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 ₹ 40 per share to the shareholders of B Ltd.: The share exchange ratio would be: ₹ 40 / ₹ 75 = 0.533 shares of A Ltd. for each share of B Ltd. Thus, A Ltd. would issue in all: 2,50,000 shares (of B Ltd.) × 0.533 = 1,33,250 shares to shareholders of B Ltd. 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.) + 1,33,250 (new shares issued by A Ltd.) = 7,33,250 shares The EPS of the merged company would be: EPS = ₹ 36,00,000 / 7,33,250 = ₹ 4.91 Thus, on account of merger, there is a dilution in the earning per share of A Ltd. (from ₹ 5 to ₹ 4.91). However, the former shareholders of B Ltd. would stand to gain. Their EPS would amount to: ₹ 4.91 × 0.533 = ₹ 2.62 As compared to the EPS of ₹ 2.4 before merger, the former shareholders of B Ltd. would gain. In this situation (b), the price earnings (P/E) ratio offered for merger is ₹ 40 / ₹ 2.4 = 16.7, which is higher than the P/E ratio of A Ltd. before merger (i.e. 15). Hence, the EPS of A Ltd. after merger would get diluted.