Consider the following premerger information about Firm X and Firm Y: Firm X Fir
ID: 2334551 • Letter: C
Question
Consider the following premerger information about Firm X and Firm Y: Firm X Firm Y Total earnings $ 88,000 $ 18,500 Shares outstanding 45,000 20,000 Per-share values: Market $ 45 $ 16 Book $ 16 $ 7 Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $5 per share, and that neither firm has any debt before or after the merger. Construct the postmerger balance sheet for Firm X assuming the use of the purchase accounting method. (Do not round intermediate calculations.)
Assets from X $
Assets from Y
Goodwill
Total Assets XY $
Explanation / Answer
(Amount in $) Particulars Firm X Firm Y Total earnings 88000 18500 Share Outstanding 45000 20000 Per share values : Market Value 45 16 Book value 16 7 With the purchase method, The assets of combined firm will be the book value of firm X (Acquiring company ) + Market value of firm Y (Targeting company) Assets from X = (45000*16) = $720,000 Assets from y = (20000*16) = $320,000 The purchase price of firm Y is the number of shares outstanding into Sum of Current stock price per share plus premium per share Purchase price of Y = (20000)*(16+5) = $420,000 Therefore Good will = $420000 - $ 320000 = $100,000 Total assets of combined company XY = $ 720000+ $ 320000 +$100000 $1,140,000