Acquiring Company buys 100% of target Company’s equity for $5million in cash. As
ID: 2588119 • Letter: A
Question
Acquiring Company buys 100% of target Company’s equity for $5million in cash.
As an analyst, you are given the premerger balance sheets for the 2 companies below.
1. Assuming plant and equipment are revalued upward by $500,000, what will be the combined companies’ shareholders’ equity plus total liabilities?
2. What is the difference between Acquiring Company’s shareholders’ equity and the shareholders’ equity of the combined companies?
Please show all your work.
Pre-merger balance sheets for above companies
Acquiring Company
Target Company
Current Assets
600,000
800,000
Plant & Equipment
1,500,000
Total Assets
1,800,000
Long-term Debt
500,000
300,000
Shareholders’ Equity
1,300,000
Shareholders’ equity +
Total Liabilities
1,800,000
Acquiring Company
Target Company
Current Assets
600,000
800,000
Plant & Equipment
1,200,0001,500,000
Total Assets
1,800,000
2,300,000Long-term Debt
500,000
300,000
Shareholders’ Equity
1,300,000
2,000,000Shareholders’ equity +
Total Liabilities
1,800,000
2,300,000Explanation / Answer
1. Combined companies’ Shareholders’ Equity plus Total Liabilities = Acquiring Company's (Shareholder's equity + Total Liabilities) + Target Company's Shareholder's Equity at Revised figure + Target Company's Total Liabilities at Revised Figure
= $ {1,300,000 (Aquiring Shareholder's Equity) + 2,300,000 (Total Liabilities including Revalution Profit) + 5,000,000 (Target's Shareholder's Equity at revised value) + 5,800,000 (Total Liabilities at revised value including Revaluation Profit)}
= $ 14,400,000
2. Difference between Acquiring Company’s shareholders’ equity and the shareholders’ equity of the combined companies
= $ 6,300,000 (Combined Shareholder's Equity) - $ 1,300,000 (Acquiring Company's Shareholder's Equity)
= $ 5,000,000
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