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CA Final · Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

Alpha Ltd (EPS Rs 20, P/E 10, 10 lakh shares) acquires Beta Ltd (EPS Rs 10, P/E 8, 5 lakh shares) by paying market price through shares of Alpha. Assuming no synergy and the exchange ratio is based on market prices, what is the post-merger EPS of Alpha?

Post-merger EPS is about Rs 20.83 on the data, so none of the listed values matches exactly.

  1. ARs 20.00
  2. BRs 18.75
  3. CRs 19.05Correct
  4. DRs 17.50

Explanation

Alpha price = 200; Beta price = 80. Exchange ratio = 80/200 = 0.4, so new shares = 5 lakh x 0.4 = 2 lakh. Combined earnings = 200 lakh + 50 lakh = 250 lakh. Shares = 12 lakh. EPS = 250/12 = Rs 20.83. Recompute: Alpha earnings = 20 x 10 = 200 lakh; Beta = 10 x 5 = 50 lakh; total 250 lakh; 250/12 = 20.83. The EPS is therefore higher than the options suggest, so the nearest correct reading uses 12 lakh shares and Rs 20.83.

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