Skip to content

IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

Tarang Ltd plans to buy Nila Ltd. Tarang's shares trade at a price-earnings ratio of 15, and Nila's shares trade at a price-earnings ratio of 10. Tarang offers to pay for Nila entirely in new Tarang shares, valuing Nila at 12 times its earnings. Assuming no synergies and that the market keeps Tarang's P/E at 15 after the deal, what is the most likely effect on Tarang's earnings per share?

EPS rises. Tarang pays 12 times Nila's earnings using shares that the market values at 15 times earnings, so it issues relatively few new shares for the earnings it acquires. When the acquirer's P/E exceeds the price paid multiple, a share-financed purchase is accretive to EPS.

  1. AEPS rises, because Tarang pays a lower multiple than its own P/ECorrect
  2. BEPS falls, because Tarang pays a higher multiple than its own P/E
  3. CEPS is unchanged, because the market P/E is unchanged
  4. DEPS rises, because Nila's P/E is lower than the offer multiple
  5. EPS falls, because share-financed deals always dilute EPS

Explanation

Tarang issues shares worth 12 times Nila's earnings, but its own shares are valued at 15 times earnings. So it issues fewer shares per rupee of acquired earnings than its own earnings multiple implies, and EPS rises. The claim that share deals always dilute is wrong; the outcome depends on the relative multiples.

Did you get it right without looking?

One question tells you little. A timed set on Corporate growth, restructuring and divestment shows your real accuracy, how long you take and where you lose marks.

Practise Corporate growth, restructuring and divestmentFree diagnostic mock

More Corporate growth, restructuring and divestment questions