A
[SFM – CA Final]
Conducted on 12th June 2015
[Solution is at the end with marking for self-assessment]
Time Allowed-1 hour
Q1
Maximum Marks- 30
Amazon Ltd. wishes to take over Nile Ltd. Amazon has 5 lakh shares of Rs.100 each
quoting in the market at Rs.250. Nile Ltd. has 2 lakh shares of Rs.100 each currently
selling at Rs.170. EPS is Rs.32 and Rs.24 respectively for Amazon and Nile.
Required:
a) Share exchange ratio that shall ensure that post merger EPS of Amazon Ltd. is the
same as its pre-merger EPS if after merger earnings are expected to increase by
Rs.16,00,000
b) Share exchange ratio that shall ensure that post merger MPS of Amazon Ltd. is the
same as its pre-merger MPS if after merger synergy of Rs.4,10,00,000 is expected
c) Share exchange ratio based on current MPS is offered. If post merger PE ratio is
expected to be 8 times determine impact of merger on (i) EPS and (ii) Wealth of
shareholders of both the companies
(2 + 2 + 8 = 12 Marks)
Q2
Swan Ltd. and Flamingo Ltd. both have shares having face value of Rs.10 each.
Swan Ltd. has 40,000 shares and Flamingo Ltd. has 2,00,000 shares. These shares
are trading at Rs.40 and at Rs.32 with PE ratio of 10 and 8 respectively. It is decided
that Flamingo Ltd. shall take over Swan Ltd. by issue of 2 shares for every 1 share of
Swan Ltd. Merger shall take place by transfer of liabilities and assets at their book
values. Following is the pre-merger extract of balance sheets of the two companies:
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Secured Loans
Unsecured Loans
Current Liabilities
Fixed Assets
Investments
Current Assets
Swan Ltd.
2,00,000
3,00,000
8,00,000
12,00,000
----10,00,000
Flamingo Ltd.
10,00,000
10,00,000
18,00,000
35,00,000
5,00,000
30,00,000
Required:
i.
Pre-merger BVPS of both the companies
ii.
Post-merger BVPS
iii.
Post-merger EPS
iv.
Post-merger MPS assuming PE ratio of Swan Ltd. prevails even after merger
(4 + 3 + 3 + 2 =12 Marks)
Q3
Aggressive wishes to make a tender offer for Passive. Passive has 1,00,000 shares
trading at Rs.55 per share. Aggressive makes a two-tier offer: Rs.65 per share for
first 50,001 shares tendered and Rs.50 per share for the remaining shares. If
successful, how much shall Aggressive pay for Passive? Are the shareholders of
Passive benefiting? Acting independently, what should shareholders of Passive do
to maximize wealth? What can they do if they can respond collectively as a cartel?
What might happen, if Aggressive offers Rs.65 in first and Rs.40 in the second tier?
(6 Marks)
(Assessed answer papers shall be returned latest by 22nd June 2015)
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Solution of Test of Mergers and Acquisitions
Conducted on 13th June 2014
Q1
(a)
Post merger EPS = [5 X 32] + [2 X 24] + 16 / Post merger no. of shares
i.e. 32 = 224 / Post merger no. of shares
i.e. Post merger no. of shares = 224 / 32 = 7 lakh shares
Thus, new shares issued = 7 – 5 = 2 lakhs
Hence, Share exchange ratio = New shares / Existing shares of selling co.
=2/2=1
(2 Marks)
(b)
Post merger MPS = [5 X 250] + [2 X 170] + 410 / Post merger shares
i.e. 250 = 2,000 / Post merger no. of shares
i.e. Post merger no. of shares = 2,000 / 250 = 8
Thus, new shares issued = 8 – 5 = 3 lakhs
Hence, Share exchange ratio = New shares / Existing shares of selling co.
= 3 / 2 = 1.5
(2 Marks)
(c)
Share exchange ratio = 170 / 250 = 0.68
New Shares issued = 2 X 0.68 = 1.36 lakhs
Post Merger Earnings = (5 X 32) + (2 X 24) = Rs.208 lakhs
Post Merger EPS = 208 / 5 + 1.36 = Rs.32.70
Post Merger Equivalent EPS = 32.7 X 0.68 = Rs.22.24
(2 Marks)
Impact of Merger on EPS:
Enjoy Fun
Post merger EPS
32.70 N.A.
Post merger Equivalent EPS N.A. 22.24
Less: Pre merger EPS
32.00 24.00
Impact on EPS
+0.70 -1.76
(2 Marks)
Post Merger MPS = 32.7 X 8 = Rs.261.6
Post Merger Equivalent MPS = 261.6 X 0.68 = Rs.177.89
(2 Marks)
Impact of Merger on MPS:
Enjoy
Fun
Post merger MPS
261.60
N.A.
Post merger Equivalent MPS
N.A.
177.89
Less: Pre merger MPS
250.00 170.00
Impact on MPS
+11.6 +7.89
X No. of shares
5
2
Impact on wealth (Rs. in lakhs)
58
15.78
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
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Q2
(i)
Determination of Pre-merger BVPS:
Fixed Assets
Investments
Current Assets
Less:
Secured Loans
Unsecured Loans
Current Liabilities
No. of equity shares
BVPS
Swan Ltd.
Flamingo Ltd.
12,00,000
----10,00,000
22,00,000
35,00,000
5,00,000
30,00,000
70,00,000
2,00,000
3,00,000
8,00,000
9,00,000
40,000
22.50
10,00,000
10,00,000
18,00,000
32,00,000
2,00,000
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(4 Marks)
(ii)
Determination of Post-merger BVPS:
New shares issued by Flamingo Ltd. = 40,000 X 2 = 80,000 shares
Pre-merger Net Assets of Flamingo Ltd.
Net Assets of Swan Ltd. at book value
Post-merger Net Assets
Post-merger no. of shares
Post-merger BVPS
32,00,000
9,00,000
41,00,000
2,80,000
14.64
(3 Marks)
(iii)
Pre merger EPS of Swan Ltd. = MPS / PE ratio = 40 / 10 = Rs.4
Pre merger EPS of Flamingo Ltd. = MPS / PE ratio = 32 / 8 = Rs.4
Post merger EPS = [4 X 40,000] + [4 X 2,00,000] / 2,80,000 = Rs.3.43
(3 Marks)
(iv)
Post merger MPS = 3.43 X 10 = Rs.34.30
(2 Marks)
Q3
Purchase Price paid by Aggressive = (50,001 X 65) + (49,999 X 50)
= Rs.57,50,015
Pre-merger Market Value of Passive = 1,00,000 X Rs.5 = Rs.55,00,000
Benefit to shareholder of Passive
= 57,50,015 – 55,00,000 = Rs.2,50,015
(2 Marks)
In the two-tier offer, Aggressive is offering higher value per share of Rs.65 initially.
Hence, in order to improve their wealth, shareholders of Passive should surrender
their shares as quickly as possible.
The shareholders who fail to fall in the first category of 50,001 shares shall be paid a
lower amount per share of Rs.50. This is even lower than current MPS of Rs.55. If
the shareholders can respond collectively as a cartel then they should demand same
value per share for all the shares surrendered. This shall ensure that every
shareholder gets fair value for their holding in Passive.
(2 Marks)
Purchase Price paid by Aggressive = (50,001 X 65) + (49,999 X 40)
= Rs.52,50,025
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The above amount is even lower than pre-merger market value of Passive of
Rs.55,00,000. It is not possible for such tender offer to be successful.
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
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