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Dividends have just been paid and the retained earnings have already been reinvested in new projects. Hanky Ltd. plans to adopt a policy of retaining 35% of earnings after the takeover and expects to achieve a 17% return on new investment.

Saving due to economies of scale are expected to be 85,00,000 per annum. Required return to equity shareholders will fall to 20% due to portfolio effects. Requirements

Calculate the existing share prices of Hanky Ltd. and Shanky Ltd.

Find the value of Hanky Ltd. after the takeover

Advise Hanky Ltd. on the maximum amount it should pay for Shanky Ltd.

A Ltd. (Acquirer company’s) equity capital is 2,00,00,000. Both A Ltd. and T Ltd. (Target Company) have arrived at an understanding to maintain debt equity ratio at 0.30 : 1 of the merged company. Pre-merger debt outstanding of A Ltd. stood at 20,00,000

and T Ltd at 10,00,000 and marketable securities of both companies stood at 40,00,000.

You are required to determine whether liquidity of merged company shall remain comfortable if A Ltd. acquires T Ltd. against cash payment at mutually agreed price of 65,00,000.

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