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

Target Ltd has EPS of Rs 20 and P/E of 10. Acquirer Ltd has EPS of Rs 40 and P/E of 15. Acquirer will issue shares to Target's shareholders at an exchange ratio set on market prices (shares of Acquirer per share of Target). Ignoring synergies, what is the exchange ratio and is the deal EPS accretive for Acquirer?

The exchange ratio is 0.333 Acquirer shares per Target share, from prices of Rs 200 and Rs 600. Each new Acquirer share issued brings in Target earnings of Rs 60, above Acquirer's EPS of Rs 40, so the deal is accretive, because Target's P/E is lower than Acquirer's.

  1. ARatio 0.333; EPS is dilutiveCorrect
  2. BRatio 0.333; EPS is accretive
  3. CRatio 0.5; EPS is dilutive
  4. DRatio 3; EPS is accretive

Explanation

Target price = 20 x 10 = Rs 200; Acquirer price = 40 x 15 = Rs 600. Ratio = 200/600 = 0.333. Target earnings per Acquirer share issued = 20 / 0.333 = Rs 60 per new share, which exceeds 40... check: that gives new share earnings of Rs 60 vs 40, so accretive. Correct: accretive.

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