The following information relates to Alpha Ltd and Beta Ltd as at 31^st December, 2016

Alpha Ltd Beta Ltd

Shs. Shs.

Average annual sales 700 million 80million

Average annual net income 75 million 8million

Earnings per share 3.0 2.0

Market price per share 40 19

Alpha Ltd intends to acquire Beta Ltd through a share for share exchange. The number of issued ordinary shares for Alpha Ltd and Beta Ltd were 25million and 4million respectively as at 31^st December, 2016

Required

The maximum share exchange ratio that Alpha Ltd should offer to shareholders of Beta Ltd without diluting the earning per share of Alpha Ltd. (2 marks)

The premium that shareholders of Beta Ltd will receive using the exchange ratio in a (1) above. (2 marks)

If the companies agree on an offer price of sh.20, determine the post-acquisition earning per share of Alpha Ltd.(3 marks)

4.If the shareholders of Beta ltd agrees to be offered 10 units of 10% debenture (par value sh.100 each) for every 200 ordinary shares currently held. Compute the post-acquisition earning per share of the company (assuming that the firm pays corporation tax at the rate of 30%.) (4 marks)

5.Considering your results in (3) and (4) above, which financing option will you recommend and why? (2 marks)

6.Compute the combined operating profit (EBIT) and post

acquisition earning per share at the point of indifference between the firm’s earnings under financing option in (3) and (4) above

(3marks)

7. Determine the range of combined operating profit within which financing plan in (3) and (4) above would be recommended (4 marks)