Big Limited is proposed to be merged with Small Limited by means of share exchange. Big Limited has 2,50,000 shares and Small Limited has 1,25,000 shares. Market price of shares of Big Limited and Small Limited is ₹20 an

Earning Before Merger Big Ltd Small Ltd. (1) Earnings After Taxes 5,00,000 1,25,000 No. of Shares 2,50,000 1,25,000 Earnings per share (EPS) 2 1 Market price per share 20 10 P/E Ratio 10 10 (2) Exchange Ratio Total number of shares in the post-merger Company Total earnings after merger = 5,00,000 + 1,25,000 = ₹6,25,000 Pre-Merger earnings of Big Ltd. = 2 Number of share to be issued = (Post - Merger Earning) / (Pre Merger EPS of Big Ltd.) = 6,25,000 / 2 = 3,12,500 Number of shares to be issued = 3,12,500 - 2,50,000 = 62,500 Number of existing share of Small Ltd. = 1,25,000 Exchange Ratio = 62,500 / 1,25,000 = 0.50 Thus one share of Big Ltd. will be issued for every two shares of Small Ltd.