PROBLEM 1

The following given information is provided related to the acquiring firm Riza Ltd. and the target firm
Shayne Ltd.

Particulars Riza Ltd. Shayne Ltd.

Profits after tax 500 300
Number of shares outstanding 180 120
P/E ratio 8 3

Required :
1.What is the swap ratio based on current market price?
2.What is the EPS of Riza Ltd. after acquisition?
3.What is the expected market price per share of Riza Ltd. after acquisition,
assuming P/E ratio of Riza Ltd. remains unchanged?
4. Determine the market value of the merged firm.
5. Calculate gain/loss for shareholders of the two independent companies after acquisition

PROBLEM 2
Spike Company is considering the possble acquisition of Pepper Company . The following information
are given below
Company Earnings After Tax No. Of Equity Shares Market value per share
Spike 300,000 70,000 14
Pepper 140,000 30,000 12

6. What shall be the earning per share for Spike company, if the proposed merger takes place by
exchange of equity share and the exchange ratio is based on the current market price?
7. [[Pepper Company wants to be sure that earnings available to its shareholders will not be
diminished by the Merger, what should be the exchange ratio in that case?

PROBLEM 3
Don’t Give Up Company is having a second thought of acquiring Tired Company , by way of merger.
The following data are available in respect of the companies

Don’t Give Up Company Tired Company

 Earnings After Tax 700,000 1,200,000
No. Of Equity Shares 1,000,000 500,000
Market Value per share 20 50

8. If the merger goes through by exchange of equity and the exchange ratio is based on the current
market price, what is the new earning per share for Don’t Give Up Company.?
9. Tired Company wants to be sure that the earnings equitable to its shareholders will not be
diminished by the merger. What should be the exchange ratio in that case?

PROBLEM 4
Strive Ltd. is considering merger with Victorious Ltd. Strive Ltd’s shares are currently trade at 20. It
has 200,000 shares outstanding and its earnings after taxes (EAT) amount 400,000. Victorious Ltd. has
125,000 shares outstanding. Its current market price is 10 and its EAT are125,000. The merger will be
effected by means of a stock swap (exchange). Victorious ltd. has argued to plan under which Strive
Ltd. will offer the current market value of Victorious Ltd’s shares.
10.What is the pre merger EPS and P/E ratio of both the companies.
11. If ABC Ltd’s P/E ratio is 6.4, what is the current market price? What is the exchange
ratio? What will X Ltd’s post merger EPS be?
12. What should be the exchange ratio, if Strive Ltd’s pre merger and post merger EPS are to be the
same?

PROBLEM 5
Conqueror Company is considering to acquire Achiever Company by merger and the following
information is available below.
Conqueror Company Achiever Company
Number of equity Shares 200,000 300,000
Earnings after Tax 500,000 700,000
Market Value per share 38 40

13. What is the present EPS of both the companies?

14. If t[he proposed merger takes place, what would be the new earning per share of Conqueror
Company ? Assume that the merger takes place by exchange of equity shares and the exchange ratio is
based on the current market price.
15.What should be the exchange ratio, if Achiever Company wants to ensure the earnings to members
are as before the merger takes place?

PROBLEM 6
Happy Company is intending merger with Naughty Company’s s shares are currently traded at 25. It
has 100,000 shares outstanding and its profits after taxes (PAT) amount to 300,000. Naughty Company
has 80,000 shares outstanding. Its current market price is 12.50 and its profit after tax are 100,000.
The merger will be effected by means of a stock swap (exchange). Naughty Company has agreed to a
plan under which Happy Company will offer the current market value of Naughty Company’s shares

16.What is the pre-merger earnings per share (EPS) and P/E ratios of both the companies?
17. If Naughty Company’s P/E ratio is 8, what is its current market price? What is the exchange ratio?
What will Happy Company’s post-merger EPS be?
18. What must the exchange ratio be or Happy Company’s that pre and post-merger EPS to be the
same?

PROBLEM 7
Sleepy Company is considering merger through acquiring Energetic Company, Sleepy Company has
300,000 shares with a market price worth 25 per share , while Energetic Company has a 100,000
shares selling at 15 per share. The EPS are 4.00 and 2.25 for Sleepy and Energetic Company
respectively. Managements of both companies are discussing two alternative proposals for exchange of
shares as indicated below.
A. in proportion to the relative earnings per share of two Companies.
B. 5 share of Company X for one share of company Y (5 : 1).

19.To calculate the Earnings Per Share (EPS) after merger under two alternatives; and
20.To show the impact on EPS for the shareholders of two companies under both alternatives.

PROBLEM 8
Consider the two firms that operate independently and have following characteristics

Revenues 7,000 4,000

Cost Goods Sold 4,500 2,400
EBIT
Expected Growth Rate
Cost of Capital

Both firms are in steady state with capital spending offset by depreciation. Both firms have an effective
tax rate of 40% and free financed only by equity. Consider the following two scenarios:
Scenario – 1: Assume that combing the firms will create economies of scale that will reduce the COGS
to 50% of Revenues.
Scenario – 2: Assume that as a consequence of the merger the combined firm is expected to increase its
future growth to 7% while COGS will be 60%. It is given that Scenario 1 & 2 are
mutually exclusive.

21.Compute the values of both the firms as separate entities.

22. Compute the value of both the firms together if there were absolutely no synergy at all from the
merger.
23. Compute the value of cost of capital ad the expected growth rate.
24. Compute the value of synergy in Scenario 1 and Scenario
25. What is the maximum price that the acquirer is willing to pay?
26. What is the gain resulting from the merger.

PROBLEM 9
Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm
T). Assume that both firms have no debt outstanding.
Firm B Firm T
Shares outstanding 1,500 900
Price per share $34 $24

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $3,000.
27.If Firm T is willing to be acquired for $27 per share in cash, what is the NPV of the merger?
28. What will the price per share of the merged firm be assuming the conditions in (a)? 29. In part (a),
what is the merger premium?
30. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers three of its shares for
every five of T’s shares, what will the price per share of the merged firm be?
31. What is the NPV of the merger assuming the conditions in (30)?

PROBLEM 10
Eastman Corp. is analyzing the possible acquisition of Kodiak Company. Both firms have no debt.
Eastman believes the acquisition will increase its total after tax annual cash flows by $2.6 million
indefinitely. The current market value of Kodiak is $102 million, and that of Eastman is $140 million.
The appropriate discount rate for the incremental cash flows is 12 percent. Eastman is trying to decide
whether it should offer 40 percent of its stock or $110 million in cash to Kodiak’s shareholders.

32. What is the cost of the share offer?

33. What is the equity cost
34. Compute the NPV cash
35. Compute the NPV shar
36. Which alternative should Eastman choose?
PROBLEM 11
Consider the following pre merger information about firm A and B:
Firm A Firm b
Share outstanding 1500 900
Price per share 34 24

Firm B has estimated that the value of the synergistic benefits from acquiring firm T is
£3,000.
37. If firm T is willing to be acquired for £27 per share in cash, what is the NPV of the
merger?
38. What will the price per share of the merged firm be, assuming the conditions in (a)?
39. In part (a), what is the merger premium?
40. Suppose firm T is agreeable to a merger by an exchange of equity. If B offers three
of its shares for every one of T’s shares, what will the price per share of the merged
firm be?
PROBLEM 12
41. Acquisition by merger or consolidation results in a combination of the assets and liabilities of
acquired and acquiring firms; the only difference lies in whether or not a new firm is created.
42. A tender offer is frequently contingent on the bidder’s obtaining some percentage of the total voting
shares. If not enough shares are tendered, then the offer might be withdrawn or reformulated.
43. In an acquisition by stock, shareholder meetings have to be held and a vote is required. If the
shareholders of the target firm don’t like the offer, they are not required to accept it and need not tender
their shares.
44. Acquisition is occasionally unfriendly. In such cases, a stock acquisition is used in an effort to
circumvent the target firm’s management, which is usually actively resisting acquisition.
45. Resistance by the target firm’s management often makes the cost of acquisition by stock higher
than the cost of a merger.
46. When the bidder and the target firm are not related to each other, the merger is called a vertical
acquisition.
47. The acquisition will be beneficial if the combined firm will have value that is greater than the sum
of the values of the separate firms.
48. A merger is the combination of two firms, which subsequently form a new legal entity under the
banner of one corporate name.
49. Unfriendly or hostile takeover deals, in which target companies do not wish to be purchased, are
always regarded as acquisitions.
50. the acquiring company obtains the majority stake in the acquired firm, which does not change its
name or alter its organizational structure.