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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Sagar Ltd is to be absorbed by Tarang Ltd, and the purchase consideration is settled by issuing Tarang's equity shares on an intrinsic value basis. Sagar has 30,000 equity shares of ₹10 each and net assets available to equity shareholders of ₹9,00,000. Tarang has 60,000 equity shares of ₹10 each and net assets available to equity shareholders of ₹24,00,000. How many shares will Tarang issue to Sagar's shareholders?

Tarang will issue 22,500 shares. Sagar's intrinsic value per share is ₹30 and Tarang's is ₹40, giving an exchange ratio of 3:4. Applying this ratio to Sagar's 30,000 shares gives 22,500 Tarang shares for Sagar's shareholders.

  1. A40,000 shares
  2. B30,000 shares
  3. C22,500 sharesCorrect
  4. D15,000 shares

Explanation

Intrinsic value per share of Sagar = 9,00,000 ÷ 30,000 = ₹30. Intrinsic value per share of Tarang = 24,00,000 ÷ 60,000 = ₹40. Exchange ratio is 30:40, so shares issued = 30,000 × 30/40 = 22,500. The 40,000-share option inverts the ratio, and 30,000 assumes a 1:1 exchange.

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