PQ Ltd., plans to acquire RS Ltd. The relevant financial details of the two firms prior to the merger announcement are: PQ Ltd., RS Ltd., Market…
CA Final · Advanced Financial Management · PYQS · May 2024
PQ Ltd., plans to acquire RS Ltd. The relevant financial details of the two firms prior to the merger announcement are: PQ Ltd., RS Ltd., Market price per share 100 50 Number of outstanding shares 20,00,000 10,00,000 The merger is expected to generate gains, which have a present value of 300 lakhs. The exchange ratio agreed to is 0.5. You are required to calculate the true cost of the merger from the point of view of PQ Ltd.
Suggested Answer and Working Notes:
Shareholders of RS Ltd. will get 5 lakh share of PQ Ltd., so they will get: = 5 lakh / (20 lakh +5 lakh) = 20% of shares PQ Ltd. The value of PQ Ltd. after merger will be: = 100 x 20 lakh +50 x 10 lakh +300 lakh = 2000 lakh +500 lakh +300 lakh = 2800 lakh True Cost of Merger will be: (2800x 20%) 560lakhs – 500lakhs = 60 lakh
Topics: Mergers, Acquisitions and Corporate Restructuring
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