Farrods PLC has a market value of £800 million and 35 million shares outstanding. Redridge department store has a market value of £300 million and 25 million shares outstanding. Farrods is contemplating acquiring Redridge. Farrods’ CFO concludes that the combined firm with synergy will be worth £1.5 billion, and Redridge can be acquired at a premium of £200 million.

(a) If Farrods offers 20 million shares of its equity in exchange for the 25 million shares of Redridge, what will the equity price of Farrods be after the acquisition?

(b) What exchange ratio between the two equities would make the value of an equity offer equivalent to a cash offer of £350 million?