Question 4

Question 4 (24 marks) Cosmo Limited is considering a merger with Politan Limited. Cosmo Limited expects the merger to result in administrative and distribution economies amounting to NS 4 800 000 per annum. Cosmo Limited's current EPS is N$10.40 and its current dividend per share is N$ 4.80. The growth rate in EPS and dividend per share over the last 10 years has been 10% per annum. Politan Limited's current EPS is N$ 3.60 and its current dividend per share amounts to N$2.60. Politan Limited has experienced a growth rate in EPS and dividend per share over the last six years of 5% per annum. This is expected to continue in the future. The current market price for Cosmo Limited is N$ 83.20 per share and that of Politan Limited is N$ 25.20 per share. Cosmo Limited has 8 million shares in issue while Politan Limited has 2.4 million shares. 10 . 40 * 4 . 80 = 49. 90 REQUIRED: MAR 4.1 Calculate the exchange ratio based on current EPS. 2 4.2 What is the exchange ratio based on EPS in five years' time? 4 4.3 What exchange ratio will maintain Cosmo Limited's current EPS and Politan Limited's current EPS? MOT 6 4.4 Calculate the exchange ratio based on current market values. 4.5 If the post-merger Price-earnings ratio is 8 and exchange ratio is 0.40 calculate the expected post-merger price of Cosmo Limited