3. Rama Company is considering the acquisition of Krishna Company with exchange of its shares. The financial
Question:
3. Rama Company is considering the acquisition of Krishna Company with exchange of its shares. The financial data for the companies are as follows: Profit after tax (2000) Rama Co. Krishna Co. 800 No. of equity shares ('000] 200 600 300 Earnings per share () 4 2 Price-earnings ratio 15 10 Market price per share (*) 60 20 Krishna Company expects an offer of 125 per cent of its current market price from Rama Company.
(a) What is the exchange ratio of shares? How many new shares will be issued?
(b) What is the acquiring company's EPS after the merger? Assume 15 per cent synergy benefits accrue due to the merger.
(c) If the price-earnings ratio after merger is at twenty times, what is the market price per share of the surviving company?
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