Scribd Logo
Upload

Welcome to Scribd!

  • 42 views

    Swap Ratio (Or Exchange Ratio)

    Uploaded by

    Jyoti Yadav
    The shareholders of the amalgamating company receive shares of the amalgamated company based on an exchange ratio. The exchange ratio is determined by comparing earnings per share, market price per share, or book value per share of the two companies. Earnings per share is an important factor but does not account for differences in growth rates or gains from the merger. Market price reflects current performance and risk but may not be reliable for companies with limited trading. Book value aims to be objective but is influenced by accounting policies and does not reflect changes in monetary value or true economic worth.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd

    Swap Ratio (Or Exchange Ratio)

    Uploaded by

    Jyoti Yadav
    42 views2 pages
    The shareholders of the amalgamating company receive shares of the amalgamated company based on an exchange ratio. The exchange ratio is determined by comparing earnings per share, market price per share, or book value per share of the two companies. Earnings per share is an important factor but does not account for differences in growth rates or gains from the merger. Market price reflects current performance and risk but may not be reliable for companies with limited trading. Book value aims to be objective but is influenced by accounting policies and does not reflect changes in monetary value or true economic worth.

    Original Description:

    Original Title

    Swap-Ratio.doc

    Copyright

    © © All Rights Reserved

    Available Formats

    DOC, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The shareholders of the amalgamating company receive shares of the amalgamated company based on an exchange ratio. The exchange ratio is determined by comparing earnings per share, market price per share, or book value per share of the two companies. Earnings per share is an important factor but does not account for differences in growth rates or gains from the merger. Market price reflects current performance and risk but may not be reliable for companies with limited trading. Book value aims to be objective but is influenced by accounting policies and does not reflect changes in monetary value or true economic worth.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    42 views2 pages

    Swap Ratio (Or Exchange Ratio)

    Uploaded by

    Jyoti Yadav
    The shareholders of the amalgamating company receive shares of the amalgamated company based on an exchange ratio. The exchange ratio is determined by comparing earnings per share, market price per share, or book value per share of the two companies. Earnings per share is an important factor but does not account for differences in growth rates or gains from the merger. Market price reflects current performance and risk but may not be reliable for companies with limited trading. Book value aims to be objective but is influenced by accounting policies and does not reflect changes in monetary value or true economic worth.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 2

    Swap Ratio (or Exchange Ratio)

    The shareholders of the amalgamating company are given the shares of the
    amalgamated company in exchange for the shares held by them in the amalgamating
    company. For example when TOMCO was emerged with Hindustan Lever Limited,
    shareholders of TOMCO were given the shares of Hindustan Lever Limited in the ratio
    of 2:15; that means 2 shares of Hindustan lever Limited were given in lieu of 15 shares
    of TOMCO . How is the exchange ratio determined? The commonly used bases for
    establishing the exchange ratio are: earnings per share, market price per share, and
    book value per share.

    Earnings per share: Suppose the earnings per share of the acquiring firm are Rs 5.00
    and the earnings per share of the target firm Rs 2.00. An exchange ratio based on
    earnings per share will be 0.4 that is (2/5). This means 2 shares of the acquiring firms
    will be exchanged for 5 shares of the target firm.

    While earnings per share reflect prime facie the earnings power, there are some
    problems in an exchange ratio based solely on current earnings per share of the
    merging companies because it fails to take into account the following:

    * The difference in the growth rates of earnings of the two companies

    * The gains in earnings arising out of merger

    * The differential risks associated with the earnings of the two companies

    Moreover, there is the measurement problem of defining the normal level of current
    earnings. The current earnings per share may be influenced by certain transient factors
    like a windfall profit, or an abnormal labor problem, or a large tax relief. Finally, how
    can earnings per share, when they are negative, be used?

    Market Price per share: The exchange ratio may be based on the relative market prices
    of the shares of the acquiring firm and the target firm. For example, if the acquiring
    firm’s equity share sells for Rs 50 and the target firm’s equity share sells for Rs 10 the
    exchange ratio based on the market price is 0.2 that is (10/50). This means that 1
    share of the acquiring firm will be exchanged for 5 shares of the target firm.

    When the shares of the acquiring firm and the target firm are actively traded in a
    competitive market, market prices have considerable merit. They reflect current
    earnings, growth prospects and risk characteristics. When the trading is meager market
    prices, however, may not be very reliable. In the extreme case market prices may not
    be available if the shares are not traded. Another problem with market prices is that
    they may be manipulated by those who have a vested interest.

    Book value per share: The relative book values of the two firms may be used to
    determine the exchange rate. For example, if the book value per share of the acquiring
    company is Rs 25 and the book value per share of the target company is Rs 15, the
    book value based exchange ratio is 0.6 =(15/25).

    The proponents of book value contend that it provides a very objectives basis. This,
    however is not convincing argument because book values are influenced by accounting
    policies which reflect subjective judgments. There are still serious objections against the
    use of the book value.

    1. Book values do not reflect changes in purchasing power of money.


    2. Book values often are highly different from true economic values.

    You might also like