Question

Delisha Berhad is planning to acquire Zahra Berhad. The exchange will be based on the current market price per share of the two companies. Under Delisha Berhad balance sheet, the price earning ratio (PER) and earning per share (EPS) is 4 times and RM3.00. While Zahra Berhad PER and EPS is 3 times and RM2.00.

1. Calculate market price per share (MPS) for both acquired and surviving companies.

2. From market price per share (MPS) values in question 1, calculate share exchange ratio (SER).

3. Share exchange ratio (SER) from acquiring process is 0.5 times, common stock of acquired company is RM13,000,000, and par values at RM2.00. Calculate the new number of share (NOS).

Answer 1

1) Computation of Market Price Per share

Delish Berhada( Surviving Company):

We know that Price Earning Ratio( PER ) = Market Price per share/ Earning per share

4= Market Price Per share/RM 3

RM 12= Market price per share

Hence Market Price of a Delish Berhad company( surviving) is RM 12 per share.

Zahra Berhad( Acquired Company):

We know that Price Earning Ratio( PER ) = Market Price per share/ Earning per share

3= Market Price Per share/RM 2

3* RM 2 = Market Price per share

  RM 6= Market price per share

Hence Market Price of Zahra Berhad share is RM 6

2) Computation of Share Exchage ratio

Share Exchange Ratio = Market Price of Target Company/ Market price of Acquiring Company

= RM 6/ RM 12

= 0.5 Shares

Here Target Company is Zahra Berhad and Acquiring Company is Delish Berhada

Hence share Exchange ratio is 0.5

Based on Exhange ratio for every 1 share in Zahra Berhad company shareholders are alloted 0.5 Shares in Delish Berhada Company

3) Computation of New shares

No.of Outstanding shares in Zahra Company = Common stock / Par value

= RM 130,00000/RM 2

= RM 65,00000

No.of New shares = Shares in Zahra company * Share Exchange ratio

= RM 6500000*0.5

=  32,50000

Hence no of new shares is  32,50000.