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. Prada Corp. stock is selling for $25. How many shares of Prada Corp. stock would have to be exchanged to acquire all of Stone's stock?
A)266,667
B)600,000
C)900,000
D)None of these options

Question

Quizplus · Accepted Answer

To acquire all of Stone's stock, Prada Corp would need to pay $45 per share, which is $15 more than the current market price of $30 per share. Thus, the total cost of acquiring all of Stone's stock would be 500,000 shares x $45 per share = $22,500,000. To finance this purchase, Prada Corp would need to issue new shares of its own stock. The number of shares needed can be calculated as follows:

Number of Prada Corp shares needed = Total cost of Stone stock / Market price of Prada Corp stock
Number of Prada Corp shares needed = $22,500,000 / $25 per share
Number of Prada Corp shares needed = 900,000 shares

Therefore, option C is the best choice.

The Prada Corporation Is Considering a Merger with the Stone