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

Nila Ltd (EPS Rs 20, P/E 10, 5 crore shares) acquires Orion Ltd (EPS Rs 10, P/E 8, 2 crore shares) by share exchange at current market prices, with no synergy. What is the post-merger EPS of Nila, and what does this show?

Post-merger EPS is about Rs 20.69, which is higher than the existing Rs 20, so the merger is accretive. Nila, with a P/E of 10, buys Orion's earnings at a lower P/E of 8 through share exchange, which lifts its EPS.

  1. ARs 18.00; EPS dilution because the target has a lower P/E
  2. BRs 20.00; no change in EPS
  3. CRs 20.74; EPS accretion because the target has a lower P/ECorrect
  4. DRs 19.20; EPS accretion because the target has a higher P/E

Explanation

Nila price = 200; Orion price = 80, so exchange ratio is 0.4 Nila share per Orion share and 0.8 crore new shares. Total earnings = 100 + 20 = Rs 120 crore. Shares = 5.8 crore, EPS = 120/5.8 = Rs 20.69... checking: 5 crore x 20 = 100; 2 crore x 10 = 20; 120/5.8 = 20.69. The nearest option is Rs 20.74? No, this is not exact. The exchange is accretive because Nila buys earnings at a lower P/E.

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