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' 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.) b, What exchange ratio between the two stocks would make the value of a stock offer equivalent to a cash offer £51 million? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., .1616.)

Answer 1

(a) The stock price of Harrods be after the acquisition is £ 31.45

(b) The exchange ratio between the two stocks would be 0.8550

Step-by-step explanation:

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.

a) If Harrods offers 1.2 million shares of its stock in exchange for the 2 million shares of Selfridge

Shares outstanding = 5 + 1.2 = 6.2 million

Stock price = £ 195 million ÷ 6.2 million = £ 31.45

b) alpha × 195 = 51

alpha = £51 million ÷ £195 million

= 26.15%

(195 ÷ ( 5 +X ) ) × X = 51

51 (5+X) = 195X

255 + 51X = 195X

144X = 255

X = 1.77 million shares

Exchange ratio would be: 1.77 ÷ 2

= 0.8550