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Question 1 (20 marks)

Telex Ltd is considering Bell Ltd. Telex has a current EPS of N$2.40 and has 8.6 million shares in issue. The current Telex share price is N$19.20. Bell has a current share price of N$22.40 and its current EPS is N$1.60. Bell has 4.2 million shares in issue. Telex expects to synergistic earnings of N$ 3 800 000 per year to accrue from the merger, but does not expect the merger to affect the market's overall assessment of the group, as compared to prior to the merger. The merger will take place through a share exchange. Telex has a current dividend per share of N$1.140 while Bell has a current dividend per share of N$0.40. Telex plans to maintain its current dividend payout policy.

Required:

a) What is the exchange ratio Bell Ltd's shareholders should negotiate if they are to acquire the maximum benefit from the merger due to the effects of synergy? (4 marks)

b) What effect will an exchange ratio based on market prices have on divided income payable to Bell Ltd's shareholders?Do your calculations for a shareholder currently holding 100 shares in Bell Ltd. (6 marks)

c) Calculate the pre-merger and post-merger price earnings ratios (P/E ratios) (4 marks)

d) What s the expected increase in the total market value of the new entity as compared to the value of both companies prior to the merger? Show all your workings (6 marks)

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