Situation Parent, Inc. is contemplating a tender offer to acquire 80 percent of
ID: 2352799 • Letter: S
Question
SituationParent, Inc. is contemplating a tender offer to acquire 80 percent of Subsidiary Corporation's common stock. Subsidiary's shares are currently quoted on the New York Stock Exchange at $85 per share. In order to have a reasonable chance of the tender offer attracting 80 percent of Subsidiary's stock, Parent believes it will have to offer at least $105 per share. If the tender offer is made and is successful, the purchase will be consummated on January 1, 2009.
A typical part of the planning of a proposed business combination is the preparation of projected or pro forma consolidated financial statements. As a member of Parent's accounting group, you have been asked to prepare the pro forma 2009 consolidated financial statements for Parent and Subsidiary assuming that 80 percent of Subsidiary's stock is acquired at a price of $105 per share. To support your computations, Martha Franklin, the chairperson of Parent's acquisitions committee, has provided you with the projected 2009 financial statements for Subsidiary. (The projected financial statements for Subsidiary and several other companies were prepared earlier for the acquisition committee's use in targeting a company for acquisition.) The projected financial statements for Subsidiary for 2009 and Parent's actual 2008 financial statements are presented in table 1.
Assumptions
Ms. Franklin has asked you to use the following assumptions to project Parent's 2009 financial statements:
Explanation / Answer
Parent , Inc Actual Financial Statements for 2008 and Subsidiary Corporation Projected Financial Statements for 2009 Parent 2008 Actual Subsidiary 2009 Projected Sales $ 800,000 $ 100,000 Cost of Goods Sold (485,000) (55,000) Operating Expenses (219,000) (10,000) Income before Taxes 96,000 35,000 Income Tax Expense (38,400) (14,000) Net Income $ 57,600 $ 21,000 Retained Earnings January 1 $ 23,000 $ 14,500 Add Net Income 57,600 21,000 Deduct Dividends (38,000) (7,000) Retained Earnings December 31 $ 42,600 $ 28,500 Cash $ 36,200 $ 19,500 Accounts Receivable 39,000 13,000 Inventory 26,000 12,000 Property, Plant and Equipment 673,000 213,000 Accumulated Depreciation (490,000) (28,000) Total Assets 284,200 229,500 Accounts Payable 44,600 21,000 Common Stock* 190,000 150,000 Paid-in Capital in Excess of Par 7,000 30,000 Retained Earnings 42,600 28,500 Total Liabilities & Equities $ 284,200 $ 229,500 *Parent: $12.50 par value. Subsidiary: $75 par value