Question

Harrods PLC has a market value of £139 million and 5 million shares outstanding. Selfridge Department Store has a market value of £41 million and 2 million shares outstanding. Harrods is contemplating acquiring Selfridge. Harrods’s CFO concludes that the combined firm with synergy will be worth £195 million and Selfridge can be acquired at a premium of £10 million.

a. If Harrods offers 1.2 million shares of its stock in exchange for the 2 million shares of Selfridge, what will the stock price of Harrods be after the acquisition? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

New stock price           £   

b. What exchange ratio between the two stocks would make the value of a stock offer equivalent to a cash offer of £51 million? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Exchange ratio             to 1

Answer 1

Solution A

No. Of shares post acquisition = 5 million +2 million = 7million

Market value of share= value of combined company/total outstanding shares= 195/7= 27.85 Euro new stock price

Solution B

We can set percentage of ownsership in new firm equal to cash offer

Thus (195million)=51million= 26.15%

Hence ownerships percentage of target shareholders in new firm is= new shares issues/ ( new shares issued+ current shares a

of acquiring firm)

0. 2847= new shares issued/ (new shares issued+ 5million)

Thus new shares of firm=1.99 million

Now exchange ratio= new shares of firm/

Current shares of acquired firm= 1.99million/2million= 0.995

Thus by rounding off exchange ratio= 1