A Ltd. is considering the acquisition of B Ltd. The financial data at the time of acquisition is as follows: Particulars A Ltd. B Ltd. Net profit after tax (₹/lakh) 30 6 Number of shares (lakh) 6 2.50 Earning per share (

In case A Ltd. offers to pay ₹ 30 per share to the shareholders of B Ltd.: The share exchange ratio would be: ₹ 30 / ₹ 75 = 0.4 In other words, A Ltd. would give 0.4 share for every one share of B Ltd. The total number of shares to be issued by A Ltd. to the shareholders of B Ltd. would, therefore, amount to: 2,50,000 shares (of B Ltd.) × 0.4 = 1,00,000 shares The Total Number of shares of A Ltd. after acquisition of B Ltd. would now increase to: 6,00,000 (existing shares of A Ltd.) + 1,00,000 (new shares issued by A Ltd.) = 7,00,000 shares The EPS of the amalgamated company will now be calculated as follows: EPS = Total Net Profit after Interest and Tax / Total Number of Shares EPS = ₹ 36,00,000 / 7,00,000 = ₹ 5.14 Thus, as a result of amalgamation, the EPS of A Ltd. will improve from ₹ 5 to ₹ 5.14. However, the former shareholders of B Ltd. would experience a reduction in their EPS. Their EPS would now amount to: ₹ 5.14 × 0.4 = ₹ 2.056 (approximately ₹ 2.06) which is lower than ₹ 2.40 before merger. In this situation, the price earning offered by A Ltd. per share of B Ltd. is ₹ 30 and the EPS of B Ltd. is ₹ 2.4, which would become the earnings of A Ltd. after merger. Thus, the price earnings ratio on account of merger would be ₹ 30 / ₹ 2.4 = 12.5. Since this is lower than the P/E ratio of A Ltd. before merger (i.e. 15), the EPS of A Ltd. after amalgamation increases to ₹ 5.14.