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baf hons cf2 lec1 (1).pptx

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baf hons cf2 lec1 (1).pptx

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baf hons cf2 lec1 (1).pptx

1. 1. Programme :_baf hons Course:corporate finance 2 “Topic:merger and acquisition_”
2. 2. formula • EPS =( PAT – Pref Div)/No of equity shares • P/E ratio = MPS/EPS • Exchange ratio (no formula only cross multiplication)
3. 3. Q1. A ltd acquires B ltd. Following information is available for both the co A Ltd = no of Equity shares = 10,00,000;PAT = 50,00,000 ; MPS = 42 B Ltd = no of equity shares = 6,00,000; PAT = 18,00,000; MPS = 28 Calculates 1. EPS before merger for both companies (ans = 5 & 3) 2. EPS after merger (use no 3) 3. Exchange ratio using market price 4. P/E ratio before merger 5. Exchange ratio using EPS
4. 4. Answer -1 EXCHANGE RATIO USING MPS MPS A B MPS 42 28 6,00,000 ? (4,00,000) EPS A B EPS 5 3 600000 ?
5. 5. answer - 1 • Shares of A = 10,00000 • Shares given to B = 4,00,000 • EPS after merger = 68 00 000/1400000 = 4.857 EPS after merger =( PAT of A+B)/ (Shares of A + shares given to B)
6. 6. Q2 C ltd acquires D ltd. Following information is available for both the co CLtd = no of shares = 40,000;PAT = 2,00,000 ; MPS = 15 D Ltd = no of shares = 10,000; PAT = 60,000; MPS = 12 Calculates 1. EPS before merger (ans = 5 & 6) 2. EPS after merger (use no 3) (5.417) 3. Exchange ratio using market price (8000 shares) 4. P/E ratio before merger (3 & 2) 5. Excahnge ratio using EPS (12000) 6. EPS after merger (using no 5) (5)
7. 7. Q3 • X ltd acquires Y ltd. Following information is available for both the co • X Ltd = equity share capital = 450 million; PAT = 90 million ; MPS = 60 • Y Ltd = equity share capital = 180 million; PAT = 18 million ; MPS = 37 • Calculates 1. EPS before merger (2 and 1) 2. EPS after merger (use no 3) 3. Exchange ratio using market price 4. P/E ratio before merger (30 and 37) 5. Exchange ratio using EPS (What should be the exchange ratio if they want EPS to remain same) 6. EPS after merger (using no 5)
8. 8. ans 3 • No of eqty shrs = 450 million/10 (X Ltd) = 45 million No of ety shrs of Y ltd = 180/10 = 18 million
9. 9. Answer -3 EXCHANGE RATIO USING MPS MPS X Y MPS 60 37 18 million ? (11.1) EPS X Y EPS 2 1 18 miilion ? (9)
10. 10. answer - 3 • Shares of X = 45 million • Shares given to Y = 11.1 million • EPS after merger = 108 million/(45+11.1) = 1.925 EPS after merger =( PAT of A+B)/ (Shares of A + shares given to B)
11. 11. Q4 • X ltd acquires Y ltd. Following information is available for both the co • X Ltd = equity share capital = 20,00,000; PAT = 4,00,000 ; MPS = 25 • Y Ltd = equity share capital = 10,00,000; PAT = 1,00,000 ; MPS = 12.5 • Calculates 1. EPS before merger (2 and 1) 2. EPS after merger (use no 3) 3. Exchange ratio using market price 4. P/E ratio before merger 5. What should be the exchange ratio if they want EPS to remain same(no of shr=50,000) 6. EPS after merger (using no 5)
12. 12. Q5 X ltd acquires Y ltd. Following information is available for both the co X Ltd = equity shares = 3,00,000; PAT = 15,00,000 ; MPS = 35 Y Ltd = equity shares = 75,000; PAT = 37,500 ; MPS = 40 Calculates 1. EPS before merger (X ltd = 15,00,000/3,00,000 = 5; Y ltd = 37500/75000 = 0.5) 2. EPS after merger ; if exchange ratio is 1.6 shares for every 1 share held in Y ltd 3. P/E ratio before merger 4. Gain to shareholders assuming same P/E ratio
13. 13. ans to Q5 X Y 1.6 1 ?(120000) 75000 EPS after merger = 1500000+37500/(300000+120000) = 3.6666 P/E ratio before merger = 35/5 = 7 (MPS/EPS) MPS after merger = (7 = X/3.6666) X=MPS after merger = 25.6662
14. 14. ans to Q5 Gain to shareholder 1. Total gain Total no of shares after merger IN X LTD = 300000+120000 = 420000 Market value of shares after merger = 420000*25.66 = 10777200 - Market value of shares before merger for X (300000*35)= 10500000 - -Market value of shares before merger for Y (75000*40)= 3000000 Gain = (2722800) - 2. Gain to shareholders of X ltd (Market value after merger – market value before merger)(300000*25.66 – 300000*35) = (2802000) - 3. Gain to shareholders of Y Ltd (Market value after merger – market value before merger)(120000*25.66 – 75000*40)= 79200
15. 15. Q6. A ltd acquires B ltd. Following information is available for both the co A Ltd = equity shares = 50000; PAT = 100000 ; MPS = 20 B Ltd = equity shares = 20,000; PAT = 20000 ; MPS = 8 Calculates 1. EPS before merger (a=2, b = 1) 2. EPS after merger (ans = 1.8) ((100000+20000)/66000) ; if exchange ratio is 0.8 (no of shares given to b ltd = 16,000) 3. P/E ratio before merger( a=10, b= 8) 4. Gain to shareholders assuming same P/E ratio Ans A B 0.8 1 ?(16000) 20,000 P/E ratio before merger = 10 MPS after merger = (10 = X/1.8) X=MPS after merger = 18
16. 16. ans to Q 6 Gain to shareholder 1. Total gain Total no of shares after merger = 50000+16000 = 66000 Market value of shares after merger = 66000 * 18 = 1188000 Market value of shares before merger for X (50000*20)= 1000000 - -Market value of shares before merger for Y (20000*8)= 160000 - Gain = 28000 - 2. Gain to shareholders of Altd (Market value after merger – market value before merger) (50000*18-50000*20) =(100000) - 3. Gain to shareholders of B Ltd (Market value after merger – market value before merger)(16000*18-20000*8) = 128000
17. 17. Q7 X ltd acquires Y ltd. Following information is available for both the co X Ltd = equity shares = 20,000; PAT = 140000 ; MPS = 70 Y Ltd = equity shares = 37500; PAT = 7,500 ; MPS = 40 Calculates 1. EPS before merger 2. EPS after merger ; if exchange ratio is 1 shares for every 1.5 share held in Y ltd 3. P/E ratio before merger 4. Gain to shareholders assuming same P/E ratio x y 1 1.5 ? (25000) 37500
18. 18. chp 2 EVA and MVA ** NOPAT = EBIT – Tax ; EVA = NOPAT – (WACC * CE) Q1. calculate EVA from the following 1. Investment = 10,000; life of the asset = 5 yrs; scrap value = 0; annual revenue = 8,000 p.a; annual cost = 4,000(excluding depreciation and tax) ; tax @40%, debt equity ratio = 3:2, cost of equity= 20%, cost of debt = 8% (post tax). 2. Average debt = 25 cr ; average equity = 2,500 cr ; cost of equity = 15%, cost of debt = 8%, PAT = 12cr, interest = 4 cr.. 3. Average debt = 50 cr ; average equity = 27.66 cr ; cost of equity = 14%, cost of debt( Post tax) = 12%, PAT = 15.41 cr, interest = 6 cr.. Tax rate = 40%
19. 19. cost of debt COST OF DEBT = 8% - before the effect of tax and tax saving Cost of debt = 8%(post tax)- after the effect of tax and tax saving Cost of debt (after tax) = Int (1 – tax rate) eg = int rate = 10%, tax rate = 40% Cost of debt (after tax) = 10(1-0.4) = 6%
20. 20. solution to q 2 of EVA NOPAT = PAT + INTEREST= 12+4 = 16 WACC = NOPAT – (WACC *CAPITAL EMPLOYED) particulars amount cost prop Wacc (prop * cost) Debt 25 8% (25/2525) = 0.009 0.08 equity 2500 15% (2500/2525) = 0.99 14.85 total 2525 14.93
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33. 33. title Historical cost = original purchase price Book value = cost – dep/ value in the balance sheet Market value Realizable value = selling price – brokerage/commission Intrinsic value = act value Replacement cost = cost of replacing the asset Current cost = cost the same asset today
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