ASSIGNMENT # 3: GIVING WEIGHTS TO DIFF.

METHODS AND
DETERMINING EXCHANGE RATIO
ASSIGNMENT: (I) GIVE WEIGHTS TO THE METHODS YOU WOULD WISH TO
USE FOR ARRIVING AT EXCHANGE RATIO. (II) DETERMINE THE EXCHANGE
RATIO.
The answer required for Part (II) Exchange ratio should be :
For every 5 shares of P ltd. with Face value Rs. 10, how many shares of S Ltd.
should be offered with Face value Re. 1?
The values for the five methods including DCF have been mutually agreed to by
both companies. They have arrived at the value per Share for each method.
There is no disagreement of value arrived at for each method. Now weights need
to be given which is the assignment. The Weights need to be assigned by you
and the Exchange ratio worked out for Exchange by shares.
No.

Method

1
2
3
4

Net assets
EV/EBITDA
DCF
Market price(as on a recent
date)
Book value

S Ltd. (Per share in

Rs.)
19.53
97.03
43.33
134.58

P.Ltd. (Per share in

Rs.)
36.21
96.44
2.06
102.00

20.50

23.00

The Net assets value is a refinement of the Book value method. It incorporates
the current values of assets and liabilities instead of historical values. Land and
buildings are based on the latest valuation by the Chartered engineer so that the
immovable properties reflect the current fair market values.
You may if you wish give zero weight also to any method.
Both are public limited companies listed in national stock exchanges in India.
S Ltd. manufactures auto components mainly control cables, speedo cables and
other components for automobiles. It is Indias one of largest manufacturer of
automotive cables with a capacity of 150 million cables per year. It is one of the
top five cable manufacturers in the world.
P Ltd. is engaged in the manufacture of Auto lamps and caters to both domestic
and international markets.
S Ltd. intends to acquire P Ltd.by issue to it shares in S Ltd.
RESTRICT YOUR ANSWER TO THE LOGIC FOR WEIGHTS GIVEN BY YOU. ANSWERS
SHOULD NOT EXCEED 500 WORDS. ONCE YOU GIVE WEIGHTS, DETERMINING THE
EXCHANGE RATIO WOULD FOLLOW LOGICALLY.

You are given additionally latest balance sheets and P & L accounts of both
companies.
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