QUESTION ONE

The following data are pertinent for companies A and B.

                                                                       A        B

Present Earnings        Shs 20 million        Shs 4 million

No of shares                 10 million              1 million

Price/earning ratio        18                        10

 a. If the two companies were to merge and the exchange ratio were one share of Company A for each share of Company B, what would be the initial impact on earnings per share of the two companies? what is the market value exchange ratio? Is the merger likely to take place?

b. If the exchange ratio were two shares of Company A for each share of Company B what would happen with respect to the above?

c. If the exchange ratio were 1.5 shares of Company A for each share of Company B, what would happen?

d. What exchange ratio would you recommend?

 QUESTION TWO

a. "A well planned merger can result to both companies benefiting". Discuss.

b. "Synergy is the necessary mainspring of a successful merger"

REQUIRED:

i. What is synergy?

ii. Discuss the above statement.

 QUESTION THREE

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

                                                                 X Ltd                 Y Ltd

EPS                                         Shs 2                   Shs 2

Market price per share          Shs 100           Shs 40

Price earnings ratio              50                       20

No. of shares                   100,000                250,000

Total earnings              Shs 200,000           Shs 500,000

Total market value      Shs 10,000,000       Shs 10,000,000

 REQUIRED:

 a. Compute the combined EPS & MPS

b. Has wealth been created for shareholders?