CA Inter P1 · Chapter 11 · Question 9 of 10
Case: Ekta Ltd is to absorb Falak Ltd on the basis of intrinsic values of shares. Falak Ltd's net assets are ₹36,00,000 for 3,00,000 shares, and Ekta Ltd's net assets are ₹75,00,000 for 5,00,000 shares (both companies' shares have a face value of ₹10). The number of Ekta Ltd shares to be issued to Falak Ltd's shareholders is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 2,40,000
Explanation
Intrinsic value of a Falak share = 36,00,000 / 3,00,000 = ₹12; of an Ekta share = 75,00,000 / 5,00,000 = ₹15. Exchange ratio = 12/15 = 0.8, i.e. 4 Ekta shares for every 5 Falak shares. Shares to be issued = 3,00,000 x 0.8 = 2,40,000 (worth 2,40,000 x ₹15 = 36,00,000, equal to Falak's net assets).
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