arden is considering two alternative approaches to making the acquisition of Pia: share-for-share exchange or cash purchase. Assume the following:
The $6 billion cost of purchasing Pia at $30 per share would be financed by debt with a 10%interest rate.
All asset and liabilities of Pia have fair market value equal to their balance sheet values expect property, plant, and equipment, which have a fair market value of $2.4 billion. Pia depreciates its property, plant, and equipment over 10 years using the straight line method.
The marginal tax rate is 40%.
Part a.
Assume Arden uses a share-for-share exchange to acquire Pia and accounts for the transaction as a pooling-of-interests:
i. Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.
ii. Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.
Part b.
Assume Arden pays $30 cash per share to acquire 100 percent of the common stock of Pia and accounts for the transaction as a purchase.
i. Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.
ii. Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.