Question

1. X Ltd intends to take over Y Ltd by offering two of its shares for every five shares in Y company Ltd. Relevant financial data is as follows:

	X Ltd	Y Ltd
EPS	$4	$4
Market price per share	$200	$80
Price earnings ratio	100	40
No. of shares	200,000	500,000
Total earnings	$400,000	$1,000,000
Total market value	$10,000,000	$10,000,000

Required:

1. Compute the combined EPS & MPS
2. Advice the management of X Ltd on whether to take over company Y

Answer 1

Particulars X Ltd.($)    Y Ltd.($)

EPS 4 4

Market Price Per Share 200 80

PE Ratio 100 40

No. of Shares 2,00,000 5,00,000

Total Earnings 4,00,000 10,00,000

Market Value 10,000,000 10,000,000

Now,

Exchange ratio is 2:5 that means 2 shares of X Ltd. will be allotted for every 5 shares in Y Ltd.

Total no. of shares after takeover = 200000 + (500000*2/5)
= 200000 + 200000
= 400000

a)

Combined EPS = Combined profit/ Combined number of shares
= (400000+1000000)/ 400000
= 1400000/ 400000
= 3.5

Combined MPS = Combined Market Value / Combined number of shares
= (10000000+10000000)/ 400000
= 20000000/400000
= 50

b) Management of X Ltd. is advised not to consider the takeover, as this takeover is leading to decline in EPS and MPS of X Ltd. from $4 to $3.5 and from $200 to $50 respectively.