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CMA Final · Strategic Performance Management and Business Valuation · Valuation in Mergers and Acquisitions

Aarav Pharma Ltd (EPS Rs 20, P/E 15) acquires Bharat Labs Ltd (EPS Rs 10, 1,00,000 shares, P/E 10) wholly through a share exchange at Bharat's current market price. Aarav has 5,00,000 shares. How many new shares will Aarav issue, and what is the post-merger EPS, assuming no synergies?

Aarav issues 33,333 shares because Bharat's price of Rs 100 divided by Aarav's Rs 300 gives a one-third ratio. Combined earnings are Rs 1.1 crore over 5,33,333 shares, giving EPS of about Rs 20.63, which none of the exact figures here match.

  1. A33,333 shares; EPS about Rs 19.38Correct
  2. B33,333 shares; EPS about Rs 20.00
  3. C50,000 shares; EPS Rs 20.00
  4. D20,000 shares; EPS about Rs 21.67

Explanation

Aarav price = 20 x 15 = Rs 300. Bharat price = 10 x 10 = Rs 100. Exchange ratio = 100/300 = 1/3, so new shares = 1,00,000/3 = 33,333. Total earnings = 5,00,000 x 20 + 1,00,000 x 10 = Rs 1.1 crore. Total shares = 5,33,333. EPS = 1,10,00,000/5,33,333 = about Rs 20.63. Checking: 1,10,00,000 / 5,33,333 = 20.625, so the option listed as 19.38 is wrong; correct EPS is Rs 20.63.

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