Question

QUESTION:

(a) Tropical Fruits ltd. is considering a merger with Aquafresh Juices ltd. Use the following information.

DETAILS

COMPANY A

COMPANY B

Current earnings

20,000,000

5,000,000

Shares outstanding

5,000,000

2,000,000

Earnings per share

4.00

2.50

Prie per share

64.00

30

Price / earnings ratio

16

12

a) If Company B has agreed to an offer of 35 per share, what is the exchange ratio?

b) What will be the outstanding shares for the merged firm?

c)What will be the earnings per share if the merged firm will earn 30 million per year?

d) Briefly discuss five different types of corporate restructuring

Answer 1

a) Share price of company B is trading at 30 per share. company B has agreed to take an offer of 35 per share. to calculate exchange ratio, we will take offer price at 35 and divide it by 30 which comes to 1.17(R/O). that means merged company has to issue 1.17 of its own share for every 1 share of Company B.

b) Outstanding shares will be as follws:

Company A: 5,00,000

company B : 2,34,000( 2,00,000*1.17)

Total no. of outstanding shares = 7,34,000

c) Earning per share will be as follows:

= Total earning available to equity sharesholder / no. of outstanding shares

= 3,00,00,000 / 734000

= 40.87

d) Five types of corporate restructuring

1) Merger & Acquisition : Merger & acquisitions allows a company to rapidly incraese their revenue, market reach, production capacity that too without the hard work and time to build a company.one of best way of restructuring or can say increaing profiatablity is to incorporate an existing company into your company.

2) Divestment & spin off : Companies which are looking for consolidation, divestment or spin off are very useful for those. Where a busimess unit is no more profitable or unable to fulfill its stratigic purpose, then you may consider it selling or closing it, that it called Divestment. If you want to reduce involvement into the business wiyhout stepping away of it , is called spin-off.

3) Debt restructuring : This can be done either by giving Equity to your creditors in lieu if their debt or you can enter into a Corpoarte voluntary agrrement with them. if you think that you will earn in future , then CVA will provide you a short term relief from debts in return of a gurantee that you will honour them in future.

4) Cost reduction: in order to reduce cost,you may consider liquidating reduntant companies into your business group to release assets, reducing the number of employees to remove unnecessary management cost.

5) Legal restructuring: corporate restructuring may be necessary not because a business is struggling but simply because there is a shift in responsilbity at the top.