C Ltd. and P Ltd. both companies operating in the same industry decided to merge and form a new entity S Ltd. The relevant financial details of the…

CA Final · Advanced Financial Management · MTP · September 2025
C Ltd. and P Ltd. both companies operating in the same industry decided to merge and form a new entity S Ltd. The relevant financial details of the two companies prior to merger announcement are as follows: C Ltd. P Ltd. Annual Earnings after Tax (₹ lakh) 10000 5800 No. Shares Outstanding (lakh) 4000 1000 PE Ratio (No. of Times) 8 10 The merger will be affected by means of stock swap (exchange) of 3 shares of C Ltd. for 1 share of P Ltd. After the merger it is expected that due to synergy effects, Annual Earnings (Post Tax) are expected to be 8% higher than sum of the earnings of the two companies individually. Further, it is expected that P/E Ratio of S Ltd. shall be average of P/E Ratios of two companies before the merger. You are required to determine the extent to which shareholders of P Ltd. will be benefitted per share from the proposed merger.

Suggested Answer and Working Notes:

Working Notes: (i) The Earnings of S Ltd. ₹ lakh Earnings of C Ltd. 10000 Earnings of D Ltd. 5800 15800 Growth 0.08 Earnings of S Ltd. (15800 X 1.08) 17064 (ii) Market Value of S Ltd. ₹ lakh Earnings of S Ltd. 17064 P/E Ratio (10+9)/2 9 Market Value of S Ltd. 153576 (iii) No. of shares in S Ltd. No. of shares of C Ltd. 4000 No. of shares issued to P Ltd. 3000 No. of shares of C Ltd. 7000 Gain to Shareholders of P Ltd. Share of Shareholders of P Ltd. in S Ltd. (3000/7000) x 153576 65818.29 lakh Market Value of P Ltd. before merger (5800 X 10) 58000.00 lakh Gains to Shareholders 7818.29 lakh No. of Shares (before merger) 1000 lakh Gain Per Share 7.82

Topics: Mergers, Acquisitions and Corporate Restructuring

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