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Following are the financial statements for A Ltd. & B Ltd. for the current financial year. Both the firms operate in the same industry. ( Amount in INR) Particulars A Ltd. B Ltd. Total Current Assets 14,00,000 10,00,000 Total Fixed Assets ( Net) 10,00,000 5,00,000 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 Income Statement Net Sales 34,50,000 17,00,000 Cost of Goods sold 27,60,000 13,60,000 Gross Profit 6,90,000 3,40,000 Operating Expenses 2,00,000 1,00,000 Interest 70,000 42,000 Earnings before taxes 4,20,000 1,98,000 Taxes ( 50%) 2,10,000 99,000 Earnings after tax 2,10,000 99,000 Additional Information: Number of Equity Shares 1,00,000 80,000 Dividend Payment Ratio ( Dividend/Price) 40% 60% Market Price per share ( M.P.S.) Rs. 40 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 you are required to— a) Decompose the share price of both the companies into E.P.S & P/E components, and segregate their EPS figures into Return on Equity ( ROE), & Book value/Intrinsic Value share ( BVPS) components. b) EstimatedFUTURE growth rates for each firm. c) Based on expected operating synergies, A Ltd. estimates that the Intrinsic Value per share would be Rs. 20,on its acquisition. You are required to develop justifiable equity share exchange ratio that can be offered by A Ltd. To B.Ltd’s Shareholders. Based on your analysis in part (a) & (b) would you expect the negotiated terms to be on the upper or the lower exchange ratio limits? Why? d) 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. 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 price.
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