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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Veda Motors Ltd (EPS Rs 40, 10 crore shares) acquires Sundaram Auto Components Ltd (net profit Rs 90 crore, 3 crore shares) by issuing 2.4 crore Veda shares to SACL holders. No synergies. Which statement about the post-merger EPS is correct?

Post-merger EPS is Rs 39.52, which is lower than Veda's existing Rs 40, so the deal is dilutive. Combined earnings of Rs 490 crore are spread over 12.4 crore shares, being 10 crore existing plus 2.4 crore newly issued.

  1. APost-merger EPS is Rs 39.52 and EPS of Veda is dilutedCorrect
  2. BPost-merger EPS is Rs 41.94 and EPS of Veda is accretive
  3. CPost-merger EPS is Rs 40.00 and EPS is unchanged
  4. DPost-merger EPS is Rs 36.00 and EPS of Veda is diluted

Explanation

Veda's earnings = 40 x 10 = Rs 400 crore. Combined earnings = Rs 490 crore. Total shares = 10 + 2.4 = 12.4 crore. EPS = 490/12.4 = Rs 39.52, below Rs 40, so there is dilution. Rs 41.94 would result from using 11.68 crore shares, a wrong share count.

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