Ram Ltd. is considering Merger with Shyam Ltd. Ram Ltd. shares are currently traded at ₹20. It has 1,70,000 shares and its Profit After Taxes (PAT) amounts to ₹8,50,000. Shyam Ltd. has 40,000 shares having market price o

Exchange Ratio with Earning Assurance: If the exchange ratio is decided with a view to maintain pre-merger EPS of the Transferor Company, shareholders of both the companies should get the same share in earnings as they were getting before the merger. Pre-merger EPS of Ram Ltd.: PAT / Number of Shares = ₹8,50,000 / 1,70,000 = ₹5 Pre-merger EPS of Shyam Ltd.: PAT / Number of Shares = ₹3,00,000 / 40,000 = ₹7.5 Exchange Ratio based on EPS: For every share of Shyam Ltd., shares of Ram Ltd. will be issued in the ratio of (Shyam's EPS / Ram's EPS) = 7.5 / 5 = 1.5 shares of Ram Ltd. This means for every 2 shares held in Shyam Ltd., 3 shares of Ram Ltd. will be issued (1.5 = 3/2). Number of shares to be issued to Shyam Ltd. shareholders: 40,000 shares (Shyam) * 1.5 = 60,000 shares of Ram Ltd. Total number of Shares in Ram Ltd. after merger: 1,70,000 (existing) + 60,000 (newly issued) = 230,000 shares Total PAT post-merger: ₹8,50,000 (Ram) + ₹3,00,000 (Shyam) = ₹11,50,000 New EPS post-merger: ₹11,50,000 / 230,000 = ₹5 Earnings for Shareholders of Shyam Ltd. after Merger: 60,000 shares * ₹5 (new EPS) = ₹3,00,000. This confirms that the pre-merger earnings of Shyam Ltd. shareholders (₹3,00,000) are maintained.