BLUERAIL LTD, a large social networking firm, is considering acquiring BLUE LOG LTD, a relatively new app development firm.

Assume the following details for the current year are relevant:

BLUERAIL BLUE LOG

Price-earnings ratio 10 12

Total earnings R21 600 000 R6 720 000

Number of shares in issue 9 000 000 4 200 000

Dividend per share R1.60 R0.96

BLUELOG earnings and dividends are expected to grow by 18% over the next three years, after which the earnings and dividends are expected to grow at a sustainable growth rate of 8% per annum.

BLUE LOG ordinary shareholders required rate of return is 15%.

The industry average price-earnings (PE) ratio is 9.

BLUERAIL estimates that the acquisition of BLUELOGwill increase the earnings of the combined firm by R3.6 million.

WHAT EXCHANGE RATIO SHOULD BE ACCEPTED FOR MERGER