To prepare: The post merger
Merger:
Merger is the combination of two entities into one in which the shareholders of both companies merge their resources into a new company.
Purchase Accounting Method for Mergers:
In the purchase accounting method, the assets of the targeted company has to be recorded into the current market value in the books of the acquiring company and
Balance Sheet:
Balance sheet is the summarized statement of the total assets and the total liabilities of a company in an accounting period. It is one of the financial statements.
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CONNECT 1 SEMESTER ACCESS CARD FOR CORPORATE FINANCE
- Tom Corporation is considering the acquisition of Jerry Corporation. Jerry Corporation has free cash flows to debt and equity holders of $3,750,000. If Tom Corporations acquires Jerry Corporation, Jerry will reduce operating costs by $1,500,000. This will increase free cash flow to $4,900,000. Assume that cash flows occur at year-end and the weighted average cost of capital is 9%. a. What is the value of Jerry Corporation without a merger? o. What is the value of Jerry Corporation with the merger?arrow_forwardTransWorld Communications Inc., a large telecommunications company,is evaluating the possible acquisition of Georgia Cable Company (GCC), a regionalcable company. TransWorld’s analysts project the following post-merger data for GCC (inthousands of dollars): If the acquisition is made, it will occur on January 1, 2018. All cash flows shown in the incomestatements are assumed to occur at the end of the year. GCC currently has a capital structureof 40% debt, but Trans World would increase that to 50% if the acquisition were made. GCC,if independent, would pay taxes at 20%, but its income would be taxed at 35% if it wereconsolidated. GCC’s current market-determined beta is 1.40, and its investment bankersthink that its beta would rise to 1.50 if the debt ratio were increased to 50%. The cost of goodssold is expected to be 65% of sales, but it could vary somewhat. Depreciation-generatedfunds would be used to replace worn-out equipment, so they would not be available toTransWorld’s…arrow_forwardTransWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Georgia Cable Company (GCC), a regional cable company. TransWorld's analysts project the post-merger data for GCC (in thousands of dollars) gathered in the Excel Online file below. If the acquisition is made, it will occur on January 1, 2018. All cash flows shown in the income statements are assumed to occur at the end of the year. GCC currently has a capital structure of 40% debt, but Trans World would increase that to 50% if the acquisition were made. GCC, if independent, would pay taxes at 20%; but its income would be taxed at 30% if it were consolidated. GCC's current market-determined beta is 1.35, and its investment bankers think that its beta will rise to 1.50 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 65% of sales, but it could vary somewhat. Depreciation-generated funds would be used to replace worn-out equipment, so they would…arrow_forward
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- If PROMDI Co., a new company would acquire the net assets of CARDO Co and SYANO Co. PROMDI Co will be issuing 30,000 shares to CARDO and 12,000 shares to SYANO. The following is the balance sheet of PROMDI Co, followed by the fair values and additional unpaid costs incurred by PROMDI in the acquisition: CARDO COMPANY Book Value Fair Value Book Value Fair Value Cash P500,000 P500,000 Accounts Payable P450,000 P440,000 Accounts Receivable 250,000 240,000 Mortgage Payable 200,000 220,000 Inventory 155,000 200,000 Ordinary Shares 595,000 - Fixed Assets (Net) 600,000 520,000 Retained Earnings 260,000 - SYANO COMPANY Book Value Fair Value Book Value Fair Value Cash P300,000 P300,000 Accounts Payable P350,000 P340,000 Accounts Receivable 150,000 160,000 Mortgage Payable 200,000 220,000 Inventory 125,000 100,000 Ordinary…arrow_forwardKing’s Road recently acquired all of Oxford Corporation’s stock and is now consolidating the financial data of this new subsidiary. King’s Road paid a total of $850,000 for Oxford, which has the following accounts:a. What amount of deferred tax liability arises in the acquisition?b. What amounts will be used to consolidate Oxford with King’s Road at the date of acquisition?c. On a consolidated balance sheet prepared immediately after this takeover, how much goodwill should King’s Road recognize? Assume a 40 percent effective tax rate.arrow_forwardPorter Corporation owns all 30,000 shares of the common stock of Street, Inc. Porter has 65,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $239,000 while Street reports $191,000. Annual amortization of $14,000 is recognized each year on the consolidation worksheet based on acquisition-date fair-value allocations. Both companies have convertible bonds outstanding. During the current year, bond-related interest expense (net of taxes) is $51,000 for Porter and $43,000 for Street. Porter’s bonds can be converted into 8,000 shares of common stock; Street’s bonds can be converted into 10,000 shares. Porter owns none of these bonds. What are the earnings per share amounts that Porter should report in its current year consolidated income statement? (Round your answers to 2 decimal places.) Basic and dilutedarrow_forward
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