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Question Paper

ADVANCED FINANCIAL MANAGEMENT Duration: 75

Details: Test 14 (Ch-14) Marks: 45

Instructions:

 All the questions are compulsory

 Properly mention test number and page number on your answer sheet, Try to upload sheets
in arranged manner.
 In case of multiple choice questions, mention option number only Working notes are
compulsory wherever required in support of your solution
 Do not copy any solution from any material. Attempt as much as you know to fairly judge
your performance.

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Q-1

L Ltd., is planning to acquire T Ltd., with the following data available for both the companies:

L Ltd. T Ltd.

Expected EPS Rs. 12 Rs. 5

Expected DPS Rs.10 Rs.3

No. of Shares 30,00,000 18,00,000

Current Market Price of Share Rs. 180 Rs. 50

As per an estimate T Ltd., is expected to have steady growth of earnings and dividends to
the tune of 6% per annum. However, under the new management the growth rate is likely
to be enhanced to 8% per annum without additional investment.

You are required to:

(i) Calculate the net cost of acquisition by L Ltd., if Rs. 60 is paid for each share of T Ltd.

(ii) If the agreed exchange ratio is one share of L Ltd., for every three shares of T Ltd., in lieu
of the cash acquisition as per (i) above, what will be the net cost of acquisition?

(iii) Calculate Gain from acquisition.

(6 Marks)

Q-2

The equity shares of XYZ Ltd., are currently being traded at Rs. 34 per share in the market
XYZ Ltd., has total 10,00,000 equity shares outstanding in number and promoters equity
holding in the company is 30% ABC Ltd., wishes to acquire XYZ Ltd., because of likely
synergies. The estimated present value of these synergies is Rs. 1,00,00,000.

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Further ABC Ltd., feels that management of XYZ Ltd., has been overpaid. With better
motivation, lower salaries and fewer perks for the top management, will lead to savings of
Rs. 5,00,000 per annum. Top management with their families are promoters of XYZ Ltd.,
Present value of these savings would add Rs. 25,00,000 in value to the acquisition.

Following additional information is available regarding ABC Ltd.,

Earnings per share Rs. 5

Total number of shares outstanding 15,00,000

Market price of equity share Rs. 30

You are required to:

(i) Calculate the maximum price per equity share which ABC Ltd., can offer to pay for XYZ
Ltd.

(ii) Calculate the minimum price per equity share at which the management of XYZ Ltd., will
be willing to offer their controlling interest.

(6 Marks)

Q-3

The following information is provided relating to the acquiring Company R Ltd. And the
target Company K Ltd.:

Particulars R Ltd. K Ltd.

Promoter Holding 50% 60%

Share Capital (Rs. In lakh) 100 50

Free Reserves & Surplus (Rs. in lakh) 400 250

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 Paid up share cap shares (Rs.) 100 10

Free Float Market Capitalisation (Rs. in lakh) 200 64

P/E Ratio (times) 20 8

For applying fair value swap weights are assigned to different parameters by the Board of
Directors through the committee as follows:

Book Value: 20%

EPS: 60%

Market Price: 20%

You are required to calculate:

(i) Swap ratio based on above weights.

(ii) Book value per share, EPS and expected market price of R Ltd after acquisition of K Ltd.
(Assuming PE multiple of K Ltd. remains unchanged and all assests and liabilities of K Ltd.
are taken over at book value.)

(iii) Revised promoter's holding (%) in R Ltd after acquisition.

(iv) Post-acquisition Free Float Market Capitalisation.

(8 Marks)

Q-4

Big Ltd. (BL), a listed company, is enjoying a price earnings ratio (PER) of 15 on an Earnings
Per Share (EPS) of Rs.5. The Total number of outstanding shares are 2,00,000.

BL is proposing to acquire Small Pvt. Ltd. (SPL) an unlisted company by issuing shares in the
ratio 4:5 i.e. for 5 shares of SPL 4 shares of BL will be issued. The outstanding shares of SPL

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are 50,000. SPL will be listed before the actual merger to discover its value. The EPS of the
merged entity will be 5.5.

No other information is available for SPL.

You are required to calculate:

(i) Pre-merger EPS of SPL.

(ii) Expected Market Price per Share of SPL at the time of listing, if it expects a PER of 10 and,

(iii) Number of shares of BL to be issued to SPL if pre-merger EPS of BL is to be maintained.

(7 Marks)

Q-5

Following is the Balance Sheet of M/s. PK Ltd. as on 31-03-2015:

Particulars Rs. in Lacs

I. Equity & Liabilities

Shareholders’ Fund

Equity Share Capital (Rs. 10 each) 900.00

10% Preference Share Capital (Rs. 100 each) 300.00

Reserves & Surplus (500.00)

Non-Current Liabilities

Term Loan 400.00

Current Liabilities

Trade Payables 400.00

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 Total (I) 1500.00

II. Assets

Non-Current Assets 1000.00

Current Assets :

Inventory 300.00

Trade Receivables 100.00

Cash & Bank Balance 100.00

Total (II) 1500.00

M/s PK Ltd. did not perform well and has suffered sizeable losses during the last few years.
However, it is now felt that the company can be nursed back to health by proper financial
restructuring and consequently the following scheme of reconstruction have been designed:

(i) Equity shares are to be reduced to Rs. 2 per share fully paid.

(ii) Preference shares are to be reduced by Rs. 50 per share and rate of dividend on

Preference shares is also reduced by 2%.

(iii) Trade Payables have agreed to forego 40% of their existing claims and for the balance

50% they have agreed to convert their claims into equity shares of Rs. 2 each, fully paid.

(iv) In order to make payment for Term Loan, the company issues 200 Lacs equity shares of

Rs. 2 each at par. Entire sum is required to be paid on application.

(v) Non-Current Assets is to be revalued at Rs. 500 Lacs.

You are required:

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(1) To show the impact of financial restructuring.

(2) To prepare Balance Sheet assuming the scheme of restructuring is implemented.

(8 Marks)

MCQs:

1. Elrond Limited is planning to acquire Doom Limited. The relevant financial details of the
two firms prior to the merger announcement are:

Particulars Elrond Limited Doom Limited

Market Price per Share Rs. 50 Rs. 25

Number of Outstanding Shares 20 lakhs 10 lakhs

The merger is expected to generate gains, which have a present value of Rs.200 lakhs. The
exchange ratio agreed upon is 0.5. Based on this information, what is the true cost of the
merger from the point of view of Elrond Limited?

A) Rs. 70 lakhs

B) Rs. 40 lakhs

C) Rs. 50 lakhs

D) Rs. 60 lakhs

2. Eager Ltd. has a market capitalization of Rs. 1,500 crores, with the current market price of
its share being Rs. 1,500. The company made a Profit After Tax (PAT) of Rs. 200 crores. The
Board of Directors is considering a proposal to buy back 20% of the shares at a premium of
10% to the current market price. The buyback will be funded through a 16% bank loan. The
corporate tax rate is 30%.

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Based on the above scenario, what will be the post-buyback Earnings Per Share (EPS) for
Eager Ltd.?

A) Rs. 203.80

B) Rs. 250.00

C) Rs. 175.50

D) Rs. 190.25

3. Rajesh, the CEO of a company with a surplus cash reserve of Rs.5 crores, decides to
strengthen the promoter's position by increasing his stake in the company's equity. Which
of the following statements regarding equity buyback is correct in this context?

A) Equity buyback increases the number of outstanding shares.

B) Buyback involves issuing shares to the public for the first time.

C) After the buyback, the company's Return on Assets (ROA) typically decreases.

D) Earnings Per Share (EPS) tends to increase after a share buyback due to reduced
outstanding shares.

Case Study: (For MCQ Q4 & Q5)

C Ltd. & D Ltd. are contemplating a merger deal in which C Ltd. will acquire D Ltd. The
relevant information about the firms are given as follows:

C Ltd. D Ltd.

Total Earnings (E) (in millions) Rs.96 Rs.30

Number of outstanding shares (S) (in millions) 20 14

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 Earnings per share (EPS) (Rs.) 4.8 2.143

Price earnings ratio (P/E) 8 7

Market Price per share (P)(Rs.) 38.4 15

i. What is the maximum exchange ratio acceptable to the shareholders of C Ltd. if the P/E
ratio of the combined firm is 7?

ii. What is the minimum exchange ratio acceptable to the shareholders of D Ltd., if the P/E
ratio of the combined firm is 9?

4. What is the combined market capitalization of C Ltd. and D Ltd. if the P/E ratio of the
combined firm is 7?

A) Rs.768 Million

B) Rs.882 Million

C) Rs.1134 Million

D) Rs.210 Million

5. How many shares of C Ltd. will be issued to the shareholders of D Ltd. for the maximum
exchange ratio acceptable to the shareholders of C Ltd.?

A) 2.97 Million

B) 4.54 Million

C) 14 Million

D) 20 Million

(5 x 2 = 10 marks)

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