Question

The Prada Corporation is considering a merger with the Stone Company, which has 500,000 outstanding shares selling for $30. An investment banker has advised that to succeed in its merger, Prada Corp. would have to offer $45 per share for Stone's stock. Currently, Prada Corp. stock is selling for $25. How many shares of Prada Corp. stock would have to be exchanged to acquire all of Stone Company’s stock?

266,667

600,000

900,000

20,000

Answer 1

Ans:

Outstanding Shares of Stone Company = 500,000 shares

Current Market Price = $ 30

Price Offerred By Prada Corporation = $ 45

Share Price of Prada Corporation = $ 25

We need to calculate Exchange Ratio

So, Exchange Ratio is number of shares of the acquirer company which is offered for each share of the Target Company.

The formula for Exhange Ratio is given below

Exchange Ratio = Offer Price for Target's Share / Share price of Acquirer Company

                       = $ 45 / $ 25

                      =   1.8

The Exchange Ratio of 1.8 implies that Prada Corporation has to issue 1.8 of its own share for each share of Stone Company. Since Stone Company has 500,000 shares outstanding.

Prada Corporation has to exchange 900,000 of its own shares to acquire all of Stone Company's Stock.

Explanation :

Total Shares to be issued by Prada Corporation = Exchange Ratio * No. of Shares Outstanding (stone)

                                                                     = 1.8 * 500,000 shares

                                                                     = 900,000 shares