The equity shares of XYZ Ltd., are currently being traded at 34 per share in the market. XYZ Ltd., has total 10,00,000 equity shares outstanding in…

CA Final · Advanced Financial Management · PYQS · May 2024
The equity shares of XYZ Ltd., are currently being traded at 34 per share in the market. XYZ Ltd., has total 10,00,000 equity shares outstanding in number and promoters equity holding in the company is 30% ABC Ltd., wishes to acquire XYZ Ltd., because of likely synergies. The estimated present value of these synergies is 1,00,00,000. Further ABC Ltd., feels that management of XYZ Ltd., has been overpaid. With better motivation, lower salaries and fewer perks for the top management, will lead to savings of 5,00,000 per annum. Top management with their families are promoters of XYZ Ltd., Present value of these savings would add - 25,00,000 in value to the acquisition. Following additional information is available regarding ABC Ltd., Earnings per share 5 Total number of shares outstanding 15,00,000 Market price of equity share 30 You are required to: (i) Calculate the maximum price per equity share which ABC Ltd., can offer to pay for XYZ Ltd. (ii) Calculate the minimum price per equity share at which the management of XYZ Ltd., will be willing to offer their controlling interest.

Suggested Answer and Working Notes:

(i) Calculation of maximum price per share at which ABC Ltd. can offer to pay for XYZ Ltd.'s share Market Value (10,00,000 x 34) = 3,40,00,000 Synergy Gain = 1,00,00,000 Saving of Overpayment = 25,00,000 Maximum Price (₹ 4,65,00,000/10,00,000) = 46.50 Alternatively, it can also be computed as follows: Let ER be the swap ratio then, (34 × 10,00,000 + 30 × 15,00,000 + 1,00,00,000 + 25,00,000) / (15,00,000 + 10,00,000 × ER) = 30 ER = 1.55 MP = PE x EPS x ER = (30 / 5) x 5 x 1.55 = 46.50 Or MP = Market Price of Share of XYZ Ltd. x 1.55 = 30.00 x 1.55 = 46.50 (ii) Calculation of minimum price per share at which the management of XYZ Ltd.'s will be willing to offer for their controlling interest Value of XYZ Ltd.'s Management Holding (30% of 10,00,000 x 34) = 1,02,00,000 Add: PV of loss of remuneration to top management = 25,00,000 Total = 1,27,00,000 No. of Shares = 3,00,000 Minimum Price (₹ 1,27,00,000/3,00,000) = 42.33

Topics: Mergers, Acquisitions and Corporate Restructuring

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic