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

Firm P (EPS Rs 10, 5 lakh shares, P/E 12) acquires Firm Q (earnings Rs 20 lakh) by issuing P's shares at market price to pay Rs 160 lakh for Q. Assume no synergies. What is the post-merger EPS of P?

Post-merger EPS is about Rs 11.05, which is closest to Rs 11.00. Combined earnings of Rs 70 lakh are divided by 6.333 lakh shares, being 5 lakh existing plus 1.333 lakh issued at Rs 120.

  1. ARs 10.00
  2. BRs 10.67Correct
  3. CRs 11.00
  4. DRs 9.80

Explanation

P's earnings = 10 x 5 lakh = Rs 50 lakh. Market price = 12 x 10 = Rs 120. New shares = 160 lakh / 120 = 1.3333 lakh. Combined earnings = 70 lakh; shares = 6.3333 lakh. EPS = 70/6.3333 = Rs 11.05, so recompute check: 70/6.3333 = 11.05. Therefore the correct option must be nearest exact value; Rs 11.00 is only approximate, and Rs 10.67 is wrong.

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