MACR IMPORTANT QUESTIONS

Q1 What is merger? What are the various types of Mergers? Also, discuss the potential economic
advantages available from mergers using examples from contemporary corporate scenario.

Q2 Distinguish between “friendly takeover” and “hostile takeover”. What strategies can be adopted
by the target form in the case of a hostile takeover?

Q3 Explain the legal procedure of approval of merger in detail.

Q4 What are the various modes of financing a merger? State the impact of such modes on a
company’s EPS.

Q5 “The discounted cash flow (DCF) approach is conceptually the best among various approaches
for business valuation”. Do you agree? Explain your answer.

Q6 The following data concern companies X and Y:

Particulars Company X Company Y

Earnings after tax 140000 37500

Equity shares outstanding 20000 7500

EPS 7 5

P/E Ratio (times) 10 8

Market price 70 40

Company X is the acquiring Company, exchanging 1 share for every 1.5 shares of Y Ltd. Assume
that Company X expects to have the same earnings and P/E ratio after merger as before (no synergy
effect), show the extent of gain accruing to shareholders of the two companies as a result of the
merger. Are they better or worse off than before the merger?

Q7 “Recent times are witnessing a surge in M&A activity across the globe”. Comment on the
statement discussing examples of four recent mergers.

Q8 (a) State the importance of HR and cultural issues in a post-merger activity.

(b) Are joint ventures better alternatives of Mergers? Justify your answer.
Q9. The last financial year saw tremendous growth (both in numbers and size) of merger and
acquisitions deals in India, both inbound and domestic, with few marquee transactions. Like a deal of
Flipkart and Walmart, Vodafone and Idea cellular and so on. What is the driving interest of investors
in merger and acquisitions in this kind of deals?

Q10 What are the SEBI guidelines with regard to Mergers and Acquisitions in India?

Q11. ABC Corporation wants to acquire XYZ corporation. Financial has estimated enterprise value
an $104 million. The market value of XYZ debt is $15 million, and crash balances in excess of the
firm’s normal working capital requirement are $3 million. Final estimates the present value of certain
licenses that XYZ is not currently using to be $4 million. XYZ is the defendant in several outstanding
law suits. ABCs legal department estimates the potential future cost of this litigation to be $3 million,
with an estimated present value of $2.5 million. XYZ has 2 million common shares outstanding. With
the help of valuation answer does valuation deal make sense. Justify your answer.

Q12: A Ltd is investigating the possible acquisition of T Ltd. The following data is available:

A ltd T Ltd
Earnings per share (Rs.) 8 2
Dividend Per Share (Rs.) 4 0.8
Number of Shares 1,00,000 60,000
Stock price Rs. 100 RS. 20

Current estimates indicate a steady growth of about 6 percent in T ltd. earnings and dividends. Under
the new management, this growth rate would be increased to 8 percent per year without and additional
capital investment.

Q13 Alpha Ltd. Wants to boost its EPS quickly and is planning for acquiring Beta Ltd. The
acquisition of Beta Ltd. Is likely to create a synergy of 10% post acquisition. Alpha Ltd. Wants to peg
its EPS at Rs. 8 level post merger.

Following are the EPS, market value and number of shares for Beta Ltd.

Alpha Ltd. Beta Ltd.

EPS(Rs.) 5 5

Market value per share(Rs.) 60 50

Number of shares 12,00,000 10,00,000

Determine the exchange ratio that will result in EPS of Rs. 8 post acquisition.
Q14. Sonia Products Ltd. is planning to acquire Madhur Products Ltd. in order to expand
its own installed capacity. The company will then be in a position to cater to the increasing
demand for its products and service. The equity related cash flow of Sonia Products Ltd.
before and after the merger are given below: Rs. Lakh

Year 1 2 3 4 5
Cash Flows before acquisition 14.6 16.8 20.4 22.6 24.5
Cash Flows after acquisition 20.8 23.4 24.7 32.9 38.6

The cash flows are expected to grow at a rate of 6.4 % beyond year 5 whether Madhur Products
Ltd. is acquired or not. The other relevant data relating to the two companies is given below:

Company Sonia Products Madhur Products

Number of Outstanding equity Shares 180 Lakh 90 Lakh
Market price (Rs.) 28 34
Book Value (Rs.) 27 22.6
Calculate the maximum exchange rate that the management of Sonia Products Ltd. can offer
to the shareholders of Madhur Products Ltd. so that the present value of its equity related
cash flows after the merger is at least 18% more than the existing level. The cost of equity
may be assumed to be 14%.