Particulars XYZ Ltd ABC Ltd

No. Of Outstanding Shares 200,000 100,000

Earning After Tax 400,000 100,000

Market Price Per Share 25 12

 
 
i. Pre Merger Earning Per Share (EPS): Earning after tax/Number of
Shares outstanding

For XYZ Ltd= 400,000/200,000

                     =2 

For ABC Ltd (EPS)=100,000/100,000

                                = 1.  

P/E Ratio= Market Price per Share/ Pre Merger Earning Per Shar4e
EPS              

For XYZ Ltd (P/E Ratio) =25/2=12.5 

For ABC Ltd (P/E Ratio) =12.5/1=12.5. 

ii. Current Market Price of ABC Ltd if P/E ratio is 8 = Rs 1*8=Rs8.

      Exchange Ratio=25/8=3.125 

Post-Merger EPS of XYZ Ltd=  

(400,000+100,000)/(200,000+(100,000/3.125)) 

500,000/2, 32,000=Rs 2.16 

III. Desired Exchange Ratio: Total Number of Share post merger =

                  Post Merger earnings/Pre-Merger EPS of XYZ Ltd= 

                    500,000/2=2, 50,000

  Number of Shares Required=2, 50,000-200,000=50,000 

Therefore Exchange Rate = 50,000/100,000

                                         =0.5 
 
 
 
 
 

2.)   

Particulars        India Cement Small Cement

     
Profit After Tax` 56 21
No. of Shares(Lakhs) 10 8.4
E.P.S (Rs) 5.6 2.5
P/E Ratio  12.5 7.5

 
 
 
 
a. Market Price per Share =EPS*P/E Ratio.

  Hence for Indian Cement Market Price per Share is =5.6*12.5= Rs 70 

   For Small Cement Market Price per Share is =2.5*75 =Rs18.75. 

Maximum Exchange Ratio= Total No of shares of Post Merger/Pre Merger Earning Per
Share (EPS)

                                          =   (5600, 000+2100,000)/2.5

                                           = 30,80,000  
 

No. of share required=3080000-8,40,000

                                  =22,40,000 
 

Exchange rate=22,40,000/1000000

                       =2.24 

Market price per share=70/18.75

                                    =3.73