Olive Ltd. is studying the possible acquisition of Cherry Ltd. by way of merger. The following data are available : Particular Olive Ltd Cherry Ltd Profit Before Tax 25,00,000 7,50,000 Number of Equity Shares 4,00,000 1,

Exchange Ratio to ensure Cherry Ltd.'s EPS is not diminished: The present earning per share of Cherry Ltd. is ₹6/- and that of Olive Ltd. ₹5/-. If Cherry Ltd. wants to ensure that, even after merger, the earning per share of its shareholders should remain unaffected, then the exchange ratio will be based on EPS. Step 1: Calculate Exchange Ratio based on EPS EPS of Cherry Ltd. = ₹6 EPS of Olive Ltd. = ₹5 Exchange Ratio = EPS of Cherry Ltd. / EPS of Olive Ltd. = ₹6 / ₹5 = 1.20 This means 1.20 shares of Olive Ltd. for every 1 share of Cherry Ltd., or 6 shares of Olive Ltd. for every 5 shares of Cherry Ltd. Step 2: Calculate Number of shares to be issued to shareholders of Cherry Ltd. Number of Equity Shares of Cherry Ltd. = 1,00,000 Shares to be issued = 1,00,000 × (6/5) = 1,20,000 shares Step 3: Calculate Total Profit After Tax (PAT) of Merged Entity Total PAT = ₹20,00,000 (Olive) + ₹6,00,000 (Cherry) = ₹26,00,000 Step 4: Calculate Total Number of Shares of Merged Entity Existing shares of Olive Ltd. = 4,00,000 New shares issued to Cherry Ltd. shareholders = 1,20,000 Total shares = 4,00,000 + 1,20,000 = 5,20,000 shares Step 5: Calculate Revised EPS of Merged Entity Revised EPS = Total PAT / Total Shares = ₹26,00,000 / 5,20,000 = ₹5 Step 6: Verify Earning Per Share for Cherry Ltd.'s shareholders Total Earning Per Share for Cherry Ltd.'s shareholders = Number of shares issued to Cherry Ltd. shareholders × Revised EPS of Merged Entity = 1,20,000 × ₹5 = ₹6,00,000 Original total earnings for Cherry Ltd. shareholders (1,00,000 shares * ₹6/share) = ₹6,00,000. Thus, with an exchange ratio of 6 shares of Olive Ltd. for every 5 shares of Cherry Ltd., Cherry Ltd.'s shareholders' earnings per share will not be diminished.