BA Ltd. and DA Ltd. both the companies operate in the same industry. The Financial statements of both the companies for the current financial year…

CA Final · Advanced Financial Management · MTP · May 2025
BA Ltd. and DA Ltd. both the companies operate in the same industry. The Financial statements of both the companies for the current financial year are as follows: Balance Sheet Particulars BA Ltd. (₹) DA Ltd. (₹) Current Assets 14,00,000 10,00,000 Fixed Assets (Net) 10,00,000 5,00,000 Total (₹) 24,00,000 15,00,000 Equity capital (10 each) 10,00,000 8,00,000 Retained earnings 2,00,000 14% long-term debt 5,00,000 3,00,000 Current liabilities 7,00,000 4,00,000 Total (₹) 24,00,000 15,00,000 Income Statement BA Ltd. (₹) DA Ltd. (₹) 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 taxes (EAT) 2,10,000 99,000 Additional Information : No. of Equity shares 1,00,000 80,000 Dividend payment ratio (D/P) 40% 60% Market price per share 40 15 Assume that both companies 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 are required to: (i) Decompose the share price of both the companies into EPS and P/E components; and also segregate their EPS figures into Return on Equity (ROE) and book value/intrinsic value per share components. (ii) Estimate future EPS growth rates for each company. (iii) Based on expected operating synergies BA Ltd. estimates that the intrinsic value of DA's equity share would be 20 per share on its acquisition. You are required to develop a range of justifiable equity share exchange ratios that can be offered by BA Ltd. to the shareholders of DA Ltd. Based on your analysis in part (i) and (ii), would you expect the negotiated terms to be closer to the upper, or the lower exchange ratio limits and why? (iv) Calculate the post-merger EPS based on an exchange ratio of 0.4: 1 being offered by BA Ltd. and indicate the immediate EPS accretion or dilution, if any, that will occur for each group of shareholders. (v) Based on a 0.4: 1 exchange ratio and assuming that BA Ltd.'s pre-merger P/E ratio will continue after the merger, estimate the post-merger market price. Also show the resulting accretion or dilution in pre-merger market prices.

Suggested Answer and Working Notes:

(a) (i) Determination of EPS, P/E ratio, ROE and BVPS of BA Ltd. and DA Ltd. Particulars BA Ltd. DA Ltd. Earnings After Tax (EAT) 2,10,000 99,000 No. of Shares (N) 100000 80000 EPS (EAT/N) 2.10 1.2375 Market price per share (MPS) 40 15 P/E Ratio (MPS/EPS) 19.05 12.12 Equity Funds (EF) 12,00,000 8,00,000 BVPS (EF/N) 12 10 ROE (EAT/EF) × 100 17.50% 12.37% (ii) Estimation of growth rates in EPS for BA Ltd. and DA Ltd. Retention Ratio (1-D/P ratio) 0.6 0.4 Growth Rate (ROE × Retention Ratio) 10.50% 4.95% (iii) Justifiable equity shares exchange ratio (a) Intrinsic value based = 20 /40 = 0.5:1 (upper limit) (b) Market price = MPSDA/MPSBA = 15 /40 = 0.375:1(lower limit) based Since, BA Ltd. has a higher EPS, ROE, P/E ratio and even higher EPS growth expectations, the negotiable terms would be expected to be closer to the lower limit, based on the existing share prices. (iv) Calculation of Post merger EPS and its effects Particulars BA Ltd. DA Ltd. Combined EAT (₹) (i) 2,10,000 99,000 3,09,000 Share outstanding (ii) 100000 80000 132000* EPS (₹) (i) / (ii) 2.1 1.2375 2.341 EPS Accretion (Dilution) (Re.) 0.241 (0.301***) (v) Estimation of Post merger Market price and other effects Particulars BA Ltd. DA Ltd. Combined EPS (₹) (i) 2.1 1.2375 2.341 P/E Ratio (ii) 19.05 12.12 19.05 MPS (₹) (i) / (ii) 40 15 44.6 MPS Accretion (₹) 4.6 2.84*** * Shares outstanding (combined) = 100000 shares + (0.40 × 80000) = 132000 shares ** EPS claim per old share = 2.34 × 0.4 = 0.936 EPS dilution = 1.2375 - 0.936 = 0.3015 ***S claim per old share (44.60 × 0.4) = 17.84 Less: MPS per old share - 15.00 2.84

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