The Prad 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 Prad Corp. would have to offer $45 per share for Stone's stock. Prad Corp. stock is selling for $25. How many shares of Prad 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

Question

Quizplus · Accepted Answer

To acquire all of Stone's stock, Prad Corp would have to pay $45 per share, which means the total cost would be $22,500,000 (500,000 shares x $45 per share). To finance this, Prad Corp. would have to exchange their own shares. However, if they exchange 900,000 shares (900,000 x $25 per share = $22,500,000), they would have enough value to cover the cost of Stone's shares at $45 per share. Therefore, the answer is C, 900,000.

The Prad Corporation Is Considering a Merger with the Stone