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Homework answers / question archive / Harrods PLC has a market value of £139 million and 5 million shares outstanding
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
a) Computation of Stock price of Harrods be after the acquisition:
Number of shares after acquisition = Current number of shares outstanding for the acquiring firm + Number of new shares created for acquisition
= 5 million + 1.2 million
= 6.2 million
New Stock Price = Market Value of combined entity/Number of shares after acquisition
= 195 million/6.2 million
= 31.45 per pound
b) Computation of Exchange Ratio between the two stocks would make the value of a stock offer equivalent to a cash offer of ?51 million:
a*195 million = 51 million
a = 26.15%
Ownership = New shares issued /(New shares issued + Current shares of acquiring firm)
26.15% = New shares issued /(New shares issued + 5 million)
26.15%*(New shares issued + 5 million) = New shares issued
26.15%*New shares issued + 1.3077 million = New shares issued
1.3077 million = New shares issued-26.15%*New shares issued
1.3077 million = 73.846%*New shares issued
1.3077 million/73.846% = New shares issued
New shares issued = 1.7708 million
Exchange Ratio = New shares issued/ Existing shares in target firm
= 1.7708/2
Exchange Ratio = 0.89 to 1
