X Ltd. is studying the possible acquisition of Y Ltd. by way of merger. The following data are available in respect of both the companies.…

Working Notes: (1) Inventory Turnover Ratio = COGS / Closing Stock X Ltd.: 5 = COGS / 15,00,000 => COGS = 75,00,000 Y Ltd.: 4 = COGS / 5,00,000 => COGS = 20,00,000 Gross Profit Ratio = 20% means COGS is 80% of Sales, then X Ltd.: Sales = 75,00,000 × 100 / 80 = 93,75,000 Y Ltd.: Sales = 20,00,000 × 100 / 80 = 25,00,000 Statement of Profit X Ltd. Y Ltd. Sales 93,75,000 25,00,000 Less: Operating Exp. (86% of Sales for X, 78% for Y) 80,62,500 19,50,000 EBIT 13,12,500 5,50,000 Less: Interest (12% of 10,00,000 for X, 10% of 14,40,000 for Y) 1,20,000 1,44,000 EBT 11,92,500 4,06,000 Less: Tax@30% 3,57,750 1,21,800 EAT 8,34,750 2,84,200 (2) X Ltd. Y Ltd. No. of Shares 1,00,000 60,000 EPS (EAT/ No. of Shares) 8,34,750/1,00,000 = 8.34 2,84,200/60,000 = 4.74 Market Price Share (Market Capitalisation/ No. Shares) 75,00,000/1,00,000 = 75 90,00,000/60,000 = 150 PE Ratio (MPS/ EPS) 75/8.34 = 8.99 150/4.74 = 31.65 (i) Swap Ratio = Target Co. / Acquirer Co. Acquirer Co. X Ltd. Target Co. Y Ltd. Weight EPS 0.34 4.74 0.40 MPS 75 150 0.60 EPS: 4.74 / 8.34 × 0.40 = 0.227 MPS: 150 / 75 × 0.60 = 1.200 Total Swap Ratio = 0.227 + 1.200 = 1.427 (ii) Post Merger EPS = (EAT X + EAT Y ) / (No. of Shares of Both Cos.) = (834750 + 284200) / (1,00,000 + (60,000 × 1.427)) = 1118950 / 185,620 = 6.03 (iii) Post Merger market price assuming same PE of X Ltd. MPS = PE x EPS = 8.99 x 6.03 = 54.21 (iv) Gain or Loss to the share holders Pre-Merger EPS Post Merger EPS X Ltd. 8.34 6.99 Y Ltd. 4.74 6.99 x 1.427 = 9.97 While Shareholders of X Ltd. will lose EPS of 1.35 (₹ 8.34 -6.99) per share the shareholders of Y Ltd. stands to gain EPS of 5.23 (9.97 -4.74) per share.