Question

Maxi ltd is considering acquiring mini ltd. Selected financial data for the two companies are as follows: Max ltd Mini Ltd Annual sales sh. Million 750 90 Net income sh. Millions 60 7.5 Ordinary shares outstanding (millions) 15 3 Earnings per share (EPS) sh 4 2.5 Market price per share (sh) 44 20 Required: a) Calculate the maximum exchange ratios Maxi ltd should agree if it expects no dilution in the Earnings Per Share. b) How much premium would the shareholders of Mini Ltd

Answer 1

To avoid dilution in EPS, Maxi Ltd should agree to a maximum exchange ratio of 1.6. The shareholders of Mini Ltd would expect a premium of $50.4 if they agree to be acquired.

Step-by-step explanation:

To calculate the maximum exchange ratio that Maxi Ltd should agree to in order to ensure no dilution in Earnings Per Share (EPS), we need to compare the EPS of both companies. This can be done by dividing the net income of each company by the number of ordinary shares outstanding. The maximum exchange ratio is determined by dividing the EPS of Maxi Ltd by the EPS of Mini Ltd. In this case, the maximum exchange ratio is 4/2.5 = 1.6.

The shareholders of Mini Ltd would expect a premium if they agree to be acquired by Maxi Ltd. The premium is calculated by subtracting the market price per share of Mini Ltd from the exchange ratio (1.6) multiplied by the market price per share of Maxi Ltd. In this case, the premium would be (1.6 * $44) - $20 = $50.4.