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Question

Read the following passage and answer the next 4 question (Q27-Q30) Corporate restructuring is an action taken by the corporate entity to modify its capital structure or its operations significantly. Generally, corporate restructuring happens when a corporate entity is experiencing significant problems and is in financial jeopardy. The process of corporate restructuring is considered very important to eliminate all the financial crisis and enhance the company’s performance. The management of the concerned corporate entity facing the financial crunches hires a financial and legal expert for advisory and assistance in the negotiation and the transaction deals. Usually, the concerned entity may look at debt financing, operations reduction, any portion of the company to interested investors. In addition to this, the need for corporate restructuring arises due to the change in the ownership structure of a company. Such change in the ownership structure of the company might be due to the takeover, merger, adverse economic conditions, adverse changes in business such as buyouts, bankruptcy, lack of integration between the divisions, over-employed personnel, etc.

Shares of Vinay Ltd. And Sagar Ltd. are currently traded at Rs.100 and Rs. 20 respectively. Vinay Ltd is acquiring Sagar Ltd and the market price of both the companies is Rs.100 and Rs.20 respectively. What will be the share swap ratio based on market price?

A 1 share for every 5 share Correct Answer Incorrect Answer
B 5 hare for every 1 share Correct Answer Incorrect Answer
C 1 share for every 10 share Correct Answer Incorrect Answer
D 10 share for every 1 share Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

When the acquiring company  (Vinay Ltd) acquires the share of Sagar Ltd, the swap ratio will be used to calculate the exchange rate of shares between both companies. The share swap ratio will be calculated as follows:     = Market price of shares of Sagar Ltd / market price of shares             of  Vinay Ltd (acquiring company)     = 20/100                                            = 1/5 For every 1 share of Vinay Ltd (acquiring company), Sagar Ltd needs to give 5 shares.

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