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Stock Price / Exchange Ratio

Harrod's PLC market value of £600 million and 30 million shares outstanding. Selfridge Department Store has market value £200 million and 20 million shares outstanding. Harrod's is contemplating acquiring Selfridge. Harrod's CFO concludes that the combined firm with synergy will be worth £1 billion, and Selfridge can be acquired at a premium of £100 million.

a. If Harrod's offers 15 million shares of stock in exchange for the 20 million shares of Selfridge, what will the stock price of Harrod's be after the acquisition?
b. What exchange ratio between the two stocks would make the value of stock offer equivalent to a cash offer of £300 million?

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Solution Preview

a. The stock price would be = Total value of firm/Total number of shares
The number of shares would be 30 million currently outstanding + 15 million issued to Selfridge = 45 million
The value of the company is given as1,000 million (1 billion)
Stock price after the acquisition = 1,000/45 = £22.22

b. A cash ...

Solution Summary

The solution explains the calculation of stock price after the acquisition and the exchange ratio