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A stock swap is the exchange of one equity-based asset for another, often associated with the payment for a merger or acquisition. A stock swap occurs when shareholders' ownership of the target company's shares is exchanged for shares of the acquiring company.
Stock Swap Taxation If you trade old shares for new through a merger or acquisition, the IRS does not look on the event as a taxable transaction. It doesn't matter whether the shares are preferred, common or private; nor does it matter whether the trade was voluntary on your part or if you voted for it.
Advantages. The Biggest advantage of the share swap is that it limits the cash transactions. Even the cash-rich companies find it challenging to set aside a large pile of cash to carry out the transactions for mergers and acquisitions.
To calculate the exchange ratio, we take the offer price of $21.63 and divide it by Firm A's share price of $11.75. The result is 1.84. This means Firm A has to issue 1.84 of its own shares for every 1 share of the Target it plans to acquire.