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Solutions of Tests of
August 2015 Batch
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Solution of Test of
M&A
[SFM – CA Final]
Conducted on 24th October 2015
[Solution is at the end with marking for self-assessment]
Q1
(a)
Following details are available for Enjoy Co. and Fun Co.:
Enjoy Co.
Fun Co.
PBIT
Rs.8,30,000 Rs.5,00,000
No. of shares
28,000
19,000
10% Debentures
Rs.3,00,000
----8% Preference Shares
----Rs.1,00,000
PE Ratio
14 times
12 times
Enjoy wants to take over Fun. It has offered to issue shares. Consider tax rate to be
30%. Ignore dividend distribution tax.
Answer the following:
i.
ii.
iii.
iv.
Calculate Pre-merger EPS and MPS
Merger is expected to result into increase in earnings to equity shareholders of
Rs.3,15,700. At what share exchange ratio can Enjoy Co. ensure a post-merger
EPS of Rs.27?
Merger shall produce synergy of Rs.42,93,520. Determine post-merger MPS.
Show the impact of merger on wealth of shareholders of the two companies
(12 Marks)
(b)
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. It is
expected that after merger, the earnings shall rise by Rs.40 lakhs. What share
exchange ratio that shall ensure that pre-merger earnings available to shareholders
of Nile Ltd. shall be continued to be available even after the merger
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
Pinnacle Academy
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Q2
(a)
A Ltd. has 1,00,000 shares and B Ltd. has 50,000 shares. Current MPS of A Ltd. is
Rs.100. A Ltd. wishes to take over B Ltd. for which it has two offers, which are:
(i) Buy B Ltd. in cash by paying 25 % premium over its current MPS of Rs.40.
(ii) Issue shares at swap ratio of 0.25
It is expected that the post merger MPS for each of the offer shall be:
Only cash offer: Rs.150; Only stock offer: Rs.120
You are required to determine cost of merger to A Ltd.
(5 Marks)
(b)
Amazon Ltd. wishes to take over Nile Ltd. Following details are available:
% Shareholding of Promoters
Share Capital
Free Reserves
Paid up value per share
Free Float Market Capitalization
PE Ratio (times)
Amazon Ltd.
50%
Rs.200 lakhs
Rs.900 lakhs
Rs.100
Rs.500 lakhs
10
Nile Ltd.
60%
Rs.100 lakhs
Rs.600 lakhs
Rs.10
Rs.156 lakhs
4
For swap ratio, 25 % weight is assigned to Book Value, 50 % to EPS and 25 % to
MPS. Determine (i) swap ratio and (ii) EPS and MPS of Amazon Ltd. after merger
assuming PE ratio of Amazon Ltd. prevails even after merger.
(9 Marks)
(Assessed answer papers shall be returned latest by 6th November 2015)
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Solution of Test of Mergers and Acquisitions
Conducted on 24th October 2015
Q1
(i) Calculation of Pre-merger EPS and MPS:
PBIT (Rs.)
Less: Interest
PBT
Less: Tax at 30%
PAT
Less: Preference Dividend
(a) Profit to Equity Shareholders
(b) No. of equity shares
(c) Pre-merger EPS [a / b]
(d) Pre-merger PE Ratio
(e) Pre-merger MPS (c X d)
Enjoy Co.
8,30,000
30,000
8,00,000
2,40,000
5,60,000
--------------5,60,000
28,000
20
14
280
Fun Co.
5,00,000
------------5,00,000
1,50,000
3,50,000
8,000
3,42,000
19,000
18
12
216
(4 Marks)
(ii)
Post-merger Earnings = 5,60,000 + 3,42,000 + 3,15,700 = Rs.12,17,700
Post Merger EPS, 27 = 12,17,700 / Post-merger Shares
Post Merger Shares = 12,17,700 / 27 = 45,100
New Shares issued = 45,100 – 28,000 = 17,100
Share Exchange Ratio = 17,100 / 19,000 = 0.9
(3 Marks)
(iii)
Post Merger Market Value = (28,000 X 280) + (19,000 X 216) + 42,93,520
= Rs.1,62,37,520
Post Merger MPS = 1,62,37,520 / 45,100 = Rs.360.03
(2 Marks)
(iv)
Impact of Merger on wealth of shareholders:
Post Merger MPS
Post Merger Equivalent MPS (360.03 X 0.9)
Less: Pre Merger MPS
(a) Impact on MPS
(b) No. of equity shares
(c) Impact on wealth of shareholders (a X b)
Enjoy Co. Fun Co.
360.03
----324.027
280
216
+ 80.03
108.027
28,000
19,000
22,40,840 20,52,513
(3 Marks)
(b)
Determination of Pre Merger Earnings:
Pre merger shares
Pre merger EPS
Pre merger Earnings (Rs. in lakhs)
Amazon Ltd. Nile Ltd.
5
2
32
24
160
48
Solution prepared by
CA. Ashish Lalaji
Pinnacle Academy
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Post Merger Earnings
248
Amazon
(a) Balance Earnings
200
(b) Pre Merger Shares
5
(c) Post Merger EPS (a / b)
40
Nile
(a) Pre Merger Earnings
48
(b) Post Merger EPS
40
(c) New Shares Issued (a / b) 1.2
Share Exchange Ratio = 1.2 / 2 = 0.6
(4 Marks)
Q2
(a)
Determination of Pre-Merger Market Value of Firm:
A
B
(a) No. of shares
1,00,000
50,000
(b) Pre-Merger MPS
100
40
(c) Pre-merger Market Value [a X b] 1,00,00,000 20,00,000
Determination of Cost of Merger:
(i) Only Cash Offer:
Cost of Merger = [50,000 shares X Rs.50*] – 20,00,000 = Rs.5,00,000
* Rs.40 + 25% Premium
(2 Marks)
(ii) Only Stock Offer:
New shares issued = 50,000 X .25 = 12,500 shares
Market Value of Combined Entity = 1,12,500 shares X Rs.120 = Rs.1,35,00,000
Cost of merger = [12,500 / 1,12,500 {1,35,00,000}] – 20,00,000
= (Rs.5,00,000)
(3 Marks)
(b)
(i) Calculation of Pre-merger BVPS:
(a) Share Capital
(b) Free Reserves
(c) Equity Funds
(d) No. of equity shares
(e) BVPS (c / d)
Amazon Ltd. Nile Ltd.
200
100
900
600
1,100
700
2
10
550
70
Share exchange ratio based on BVPS = 70 / 550 = 0.1273
(3 Marks)
Calculation of Pre-merger EPS:
(a) Free Float Market Capitalisation
(b) Non Promoter Holding
(c) Total Market Capitalisation (a / b)
(d) No. of equity shares
(e) MPS (c / d)
(f) PE Ratio
(g) EPS (e / f)
Amazon Ltd. Nile Ltd.
500
156
50%
40%
1,000
390
2
10
500
39
10
4
50
9.75
Share exchange ratio based on EPS = 9.75 / 50 = 0.195
Share exchange ratio based on MPS = 39 / 500 = 0.078
Agreed Swap Ratio = 0.1273 (.25) + 0.195 (.50) + 0.078 (.25) = 0.1488
(3 Marks)
Solution prepared by
CA. Ashish Lalaji
Pinnacle Academy
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(ii)
New shares issued = 10 X .1488 = 1.488 lakhs
Post Merger EPS = (2 X 50) + (10 X 9.75) / 2 + 1.488 = Rs.56.62
Post Merger MPS = 56.62 X 10 = Rs.566.20
(3 Marks)
Solution prepared by
CA. Ashish Lalaji
Pinnacle Academy
5