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XYZ Ltd. is considering merger with ABC Ltd. XYZ Ltd.'s shares are currently traded at Rs. 20. It has 2,50,000 shares outstanding and its earnings after taxes (EAT) amount to Rs. 5,00,000. ABC Ltd., has 1,25,000 shares outstanding; its current market price is Rs. 10 and its EAT are Rs.1,25,000. The merger will be effected by means of a stock swap (exchange). ABC Ltd. has agreed to a plan under which XYZ Ltd. will offer the current market value of ABC Ltd.'s shares:
a. What is the pre-merger earnings per share (EPS) and P/E ratios of both the companies?
b. If ABC Ltd.'s P/E ratio is 6.4, what is its current market price? What is the exchange ratio? What will XYZ Ltd.'s post-merger EPS be?
c. What should be the exchange ratio; if XYZ Ltd.'s pre-merger and post-merger EPS are to be the same?
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