Question: A Ltd & B Ltd are contemplating a merger deal in which A Ltd. will acquire B Ltd. The relevant information about the firms is

A Ltd & B Ltd are contemplating a merger deal in which A Ltd. will acquire B Ltd. The relevant information about the firms is given as follows: A B

Market price per share (Rs.)	4	15
Total earning (Rs. Mn)	48	15
Number of outstanding shares(Mn)	10	7
Earnings per share (Rs./Sh)	8	4
Price earnings ratio (X)	38	7

Set 1: P/E of the combined firm is expected to be 7x (a) What is the maximum exchange ratio acceptable to the shareholders of A Ltd.? (b) How much synergy is being generated with such PE? (c) What is the minimum exchange ratio acceptable to the shareholders of B Ltd.? (d) Would the merger happen in such a situation? Set 2: P/E of the combined firm is expected to be 8x (a) What is the maximum exchange ratio acceptable to the shareholders of A Ltd.? (b) How much synergy is being generated with such PE? (c) What is the minimum exchange ratio acceptable to the shareholders of B Ltd.? (d) What shall be the price range between which the merger shall happen? Set 3: P/E of the combined firm is expected to be 10x (a) What is the maximum exchange ratio acceptable to the shareholders of A Ltd.? (b) How much synergy is being generated with such PE? (c) What is the minimum exchange ratio acceptable to the shareholders of B Ltd.? (d) What shall be the price range between which the merger shall happen?

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