Harrods PLC has a market value of £133 million and 5 million shares outstanding.

Question

Harrods PLC has a market value of £133 million and 5 million shares outstanding. Selfridge Department Store has a market value of £35 million and 2 million shares outstanding. Harrods is contemplating acquiring Selfridge. Harrods’s CFO concludes that the combined firm with synergy will be worth £183 million, and Selfridge can be acquired at a premium of £10 million.

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.)

What exchange ratio between the two stocks would make the value of a stock offer equivalent to a cash offer of £45 million? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

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.)

Explanation / Answer

Market Value of share of Harrods = 133/5 = 26.6

MV of Selfridge = 35/2 = 17.5

Combined Market Value = 183-10 = 173

Total shares = 5+1.2 = 6.2

Combined Market Value per share = 173/6.2 = 27.90

New Stock price will be 27.90

b)

Payment to Selfridge = 45m

equivalent shares to be distributed = 45/17.5 = 2.57m shares

Exchange Ratio = 2.57/2 = 1.29 to 1

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