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 AdvancedMERGERS,
Financial Management
ACQUISITIONS & RESTRUCTURING
The Best & The Most Comprehensive Notes for CA Final
Practice Book
NT
MANA GEME

RISK

$
%

CHAPTER - 01 CHAPTER - 02 CHAPTER - 03 CHAPTER - 04

MERGERS, SECURITY PORTFOLIO RISK
ACQUISITIONS & & BUSINESS MANAGEMENT MANAGEMENT
RESTRUCTURING VALUATION

01 25 79 136

CHAPTER - 05 CHAPTER - 06 CHAPTER - 07 CHAPTER - 08

MUTUAL BONDS SECURITY ANALYSIS -
FUNDS MANAGEMENT DERIVATIVES TECHNICAL ANALYSIS
[Part of Security Valuation
Chapter]

138 157 191 231

₹
CHAPTER - 09 CHAPTER - 10 CHAPTER - 11 CHAPTER - 12
FOREIGN EXCHANGE ADVANCED INTEREST INTERNATIONAL
EXPOSURE &
CAPITAL RATE RISK FINANCIAL
RISK
MANAGEMENT BUDGETING MANAGEMENT MANAGEMENT

235 292 336 356

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Leaders in Advanced Financial Education Across India

 MERGERS, ACQUISITIONS & RESTRUCTURING

From the Desk of CA Praveen Khatod

Targeting 100 Marks in AFM...

Leaders in Advanced Financial Education Across India

CA, CFA (USA), CPA (USA) PRAVEEN KHATOD - Leaders in Advanced Financial Education Across India
 MERGERS, ACQUISITIONS & RESTRUCTURING

MERGERS,
ACQUISITIONS
& RESTRUCTURING

Ques on 1 Study Material, (8 Marks) CA Final Nov 2007, May 2018, Nov 2022
A Ltd. wants to acquire T Ltd. and has offered a swap ra o of 1:2 (0.5 shares for every one share of T Ltd).
Following informa on is provided:
A Ltd. T Ltd.
Profit A er tax ₹ 18,00,000 ₹ 3,60,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS ₹3 ₹2
PE Ra o 10 Times 7 Times
Market price per share ₹ 30 ₹ 14
Required:
i. The number of equity shares to be issued by A Ltd. for acquisi on of T Ltd.
ii. What is the EPS of A Ltd. a er the acquisi on?
iii. Determine the equivalent earnings per share of T Ltd.
iv. What is the expected market price per share of A Ltd. a er the acquisi on assuming its PE mul ple
remains unchanged?
v. Determine the market value of the merged firm.
Ques on 2 Study Material
You have been provided the following financial data of two companies
Krishna Ltd. Rama Ltd.
Earnings a er Taxes ₹ 7,00,000 ₹ 10,00,000
Equity share outstanding 2,00,000 4,00,000
EPS 3.5 2.5
P/E Ra o 10 Times 14 Times
Market price per share ₹ 35 ₹ 35
Company Rama Ltd. is acquiring the company Krishna Ltd., exchanging its shares on a one-to-one basis for
company Krishna Ltd. The exchange ra o is based on the market price of the shares of the two companies.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Required:
(i) What will be the EPS subsequent to merger?
(ii) What is the change in EPS for the shareholders of companies Rama Ltd. & Krishna Ltd.?
(iii) Determine the market value of the post-merger firm. PE ra o is likely to remain the same.
(iv) Ascertain the profits accruing to shareholders of both the companies?

Ques on 3 Study Material, CA Final May 2003, May 2005

XYZ Ltd., is considering merger with ABC Ltd. XYZ Ltd.'s shares are currently traded at ₹ 20. It has 2,50,000
shares outstanding and its earnings a er taxes (EAT) amount to ₹ 5,00,000. ABC Ltd., has 1,25,000 shares
outstanding; its current market price is ₹ 10 and its EAT are ₹ 1,25,000. The merger will be effected by means of
a stock swap (exchange). ABC Ltd., has agreed to a plan under which XYZ Ltd., will offer the current market
value of ABC Ltd's shares:
(i) What is the pre-merger earning per share (EPS) and P/E ra os of both the companies?
(ii) If ABC Ltd.'s P/E ra o is 6.4, what is current market price? What will XYZ Ltd.'s post merger EPS be?
(iii) What would be the gain or loss in (ii) above?
(iv) What should be the exchange ra o, if XYZ Ltd's pre merger and post-merger EPS are to be the same?

[Ans: (i) 2,1,10,10 (ii) 6.4, 2.16 (iii) 40000,(38600) (iv)0.5:1 ]

Ques on 4 Study Material, (8 Marks) Exam May 2022
P Ltd. is considering take-over of R Ltd. by the exchange of four new shares in P Ltd. for every five shares in R
Ltd. The relevant financial details of the two companies prior to merger announcement are as follows:
P Ltd R Ltd
Profit before Tax (₹ Crore) 15 13.50
No. of Shares (Crore) 25 15
P/E Ra o 12 9
Corporate Tax Rate 30%
You are required to determine:
(i) Market value of both the company.
(ii) Value of original shareholders.
(iii) Price per share a er merger.
(iv) Effect on share price of both the company if the Directors of P Ltd. expect their own pre-merger P/E ra o
to be applied to the combined earnings.

Ques on 5
Refer Champions Book Pg No.18 - [Link] Ltd, and DA Ltd. both the

Ques on 6
Refer Champions Book Pg No.17 - [Link] is the following informa on:

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 7 Study Material, (4 Marks) Exam May 2024

Elrond Limited plans to acquire Doom Limited. The relevant financial details of the two firms prior to the
merger announcement are:
Elrond Limited Doom Limited
Market price per share ₹ 50 ₹ 25
Number of outstanding shares 20 lakhs 10 lakhs
The merger is expected to generate gains, which have a present value of ₹ 200 lakhs. The exchange ra o
agreed to is 0.5.
What is the true cost of the merger from the point of view of Elrond Limited?
Ques on 8
Refer Champions Book Pg No.20- [Link] Ltd. wishes to acquire BCD Ltd.

Ques on 9 Exam Nov 2020

ICL is proposing to take over SVL with an objec ve to diversify. ICL's profit a er tax (PAT) has grown @ 18 per
cent per annum and SVL's PAT is grown @ 15 per cent per annum. Both the companies pay dividend regularly.
The summarised Profit & Loss Account of both the companies are as follows:
(₹ in crores)
Par culars ICL SVL ICL SVL
Net Sales 4.545 1,500 Fixed Assets
PBlT 2,980 720 Land & Building (Net) 720 190
Interest 750 25 Plant & Machinery (Net) 900 350
Provision for Tax 1,440 445 Furniture & Fixtures (Net) 30 1,650 10 550
PAT 790 250 Current Assets 775 580
Dividends 235 125 Less: Current Liabili es
Creditors 230 130
Overdra s 35 10
Provision for Tax 145 50
Provision for dividends 60 470 50 240
Net Assets 1,995 890
Paid up Share Capital 250 125
(₹ 10 per share)
Reserves and Surplus 1,050 1,300 660 785
Borrowing 665 105
Capital Employed 1,955 890
Market Price Share (₹) 52 75

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 MERGERS, ACQUISITIONS & RESTRUCTURING

ICL's Land & Buildings are stated at current prices. SVL's Land & Buildings are revalued three years ago. There
has been an increase of 30 per cent per year in the value of Land & Buildings.
SVL is expected to grow @ 18 per cent each year, a er merger.
ICL's Management wants to determine the premium on the shares over the current market price which can be
paid on the acquisi on of SVL.
You are required to determine the premium using:
(i) Net Worth adjusted for the current value of Land & Buildings plus the es mated average profit a er
tax (PAT) for the next five years.
(ii) The dividend growth formula.
(iii) ICL will push forward which method during the course of nego a ons?
Period (t) 1 2 3 4 5
FVIF (30%, t) 1.300 1.690 2.197 2.856 3.713
FVIF (15%, t) 1.15 2.4725 3.9938 5.7424 7.7537
Ques on 10 Study Material, RTP May 23, (10 Marks) Exam Nov 23 (Similar), May 05, Nov 15
The following informa on is provided rela ng to the acquiring company Efficient Ltd. and the target Company
Healthy Ltd.
Par culars Efficient Ltd. Healthy Ltd.
No. of shares (F.V. ₹ 10 each) 10.00 lakhs 7.5 lakhs
Market capitaliza on 500.00 lakhs 750.00 lakhs
P/E ra o ( mes) 10.00 5.00
Reserves and Surplus 300.00 lakhs 165.00 lakhs
Promoter's Holding (No. of shares) 4.75 lakhs 5.00 lakhs
Board of Directors of both Companies have decided to give a fair deal to the shareholders and accordingly for
swap ra o the weights are decided as 40%, 25% and 35% respec vely for Earning, Book Value and Market
Price of share of each company:
(i) Calculate the swap ra o and also calculate Promoter's holding % a er acquisi on.
(ii) What is the EPS of Efficient Ltd. a er acquisi on of Healthy Ltd.?
(iii) What is the expected market price per share and market capitaliza on of Efficient Ltd. a er acquisi on,
assuming P/E ra o of Firm Efficient Ltd. remains unchanged.
(iv) Calculate free float market capitaliza on of the merged firm.
Ques on 11 Study Material
B Ltd. is a highly successful company and wishes to expand by acquiring other firms. Its expected high growth
in earnings and dividends is reflected in its PE ra o of 17. The Board of Directors of B Ltd. has been advised that
if it were to take over firms with a lower PE ra o then its own, using a share-for –share exchange, then it could
increase its reported earnings per share. C Ltd. has been suggested as possible target for a takeover, which has
a PE ra o of 10 and 1,00,000 shares in issue with a share price of ₹ 15, B Ltd. has 5,00,000 shares in issue with a
share price of ₹ 12.
Calculate the change in earning per share of B Ltd. if it acquires the whole of C Ltd. at its market price of ₹ 12.
Assume the price of B Ltd. shares remains constant.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 12
Refer Champions Book Pg No.24 - Q5.T Ltd. and E Ltd. are in the same

Ques on 13 Study Material, CA Final May 2006, RTP May 2019

Reliable Industries Ltd. (RIL) is considering a takeover of Sunflower Industries Ltd. (SIL). The par culars of 2
companies are given below:
Par culars Reliable Industries Ltd. Sunflower Industries Ltd.
Earnings A er Tax (EAT) ₹ 20,00,000 ₹ 10,00,000
Equity shares O/s 10,00,000 10,00,000
Earnings per share (EPS) 2 1
PE Ra o (Times) 10 5
Required:
(i) What is the market value of each Company before merger?
(ii) Assume that the management of RIL es mates that the shareholders of SIL will accept an offer of one share of
RIL for four share of SIL. If there are no synergic effects, what is the market value of the Post-merger RIL? What
is the new price per share? Are the shareholders of RIL be er or worse off than they were before in merger?
(iii) Due to synergic effects, the management of RIL es mates that the earnings will increase by 20%. What is
the new post-merger EPS and Price per share? Will the shareholders be be er off or worse off than
before the merger?
Ques on 14 Study Material
Longitude Limited is in the process of acquiring La tude Limited on a share exchange basis. Following relevant
data are available:
Longitude Limited La tude Limited
Profit a er Tax (PAT) ₹ In lakhs 120 80
Number of shares Lakhs 15 16
EPS ₹ 8 5
PE Ra o 15 10
(Ignore Synergy)
You are required to determine:
(i) Pre-merger Market Value per share, and
(ii) The maximum exchange ra o Longitude Limited can offer without the dilu on of
1. EPS and
2. Market Value per share
Calculate Ra o/s up to four decimal points and amounts and number of shares up to two decimal points.

Ques on 15
Refer Champions Book Pg No.25 - [Link] equity shares of XYZ Ltd. are

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 16
Refer Champions Book Pg No.26 - [Link] CEO of a company thinks that shareholders

Ques on 17
Refer Champions Book Pg No.21 - [Link] the audit of the Weak Bank

DEMERGER

Ques on 18
Refer Champions Book Pg No.29 - [Link] following informa on is rela ng to Fortune

RESTRUCTURING

Ques on 19
Refer Champions Book Pg No.31 - [Link] following is the Balance-sheet

MISCELLANEOUS

Ques on 20 Study Material

Simple Ltd. and Dimple Ltd. are planning to merge. The total value of the companies are dependent on the
fluctua ng business condi ons. The following informa on is given for the total value (debt + equity) structure
of each of the two companies.
Business Condi on Probability Simple Ltd. ₹ Lacs Dimple Ltd. ₹ Lacs
High Growth 0.20 820 1050
Medium Growth 0.60 550 825
Slow Growth 0.20 410 590
The current debt of Dimple Ltd. is ₹ 65 lacs and of Simple Ltd. is ₹ 460 lacs.
Calculate the expected value of debt and equity separately for the standalone as well as merged en ty.
Ques on 21 CA Final May 2003, RTP May 2021, (8 Marks) Exam Nov 2023 (Similar)
Pragya Limited has issued 7,50,000 equity shares of ₹ 10 each. The current market price per share is ₹ 240. The
company has a plan to raise ₹ 3 crores by making a rights issue of one new equity share for every four shares held.
You are required to:
(i) Calculated the theore cal post-rights price per share and analysis the change;
(ii) Calculated the theore cal value of the right alone;
(iii) Show the effect of the rights issue on the wealth of a shareholder Mr A, who has 1,000 shares assuming
he sells the en re rights ; and
(iv) Show the effect, if the same shareholder does not take any ac on and ignores the issue.
(v) Suppose Mr A is not interested in subscribing to the right issue, then advice what should he do.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.1. A Ltd. wants to acquire T Ltd……

Solu on:
(i) The number of shares to be issued by A Ltd.:
The Exchange ra o is 0.5
So, new Shares = 1,80,000 x 0.5 = 90,000 shares.

(ii) EPS of A Ltd. A

er a acquisi on: (iv) New Market Price of A Ltd.
Total Earnings
(₹ 18,00,000 + ₹ 3,60,000) ₹ 21,60,000 (PE remains unchanged):
No. of Shares
(6,00,000 + 90,000) 6,90,000 Present PIE Ra o of A Ltd. 10 mes
EPS (₹ 21,60,000)/6,90,000) ₹ 3.13 Expected EPS a er merger ₹ 3.13
Expected Market Price (₹ 3.13 x 10) ₹ 31.30
(iii) Equivalent EPS of T Ltd.:
No. of new Shares 0.5 (v) Market Value of merged firm:
EPS ₹ 3.13 Total number of Shares 6,90,000
Equivalent EPS (₹ 3.13 x 0.5) ₹ 1.565 Expected Market Price ₹ 31.30
~ ₹ 1.57 Total value (6,90,000 x 31.30) ₹ 2,15,97,000
Q.2. You have been provided the following...
Solu on:
(i) Exchange Ra o 1:1
New Shares to be issued 2,00,000
Total shares of Rama Ltd. (4,00,000 + 2,00,000) 6,00,000
Total earnings (₹ 10,00,000 + ₹ 7,00,000) ₹ 17,00,000
New EPS (₹ 17,00,000/6,00,000) ₹ 2.83

(ii) Exis ng EPS of Rama Ltd. ₹ 2.50

Increase in EPS of Rama Ltd (₹ 2.83 - ₹ 2.50) ₹ 0.33
Exis ng EPS of Krishna Ltd. ₹ 3.50
Decrease in EPS of Krishna Ltd. (₹ 3.50 – ₹ 2.83) ₹ 0.67

(iii) P/E ra o of new firm (expected to remain same) 14 mes

New market price (14 × ₹ 2.83) ₹ 39.62
Total No. of Shares 6,00,000
Total market Capitaliza on (6,00,000 × ₹ 39.62) ₹ 2,37,72,000
Exis ng market capitaliza on (₹ 70,00,000 + ₹ 1,40,00,000) ₹ 2,10,00,000
Total gain ₹ 27,72,000

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 MERGERS, ACQUISITIONS & RESTRUCTURING

(iv) Rama Ltd. Krishna Ltd Total

No. of shares a er merger 4,00,000 2,00,000 6,00,000
Market price ₹ 39.62 ₹ 39.62 ₹ 39.62
Total Mkt. Values ₹ 1,58,48,000 ₹ 79,24,000 ₹ 2,37,72,000
Exis ng Mkt. values ₹ 1,40,00,000 ₹ 70,00,000 ₹ 2,10,00,000
Gain to share holders ₹ 18,48,000 ₹ 9,24,000 ₹ 27,72,000
or ₹ 27,72,000 ÷ 3 = ₹ 9,24,000 to Krishna Ltd. and ₹ 18,48,000 to Rama Ltd. (in 2:1 ra o)
Q.3. XYZ Ltd., is considering merger with ABC Ltd…..
Solu on:
(i) Pre-merger EPS and P/E ra os of XYZ Ltd. and ABC Ltd.
Par culars XYZ Ltd. ABC Ltd.
Profits a er taxes 5,00,000 1,25,000
Number of shares outstanding 2,50,000 1,25,000
EPS (Earnings a er tax/No. of shares) 2 1
Market price per share 20.00 10.00
P/E Ra o ( mes) 10.00 10.00
(ii) Current market price of ABC Ltd., if P/E ra o is 6.4 = ₹ 1 × 6.4 = ₹ 6.4
Exchange ra o = ₹ 6.4/20 = 0.32
₹ 5,00,000 + ₹ 1,25,000 ₹ 6,25,000
Post-merger EPS of XYZ Ltd. = = = 2.16
2,50,000 + (1,25,000*0.32) 2,90,000
(iii) Calcula on of Gain/ Loss from Merger
Par culars Acquiror Target
Post Merger EPS / Adjusted EPS 2.16 0.6912
[2.16 * 0.32]
Less: Pre-merger EPS 2 1
Gain / (Loss) per Share 0.16 (0.3088)
No. of Shares 250000 125000
Total Gain / (Loss) 40000 (38600)
(iv) Desired exchange ra o
Total number of shares in post-merged company
Post-merger earnings
= = 6,25,000 / 2 = 3,12,500
Pre-merger EPS of XYZ Ltd.
Number of shares required to be issued = 3,12,500 – 250,000 = 62,500
Therefore, the exchange ra o is = 62,500/ 1,25,000 = 0.50
Alterna vely, EPS based swapping will lead to no loss of EPS a er merger.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.4. P Ltd. is considering take-over of R Ltd. by the.....

Solu on: P Ltd. R Ltd.
Profit before Tax (₹ in Crore) 15 13.50
Tax 30% (₹ in crore) 4.50 4.05
Profit a er Tax (₹ in crore) 10.50 9.45
10.50 9.45
Earning per Share (₹) = ₹ 0.42 = ₹ 0.63
25 15
Price of Share before Merger ₹ 0.42 x 12 = ₹ 5.04 ₹ 0.63 x 9 = ₹ 5.67
(EPS x P/E Ra o)
(i) Market Value of company
P Ltd. = ₹ 5.04 x 25 Crore = ₹ 126 crore
R Ltd. = ₹ 5.67 x 15 Crore = ₹ 85.05 crore
Combined = ₹ 126 + ₹ 85.05 = ₹ 211.05 Crores
A er Merger P Ltd. R Ltd.
4
No. of Shares 25 crores 15 x = 12 crores
5
Combined 37 crores
% of Combined Equity 25 12
x 100 = 67.57% x 100 = 32.43%
Owned 37 37
(ii) ∴ Value of Original Shareholders
P Ltd. Alterna vely, it can also be computed as follows:
₹ 211.05 crore x 67.57% Combined Value of En ty 211.05 crore
= ₹ 142.61 No. of shares a er Merger 37 crore
R Ltd. Value of Per Share ₹ 5.70405
₹ 211.05 crore x 32.43%
Value of P Ltd. Shareholders (25 crores x ₹ 5.70405) ₹ 142.60 crore
= ₹ 68.44
Value of R Ltd. Shareholders (12 crores x ₹ 5.70405) ₹ 68.45 crore
(iii) Price per Share a er Merger (iv) Effect on Share Price
₹ 19.95 crore P Ltd.
EPS = = ₹ 0.539 per share
37 crore Gain/loss (-) per share = ₹ 6.47 - ₹ 5.04 = ₹ 1.43
6.47 - 5.04
P/E Ra o = 12 ie. x 100 = 0.284 or 28.4%
Market Value Per Share = ₹ 0.539 x 12 = ₹ 6.47 5.04
Share price would rise by 28.4%
Total Market Value = ₹ 6.47 x 37 crore
= ₹ 239.39 crore R Ltd.
Market Value 4
Price of Share = 6.47 x = ₹ 5.18
Number of Shares 5
239.39 crore Gain/loss (-) per share = ₹ 5.18 – ₹ 5.67 = (-₹ 0.49)
= = ₹ 6.47 5.18 - 5.67
37 crore ie. x 100 = (-) 0.0864 or (-) 8.64%
5.67
Share Price would decrease by 8.64%.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.7. Elrond Limited plans to acquire….

Solu on: Shareholders of Doom Ltd. will get 5 lakh share of Elrond Limited, so they will get:
5 Lakh
= = 20% of shares Elrond Limited
20 Lakh + 5 Lakh
The value of Elrond Ltd. a er merger will be:
= ₹ 50 x 20 lakh + ₹ 25 x 10 lakh + ₹ 200 lakh True Cost of Merger will be:
= ₹ 1000 lakh + ₹ 250 lakh + ₹ 200 lakh = ₹ 1450 lakh (₹ 1450 x 20%) = ₹ 290 lakhs – ₹ 250 lakhs = ₹ 40 lakhs

Q.9 ICL is proposing to take over SVL with an objec ve....

Solu on:
(i) Computa on of Premium (Net Worth Formula): Amount ₹ in Crores
Total Assets (Fixed assets + Current Assets) = (550 + 580) 1130
Less: Liabili es (Current Liabili es + Borrowings) = (240 + 105) 345
Net Assets Value 785
Current Value of Land a er growing for three years @ 30% = 190 X 2.197 417.43
Less: Book Value 190.00
Increase in the Value of land 227.43
Adjusted NAV (785 + 227.43) 1012.43
Current Profit a er Tax (@15 % for 5 years i.e. 250 X 7.7537 1938.43
Average Profit for 1 year = 1938.43/5 387.69
Total Value of Firm (1012.43 + 387.69) 1400.12
Total Market Value = No of shares X MPS = 12.50 X 75 937.50
Premium (Total Value – Market Value) 462.62
Premium (%) = 462.62/937.50 * 100 49.35%

(ii) Computa on of Premium (Dividend Growth Formula):

Exis ng Growth Rate 0.15
DPS= 125/12.50 10
MPS 75
Cost of Equity (D1/MP + g) = [(10 X 1.15/75) + 0.15] 0.3033
Expected growth rate a er merger 0.18
Expected Market Price = 10 X [1.18 / (0.3033 - 0.18)] 95.70
Premium over current market price (95.70 - 75)/ 75 X 100 27.60%

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Alterna vely, if given figure of dividend is considered as D1 then Premium over Current Market Price shall be
computed as follows:
D 10 0.2833
Cost of Equity 1 + g + 0.15
P 75
Expected Growth Rate a er Merger 0.18
Expected Market Price 10.00 / (0.2833 – 0.18) 96.81
Premium over Current Market Price (96.81 - 75)/ 75 x 100 29.08%
(iii) During the course of nego a ons, ICL will push forward valua on based on Growth Rate Method as it will
lead to least cash ou low.
Q.10. The following informa on is provided rela ng....

Solu on:
Swap Ra o
Efficient Ltd. Healthy Ltd.
Market capitaliza on 500 lakhs 750 lakhs
No. of shares 10 lakhs 7.5 lakhs
Market Price per share ₹ 50 ₹ 100
P/E ra o 10 5
EPS ₹5 ₹ 20
Profit ₹ 50 lakh ₹ 150 lakh
Share capital ₹ 100 lakh ₹ 75 lakh
Reserves and surplus ₹ 300 lakh ₹ 165 lakh
Total ₹ 400 lakh ₹ 240 lakh
Book Value per share ₹ 40 ₹ 32
(i) Calcula on of Swap Ra o
EPS 1 : 4 i.e. 4.0 x 40% 1.6
Book value 1: 0.8 i.e. 0.8 × 25% 0.2
Market price 1 : 2 i.e. 2.0 × 35% 0.7
Total 2.5
Swap ra o is for every one share of Healthy Ltd., to issue 2.5 shares of Efficient Ltd. Hence, total no. of shares
to be issued 7.5 lakh × 2.5 = 18.75 lakh shares.

Promoter's holding = 4.75 lakh shares + (5 × 2.5 = 12.5 lakh shares) = 17.25 lakh i.e. Promoter's holding % i s
(17.25 lakh/28.75 lakh) × 100 = 60%.

Calcula on of EPS, Market price, Market capitaliza on and free float market capitaliza on.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

(ii) Total No. of shares 10 lakh + 18.75 lakh = 28.75 lakh

Total capital 100 lakh + 187.5 lakh = ₹ 287.5 lakh
Total profit 50 lakh + 150 lakh 200
EPS = = = = ₹ 6.956
No. of shares 28.75 lakh 28.75
(iii) Expected market price EPS 6.956 × P/E 10 = ₹ 69.56
Market capitaliza on = ₹ 69.56 per share × 28.75 lakh shares
= ₹ 1,999.85 lakh
(iv) Free float of market capitaliza on = ₹ 69.56 per share × (28.75 lakh × 40%)
= ₹ 799.94 lakh
Q.11. B Ltd. is a highly successful company and....
Solu on:
1. Total market value of C Ltd is = 1,00,000 x ₹ 15 = ₹ 15,00,000
PE ra o (given) = 10
Therefore, earnings = ₹ 15,00,000 / 10
= ₹ 1,50,000
Total market value of B Ltd. is = 5,00,000 x ₹ 12 = ₹ 60,00,000
PE ra o (given) = 17
Therefore, earnings = ₹ 60,00,000/17
= ₹ 3,52,941

The number of shares to be issued by B Ltd.

₹ 15,00,000 ÷ 12 = 1,25,000
Total number of shares of B Ltd = 5,00,000 + 1,25,000 = 6,25,000
The EPS of the new firm is = (₹ 3,52,941 + ₹ 1,50,000) / 6,25,000
= ₹ 0.80
The present EPS of B Ltd is = ₹ 3,52,941 / 5,00,000
= ₹ 0.71
So the EPS of firm B will increase from Re. 0.71 to ₹ 0.80 as a result of merger

Q.13. Reliable Industries Ltd. (RIL) is considering....

Solu on: (i) Market value of Companies before Merger
Par culars RIL SIL
EPS ₹2 ₹1
P/E Ra o 10 5
Market Price Per Share ₹ 20 ₹5
Equity Shares 10,00,000 10,00,000
Total Market Value 2,00,00,000 50,00,000
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 MERGERS, ACQUISITIONS & RESTRUCTURING

(ii) Post Merger Effects on RIL

Par culars ₹
Post merger earnings 30,00,000
Exchange Ra o (1:4)
No. of equity shares o/s (10,00,000 + 2,50,000) 12,50,000
EPS: 30,00,000/12,50,000 2.4
PE Ra o 10.00
Market Value 10 x 2.4 24
Total Value (12,50,000 x 24) 3,00,00,000

Gains From Merger ₹

Post-Merger Market Value of the Firm 3,00,00,000
Less: Pre-Merger Market Value
RIL 2,00,00,000
SIL 50,00,000 2,50,00,000
Total gains from Merger 50,00,000

Appor onment of Gains between the Shareholders:

Par culars RIL SIL
Post Merger Market Value: ₹ ₹

10,00,000 x 24 2,40,00,000 --
2,50,000 x 24 - 60,00,000
Less: Pre-Merger Market Value 2,00,00,000 50,00,000
Gains from Merger: 40,00,000 10,00,000

Thus, the shareholders of both the companies (RIL + SIL) are be er off than before.

(iii) Post-Merger Earnings:

Increase in Earnings by 20%

New Earnings: ₹ 30,00,000 + 20% = ₹ 36,00,000

No. of equity shares outstanding: 12,50,000
EPS: ₹ 36,00,000/12,50,000 = ₹ 2.88

PE Ra o = 10
Market Price Per Share:
= ₹ 2.88 x 10 = ₹ 28.80

Therefore, Shareholders will be be er-off than before the merger situa on.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.14. Longitude Limited is in the process...

Solu on:
(i) Pre-Merger Market Value Per share
PE Ra o x EPS
Longitude Ltd. ₹ 8 x 15 = ₹ 120.00
La tude Ltd. ₹ 5 x 10 = ₹ 50.00
(ii) Maximum exchange ra o without dilu on of EPS
Pre Merger PAT of Longitude Ltd. ₹ 120 Lakhs

Pre Merger PAT of La tude Ltd. ₹ 80 Lakhs

Combined PAT ₹ 200 Lakhs

Longitude Ltd.'s EPS ₹8

Maximum number of shares of longitude a er merger 25 lakhs

(₹ 200 lakhs/ ₹ 8)
Exis ng number of shares 15 lakhs
Maximum number of shares to be exchanged 10 lakhs
Maximum share exchange ra o 10:16 or 5:8

(iii) Maximum exchange ra o without dilu on of Market Price Per share

Pre Merger Market Capitaliza on of Longitude Ltd. ₹ 1800 lakhs
(₹ 120 x 15 lakhs)
Pre Merger Market Capitaliza on of La tude Ltd. ₹ 800 lakhs
(₹ 50 x 16 lakhs)
Combined Market Capitaliza on ₹ 2600 lakhs

Current Market Price of shares of Longitude Ltd. ₹ 120

Maximum number of shares to be exchanged of 21.67 lakhs

Longitude (surviving company) (₹ 2600 lakhs/ ₹ 120)
Current Number of Shares of Longitude Ltd. 15.00 Lakhs
Maximum Number of shares to be exchanged (Lakhs) 6.67 Lakhs

Maximum share exchange ra o 6.67:16 or 0.4169:1

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.20. Simple Ltd. and Dimple Ltd…..

Solu on: Compute Value of Equity
Simple Ltd. ₹ in Lacs
High Growth Medium Growth Slow Growth
Debit + Equity 820 550 410
Less: Debt 460 460 460
Equity 360 90 -50
Since the Company has limited liability the value of equity cannot be nega ve therefore the value of equity under
slow growth will be taken as zero because of insolvency risk and the value of debt is taken at 410 lacs. The expected
value of debt and equity can then be calculated as:
Simple Ltd. ₹ in Lacs
High Growth Medium Growth Slow Growth Expected Value
Prob. Value Prob. Value Prob. Value
Debt 0.20 460 0.60 460 0.20 410 450
Equity 0.20 360 0.60 90 0.20 0 126
820 550 410 576
Dimple Ltd. ₹ in Lacs
High Growh Medium Growth Slow Growth Expected Value
Prob. Value Prob. Value Prob. Value
Equity 0.20 985 0.60 760 0.20 525 758
Debt 0.20 65 0.60 65 0.20 65 65
1050 825 590 823
Simple Ltd. + Dimple Ltd. (Merged Firm) ₹ in Lacs
High Growh Medium Growth Slow Growth Expected Value
Prob. Value Prob. Value Prob. Value
Equity 0.20 1345 0.60 850 0.20 475 874
Debt 0.20 525 0.60 525 0.20 525 525
1870 1375 1000 1399
Expected Values ₹ in Lacs
Equity Debt
Simple Ltd. 126 Simple Ltd. 450
Dimple Ltd. 758 Dimple Ltd. 65
Merged Firm 874 Merged Firm 525

Tutorial Note: There was a mistake in ICAI’s solu on for this Q., however, in another similar Q, ICAI
has solved the same situa on in correct manner. We have presented the correct solu on for this Q.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Q.21. Pragya Limited has issued 75,000 equity....

₹ 3 crores
WN#1 Rights issue Price = = ₹ 160
750000 shares x 1/4

Solu on:
(i) Computa on of theore cal post-rights price per share
MN - SR
Theore cal post-rights price per share =
N+R
Where, M = Market price per share (current)
N = Number of exis ng shares required for a rights share
S = Subscrip on price of a rights share
R = Rights share offer (in number)
= [(Rs 240 x 4) + (Rs 160 x 1)]/(4 + 1)
= ₹ 1120/5
= ₹ 224

(ii) Computa on of theore cal value of rights alone

= ₹ 224 - ₹ 160 (Cost of rights share) = ₹ 64

(iii) Impact of rights issue on wealth of the shareholder

Exis ng wealth (1,000 shares x ₹ 240) ₹ 2,40,000

Wealth a er rights issue

Value of shares (1,000 shares x ₹ 224) 2,24,000
Sale proceeds of rights (1,000 x 1/4 x ₹ 64) 16,000
2,40,000

Therefore, No change in wealth.

(iv) Impact of rights issue on wealth of shareholder (when shareholder does not take any ac on)
Exis ng wealth (prior to rights issue) ₹ 2,40,000

Wealth a er right issue (1,000 shares x ₹ 224) 2,24,000

Loss of wealth 16,000

(v) If Mr. A is not interested in subscribing to the right issue, he can renounce his right eligibility @ ₹ 64 per right
and can earn a gain of ₹ 16000.

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 1 (8 Marks) CA Final Nov 2019

A Ltd., a listed company, is considering merger of B Ltd. which is also a listed company, with itself by means of a stock
swap (exchange). B Ltd. has agreed to a plan under which A Ltd. will offer the current market value of B Ltd.'s shares.
Addi onal Informa on:
Par culars A Ltd. B Ltd.
Earnings a er tax (₹) 10,00,000 2,50,000
Number of shares outstanding 4,00,000 2,00,000
Current market price (₹) per share 50 20
On the basis of above informa on, you are required to calculate the following:
(i) What is the pre-merger Earnings Per Share (EPS) and P/E ra os of both the companies?
(ii) If B Ltd.'s P/E is 10, what is its current market price per share? What is the exchange ra o? What will A
Ltd.'s post-merger EPS be?
(iii) What must the exchange ra o be for A Ltd.'s Pre-merger and Post-merger EPS to be the same?

Solu on: (i) Before Merger

Par culars A Ltd. B Ltd.
Earning a er tax (₹) 10,00,000 2,50,000
No. of shares outstanding 4,00,000 2,00,000
EPS ₹ 2.50 ₹ 1.25
Current Market Price/Share ₹ 50 ₹ 20
P/E Ra o 20 16
(ii) If B Ltd.'s P/E Ra o is 10
Then, it's Current Market Price = 10 x ₹ 1.25 = ₹ 12.50
Exchange Ra o = 12.50 : 50 i.e. 1 share of A Ltd. for every 4 shares of B Ltd.
No. of shares to be issued = 50,000
A Ltd. Post-Merger EPS
Post-Merger Earning (10,00,000 + 2,50,000) ₹ 12,50,000
No. of Equity Shares a er Merger (4,00,000 + 50,000) 4,50,000
EPS ₹ 2.78
(iii) Calcula on of Exchange Ra o for A Ltd.'s pre-merger and post-merger EPS to be the same
= Total earnings/Pre-merger EPS of A Ltd.
= ₹ 12,50,000 / ₹ 2.50 = 5,00,000 shares
Now, number of shares to be issue to B Ltd. = 5,00,000 – 4,00,000 = 1,00,000 shares
Therefore, the share exchange ra o is 1,00,000 : 2,00,000 or 1:2. It means for every two shares in B
Ltd., one share should be issued from A Ltd.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 2 Study Material, CA Final MTP Nov 2018, MTP Nov 2023
Following informa on is provided rela ng to the acquiring company Mani Ltd. and the target company Ratnam Ltd:
Mani Ltd. Ratnam Ltd.
Earnings a er tax (₹ lakhs) 2,000 4,000
No. of shares outstanding (lakhs) 200 1,000
P/E ra o (No. of mes) 10 5
Required:
(i) What is the swap ra o based on current market prices?
(ii) What is the EPS of Mani Ltd. a er the acquisi on?
(iii) What is the expected market price per share of Mani Ltd. a er the acquisi on, assuming its P/E ra o is
adversely affected by 10%?
(iv) Determine the market value of the merged Co.
(v) Calculate gain/loss for the shareholders of the two independent en es, due to the merger.
Solu on:
(i) SWAP ra o based on current market prices:
EPS before acquisi on:
Mani Ltd. : ₹ 2,000 lakhs / 200 lakhs: ₹ 10
Ratnam Ltd.: ₹ 4,000 lakhs / 1,000 lakhs: ₹4
Market price before acquisi on:
Mani Ltd.: ₹ 10 × 10 ₹ 100
Ratnam Ltd.: ₹ 4 × 5 ₹ 20
SWAP ra o: 20/100 or 1/5 i.e. 0.20
(ii) EPS a er acquisi on:
₹ (2,000 + 4,000) Lakhs
= ₹ 15.00
(200 + 200) Lakhs
(iii) Market Price a er acquisi on:
EPS a er acquisi on : ₹ 15.00
P/E ra o a er acquisi on 10 x 0.9 9
Market price of share (₹ 15 x 9) ₹ 135.00

(iv) Market value of the merged Co.:

₹ 135 × 400 lakhs shares = ₹ 540.00 Crores or ₹ 54,000 Lakhs

(v) Gain/loss per share: ₹ Crore

Mani Ltd. Ratnam Ltd
Total value before Acquisi on 200 200
Value a er acquisi on 270 270
Gain (Total) 70 70
No. of shares (pre-merger) (lakhs) 200 1,000
Gain per share (₹) 35 7
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Ques on 3 RTP May 2022

B Ltd. wants to acquire S Ltd. and has offered a swap ra o of 2:3 (2 shares for every 3 share of S Ltd.). Following
informa on is available:
Par culars B Ltd. S Ltd.
Profit a er tax (in ₹) 21,00,000 4,50,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS (₹) 3.5 2.5
PE Ra o 10 mes 7 mes
Price quo ng per share on BSE before the merger announcement (₹) 35.00 17.50
Required:
(i) The number of equity shares to be issued by B Ltd. for acquisi on of S Ltd.
(ii) What is the EPS of B Ltd. a er the acquisi on?
(iii) Determine the equivalent earnings per share of S Ltd. and calculate per share gain or loss to
shareholders of S Ltd.
(iv) What is the expected market price per share of B Ltd. a er the acquisi on, assuming its PE Mul ple
remains unchanged?
(v) Determine the market value of the merged firm.
(vi) A er the announcement of merger, price of shares of S Ltd. rose by 10% on BSE. Mr. X, an investor, having
10,000 shares of S Ltd. is having another investment opportunity, which yields annual return of 14% is seeking
your advice whether he needs to offload the shares in the market or accept the shares from B Ltd.

Solu on:
(i) The number of shares to be issued by B Ltd.:
The Exchange ra o is 2:3
2
So, new Shares = 1,80,000 x = 1,20,000 shares.
3
(ii) EPS of B Ltd. a er acquisi on:
Total Earnings (₹ 21,00,000 + ₹ 4,50,000) ₹ 25,50,000
No. of Shares (6,00,000 + 1,20,000) 7,20,000
EPS (₹ 25,50,000/7,20,000) ₹ 3.5416 or 3.54
(iii) Equivalent EPS of S Ltd. and gain/loss to shareholders:
2 ₹ 2.36
Equivalent EPS of S Ltd. ₹ 3.54 x
3
Less: EPS before merger 2.50
Loss (0.14)
(iv) New Market Price of B Ltd. (P/E remaining unchanged):
Present P/E Ra o of B Ltd. 10 mes
Expected EPS a er merger ₹ 3.54
Expected Market Price (₹ 3.54 x 10) ₹ 35.40
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 MERGERS, ACQUISITIONS & RESTRUCTURING

(v) Market Value of merged firm:

Total number of Shares 7,20,000
Expected Market Price ₹ 35.40
Total value (7,20,000 x 35.40) ₹ 2,54,88,000
(vi)
a) Equivalent EPS of S Ltd. ₹ 2.36
b) BSE price per share before merger announcement ₹ 17.50
c) A er the merger announcement 10% increase in price of share ₹ 1.75
d) Present Market Price of share (b + c) ₹ 19.25
e) Return on Market Price per share (a/d) 12.26%
As Mr. X is having another opportunity to earn 14% and expected return on S Ltd.'s share is 12.26%, it is
advisable to offload in market.
Ques on 4 Study Material, Prac ce Manual, CA Final RTP May 2020
The following informa on rela ng to the acquiring Company Abhiman Ltd. and the target Company Abhishek
Ltd. are available. Both the Companies are promoted by Mul na onal Company, Trident Ltd. The promoter's
holding is 50% and 60% respec vely in Abhiman Ltd. and Abhishek Ltd.:
Abhiman Ltd Abhishek Ltd.
Share Capital (₹) 200 lacs 100 lacs
Free Reserve and Surplus (₹) 800 lacs 500 lacs
Paid up Value per share (₹) 100 10
Free float Market Capitalisa on (₹) 400 lacs 128 lacs
P/E Ra o ( mes) 10 4
Trident Ltd. is interested to do jus ce to the shareholders of both the Companies. For the swap ra o weights
are assigned to different parameters by the Board of Directors as follows:
Book Value 25%
EPS (Earning per share) 50%
Market Price 25%
(a) What is the swap ra o based on above weights?
(b) What is the Book Value, EPS and expected Market price of Abhiman Ltd. a er acquisi on of Abhishek
Ltd. (assuming PE ra o of Abhiman Ltd. remains unchanged and all assets and liabili es of Abhishek Ltd.
are taken over at book value).
(c) Calculate:
(i) Promoter's revised holding in the Abhiman Ltd.
(ii) Free float market capitaliza on.
(iii) Also calculate No. of Shares, Earning per Share (EPS) and Book Value (B.V.), if a er acquisi on of
Abhishek Ltd., Abhiman Ltd. decided to:
(a) Issue Bonus shares in the ra o of 1 : 2; and
(b) Split the stock (share) as ₹ 5 each fully paid.
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 MERGERS, ACQUISITIONS & RESTRUCTURING

Solu on:
(a) Swap Ra o
Abhiman Ltd. Abhishek Ltd
Share Capital 200 lakh 100 lakh
Free Reserves 800 lakh 500 lakh
Total 1000 lakh 600 lakh
No. of Shares 2 lakh 10 lakh
Book Value per share ₹ 500 ₹ 60
Promoter's holding 50% 60%
Non promoter's holding 50% 40%
Free Float Market Cap. i.e. 400 lakh 128 lakh
rela ng to Public's holding
Hence Total market Cap 800 lakh 320 lakh
No. of Shares 2 lakh 10 lakh
Market Price ₹ 400 ₹ 32
P/E Ra o 10 4
EPS 40 8
Profits (₹ 2 x 40 lakh) ₹ 80 lakh -
(₹ 8 x 10 lakh) - ₹ 80 lakh

Calcula on of Swap Ra o
Book Value 0.12:1 0.12 x 25% 0.03
EPS 0.20:1 0.20 x 50% 0.10
Market Price 0.08:1 0.08 x 25% 0.02
Total 0.15
Swap ra o is for every one share of Abhishek Ltd., to issue 0.15 shares of Abhiman Ltd.
Hence total no. of shares to be issued. = 10 Lakh x 0.15 = 1.50 lakh shares
(b) Book Value, EPS & Market Price
Total No of Shares 2 Lakh + 1.5 Lakh = 3.5 Lakh
Total Capital ₹ 200 Lakh + ₹ 150 Lakh = ₹ 350 Lakh
Reserves ₹ 800 Lakh + ₹ 450 Lakh* = ₹ 1,250 Lakh
*Since issue of shares has resulted in Increase in Equity Share Capital therefore, same has been taken out
of the Reserves and capitalized to Equity Share Capital.
₹ 350 Lakh + ₹ 1,250 Lakh
Book Value = = ₹ 457.14 per share
3.5 Lakh
Total Profit ₹ 80 Lakh + ₹ 80 Lakh ₹ 160 Lakh
EPS = = = = ₹ 45.71
No. of Share 3.5 Lakh 3.5
Expected Market Price EPS (₹ 45.71) x P/E Ra o (10) = ₹ 457.10
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 MERGERS, ACQUISITIONS & RESTRUCTURING

(c)
(1) Promoter's holding
Promoter's Revised Abhiman 50% i.e. 1.00 Lakh shares
Holding Abhishek 60% i.e. 0.90 Lakh shares
Total 1.90 Lakh shares
Promoter's % = 1.90/3.50 x 100 = 54.29%
(2) Free Float Market Capitalisa on
Free Float Market Capitalisa on = (3.5 Lakh – 1.9 Lakh) x ₹ 457.10
= ₹ 731.36 Lakh
Note: The concept of Stock Split & Bonus is covered in Chapter - Security & Business Valua on
(3) (i) & (ii)
Revised Capital ₹ 350 Lakh + ₹ 175 Lakh = ₹ 525 Lakh
No. of shares before Split (F.V ₹ 100) 5.25 Lakh
No. of Shares a er Split (F.V. ₹ 5) 5.25 x 20 = 105 Lakh
EPS 160 Lakh / 105 Lakh = 1.523
Book Value Cap. ₹ 525 Lakh + ₹ 1075 Lakh
No. of Shares =105 Lakh
= ₹ 15.238 per share
Ques on 5 Study Material
Simpson Ltd. is considering a merger with Wilson Ltd. The data below are in the hands of both Board of
Directors. The issue at hand is how many shares of Simpson should be exchanged for Wilson Ltd. Both boards
are considering three possibili es 20,000, 25,000 and 30,000 shares. You are required to construct a table
demonstra ng the poten al impact of each scheme on each set of shareholders:
Simpson Wilson Combined Post
Ltd. Ltd. merger Firm 'A'
1. Current earnings per year 2,00,000 1,00,000 3,50,000
2. Shares outstanding 50,000 10,000 ?
3. Earnings per share (₹) (1÷ 2) 4 10 ?
4. Price per share (₹) 40 100 ?
5. Price-earning ra o [4 ÷ 3] 10 10 10
6. Value of firm (₹) 20,00,000 10,00,000 35,00,000
7. Expected Annual growth rate in
earnings in foreseeable future 0 0 0

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 MERGERS, ACQUISITIONS & RESTRUCTURING

Solu on:
The following table demonstrates the poten al impact of the three possible schemes, on each set of
shareholders:-
Number of Exchang Number of Frac on of Value of Frac on of Value of
Simpson e ra o Simpson Simpson Ltd. shares Simpson Ltd. shares owned
Ltd.'s shares [(1)/10,0 Ltd.'s shares (Post owned by (combined by Simpson
issued to 00 outstanding merger) Wilson Postmerger Ltd.'s
sharehol shares of a er merger owned by Ltd.'s owned by sharehold ers
ders of Wilson [50,000+(1)] Wilson Ltd.'s shareholder Simpson Ltd.'s [(6) x
Wilson Ltd Ltd.] shareholders s [(4)x shareholders 35,00,000 ]
[(1)/(3)] 35,00,000] [50,000/(3)]

(1) (2) (3) (4) (5) (6) (7)

20,000 2 70,000 2/7 10,00,000 5/7 25,00,000
25,000 2.5 75,000 1/3 11,66,667 2/3 23,33,333
30,000 3 80,000 3/8 13,12,500 5/8 21,87,500

Comment: The best offer for Simpson is issuing 20000 shares and for Wilson is 30000 shares.

Ques on 6 Study Material, CA Final RTP Nov 2018

ABC Limited's shares are currently selling at ₹ 13 per share. There are 10,00,000 shares outstanding. The firm
is planning to raise ₹ 20 lakhs to Finance a new project.

Required:
What are the ex-right price of shares and the value of a right, if
(i) The firm offers one right share for every two shares held.
(ii) The firm offers one right share for every four shares held.
(iii) Analyze how does the shareholders' wealth (holding 100 shares) change from (i) to (ii)? How does right
issue increases shareholders' wealth?

Solu on:
(i) Number of shares to be issued : 5,00,000

Subscrip on price ₹ 20,00,000 / 5,00,000 = ₹ 4

₹ 1,30,00,000 + ₹ 20,00,000
Ex-right Price = = ₹ 10
15,00,000

Value of a Right = ₹ 10 - ₹ 4 = ₹ 6
₹ 10 - ₹ 4
Value of a Right share basis =₹3
2

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 MERGERS, ACQUISITIONS & RESTRUCTURING

(ii) Subscrip on price ₹ 20,00,000/2,50,000 = ₹ 8

₹ 1,30,00,000 + ₹ 20,00,000
Ex-right Price = = ₹ 12
12,50,000

Value of a Right = ₹ 12 - ₹ 8 = ₹ 4
₹ 12 - ₹ 8
Value of a Right per Share basis = =₹1
4

(iii) Calcula on of effect of right issue on wealth of Shareholder's wealth who is holding, say 100 shares.

(a) When firm offers one share for two shares held.
Value of Shares a er right issue (150 x ₹ 10) ₹ 1,500
Less: Amount paid to acquire right shares (50 x ₹ 4) ₹ 200
₹ 1,300

(b) When firm offers one share for every four shares held.
Value of Shares a er right issue (125 x ₹ 12) ₹ 1,500
Less: Amount paid to acquire right shares (25 x ₹ 8) ₹ 200
₹ 1,300

(c) Wealth of Shareholders before Right Issue ₹ 1,300

Thus, there will be no change in the wealth of shareholders from (i) and (ii).

Note: If you have covered CW+HW questions of AFM Champions Book + Practice
book then you are already well prepared for exams. However, ICAI’s vast
question database still contains some additional questions but after doing our
CW+HW questions these additional questions are mostly repetitive in nature. To
glance through these additional questions, please visit
[Link] “Downloads” section & look for PDF file named “AFM
Additional Practice Booklet”.
Ø If your time management permits, then we strongly recommend you to cover
this PDF Booklet as well.
Ø If you are running short of time, then focus on CW+HW Questions of AFM only.

+ =
Alpha Academy AFM Additonal AFM Compiler |
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+ Practice book from our Website ... blah blah
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