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ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

Acquirer plc has 8 million shares in issue at a price of $5.00 each. It offers Target Ltd's shareholders 3 new Acquirer shares for every 4 Target shares held. Target has 6 million shares in issue. How many new shares will Acquirer issue, and what is the offer value per Target share at Acquirer's current price?

Acquirer issues 4.5 million new shares because 6 million Target shares are multiplied by the three-for-four ratio. Each Target share is offered three-quarters of an Acquirer share, worth $3.75 at $5.00. The ratio must be applied to Target's share count and to the price.

  1. A4.5 million new shares; $3.75 per Target shareCorrect
  2. B4.5 million new shares; $5.00 per Target share
  3. C8.0 million new shares; $3.75 per Target share
  4. D6.0 million new shares; $3.75 per Target share

Explanation

New shares = 6m x 3/4 = 4.5m. Value per Target share = 3/4 x $5.00 = $3.75. Using $5.00 ignores the exchange ratio. Using 8m or 6m applies the ratio to the wrong share base or ignores it.

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