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q. 12 Purchasing company vendor company

Net profits 80 lac 15.75 lac

EPS Rs 4 Rs 10.50

No. pf shares 20 lac 1.5 lac

Price per share rs 42 rs 85

The purchasing company is willing to purchase all shares of vendor at a price in cash which results

into post merger EPS of purchasing co. Rs 4( same a searlier)

Assumed that the amount borrowed for this purpose=

Interest per annum= 15% of x = .15x

Tax saving on internet cost = .15x * 52%

= .075x

Net outflows as interest = 0.15x 0.075x = 0.072

Combined annual earning after merger = 80l + 15.75l 0.072x

Post merger EPS of purchasing company = combined earning

No. of shares of purchasing company

Rs. 4 = 95.75 lac 0.072x

20 lac

x = 218.75 lacs

Amount of loan to purchase 1.5 lacs share = 218.75 lacs

Value per share paid to vendor co. = 218.75 lacs = Rs 145.83

1.5 lacs

Q. 21 Firm A Firm B

Price per share Rs 75 Rs 30

No. of shares 10 lacs 5 lacs

Market value of business 750 lacs 150 lacs

A acquires B by allotting 2,5 lacs shares to B for its business. There will be synergic gain of Rs 150

lacs.

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Post merger value of combined business = sum of value of individual business and synergic gain

= 750 + 150 + 150 lac = 1050 lacs

Total shares of A ( after merger ) = 10 lac + 2.5 lacs = 12.50 lacs

Post merger value per share = 1050 lac

12.50 lac

= Rs 84

Value of shares allotted to B ltd = 2.5 l * 84 = 210 lacs

Cost to purchasing company = value of consideration given current value of B ltd

= 210l 110l = 60 lac

NV to vendor co. ( B ltd) = value of ______ - premerger value of business

= 210 -150 = 60 lac

NPV to purchasing co. A ltd = total synergic gain cost of acquisition of B

= 150 60 = 90 lacs

Or postmerger value of combined business = sum of premerger value of individual business cost of

acquisition of B ltd

= Rs 1050l (750 150) 60 l

= 90 lacs

Q.22 BM ltd( purchasing co.) WA ltd ( vendor co.)

No. of shares 20l 12l

Price per share Rs 180 Rs 40

Value of business 3600 lac 4800 lac

1. If the payment will be in cash Rs 50 per share of WA ltd:-

Cost to BM = value of cash consideration given premerger value of WA ltd.

= 12 lac * Rs 50 480 lac = Rs 120 lac

2. If the payment is in the form of shares:

Agreed exchange ratio = one share of BM for 3 shares of WA

Total shares to be allotted to WA ltd = 12 lac * 1/3 = 4 lacs Exchange shares

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WA ltd ( Premerger position)

Expected dividend per share = Rs 1.60

( next dividend D1 )

Current price per share (Po) = Rs 40

Cost of equity = D1/Po + f

= 1.60/40 + 0.06 = 0.10

WA ltd under new management :-

Expected dividend per share (D!) = RS 1.60

Cost of equity = 10%

g. rate under new mgmt = 8% PA

value of one share = D1/

= 1.60/.10-.08 = 80

Value of all shares of WA ltd = 12lac * 80

= 960 lacs

Post merger value of combined business = value of BM + value of WA

= 3600 + 960 = 4560 lacs

Post merger no. of shares of BM = 20lac + 4lac

= 24 lacs

Post merger value per share = 4560/24 = 190

Value of consideration offered = consideration given current value of WA

= 760 480

= 280 lacs

3. Total gain from acquisition = post merger value of combined price sum of premerger

value of individual business

= 4560 lac ( 3600 + 480) lacs

= 480 lacs

NPV to vendor WA = 280 lacs

NPV to purchasing company BM = overall gain cost to BM ( NPV to WA)

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9= 480 280 = 200 lacs

4. If the g. Rate of WA will continue to be 6% even under new mgmt:-

Current price per share ( po) od WA = D1/ = 1.60 / .10 - .06 = Rs 40

Value of WA ltd = 12lacs * Rs 40 = rs 480 lacs

( value of all share)

Post merger value of combined business = 3600 +480 =4080 lacs

Post merger value of one share of BM = 480 /24 =rs 170

Value of consideration given = 4 lac * 170 =680 lacs

Cost of acquisition of WA ltd to BM = consideration given premium value of WA

=680 480

200 lacs

Q. 23 (i) AFC ( purchasing company) VCD ( vendor company)

No. of shares 10lacs 5 lacs

Price per share RS 100 RS 20

Premerger value of business 1000 lacs 100 lacs

(ii) expected ( next) div. Per share of BCD = 0.60

g. rate ( under existing mgt. ) of BCD = 7 % PA

g. rate ( under new mgt.) = 8% PA

a) cost of equity of BCD:-

under existing mgt. = D1/Po +g = .60/20 + 0.07 = 0.10

under new mgt. =

price per share = D1/Ke y = .60/ .10 - .08 = Rs 30

value of all shares of BC ltd

5lacs * 30 = 150 lacs

Increase in value of BCD under new mgt

= calue of BCD under new mgmt. value of BCD under existing mgmt.

= 150lacs 100lacs = Rs 50 lacs

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B) if the exchange ratio is 1 share for 4 shares of BCD

No. of new shares offered by AFC = 5lac * ¼ = 1.25

Post merger value of AFC ltd. = 1000lacs + 150 lacs

=Rs 1150 lacs

Post merger total share = 10l + 1.25

= 11.25 lacs

Value per share = Rs 1150 lacs/ 11.25 lacs = 102.22

Value of consideration offered = Rs 102.22 * 1.25 lacs = 127.775 lacs

Gain to BCD = 127.775 100l

= 27.775l

Total gain = inverse in value of BCD under new mgt. = 50 lacs

Gain to AFC = total gain gain to BCD ( cost to AFC)

= 50 27.775 = 22.225 lacs

C ) cash payment for 5 lac share of BCD = %lacs * 22 = Rs 110 lacs

Gain to share holders of BCD = 110 100 = 10 lacs

Assumed this cash is taken at loan 10%

Interest rate ,then interest cost = 110 * 10% = 11lacs

AFC BCD

Premerger EPS Rs 8 RS 2.50

NO. of share 10l 5l

Premerger earning 80l 12. 5 lacs

Post merger combined earning after paying interest ( net of tax)

= 80 + 12.50 11 ( 1- tax rate)

81.50 lacs

Premerger P/E ratio of AFC = Price per share / EPS

= Rs 100/* = RS. 12.50

Assuming same P/E continues during post merger = P/Er * EPS

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Post merger value per share = 12.5 * Rs 8.15 = Rs 101.87

Post merger value per share of AFC = 101.875 * 10 lacs

= 1018.75 lacs

Gain to AFC = Post merger value pare merger value

= 1018.75 -1000 = Rs 18.75 lacs

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