a. Calculate (1) the ratio of exchange in market price and (2) the earnings per share (EPS) and price/earnings (PIE) ratio for each company on the basis of the data given in the table that accompanies discussion of the acquisition alternative.

b. Find the postmerger earnings per share (EPS) for Rome Industries, assuming that it acquires Procras Corporation under the terms given.

c. Use the estimated postmerger price/earnings (PIE) ratio and your finding in part b to find the postmerger share price.

d. Use your finding in part c to determine how much, if any, the total market value of Rome Industries will change as a result of acquiring Procras Corporation.

e. Determine how much each claimant wilt receive if Procras Corporation is liquidated under the terms given.

f. How much, if any, of its $1.9 million balance due from Procras Corporation will Rome Industries recover as a result of liquidation of Procras?

g. Compare your findings in parts d and f, and make a recommendation for Rome Industries with regard to its best action—acquisition of Procras or the liquidation of Procras.

h. Which alternative would the shareholders of Procras Corporation prefer? Why?

Sharon Scotia, GFO of Rome Industries, must decide what to do about Procras Corporation, a major customer that is bankrupt. Rome Industries is a large plastic- injection-molding firm that produces plastic products to customer order. Procras Corporation is a major customer of Rome Industries that designs and markets a variety of plastic toys. As a result of mismanagement and inventory problems, Procras has become bankrupt. Among its unsecured debts are total past-due accounts of $1.9 million owed to Rome Industries.

Recognizing that it probably cannot recover the full $1.9 million that Procras Corporation owes it, the management of Rome Industries has isolated two mutually exclusive alternative actions:

(1) Acquire Procras through an exchange of stock or

(2) Let Procras be liquidated and recover Rome Industries’ proportionate claim against any funds available for unsecured creditors. Rome’s management feels that acquisition of Procras would have appeal in that it would allow Rome to integrate vertically and expand its business from strictly industrial manufacturing to include product development and marketing. Of course, the firm wants to select the alternative that will create the most value for its shareholders. Charged with making a recommendation as to whether Rome should acquire Procras Corporation or allow into be liquidated, Ms. Scotia gathered the following data.

Acquire Procras Corporation Negotiations with Procras management have resulted in a planned ratio of exchange of 0.6 share of Rome Industries for each share of Procras Corporation common stock. The following table reflects current data for Rome Industries and Rome’s expectations of the data values for Procras. Corporation with proper management in place.

Rome Industries estimates that after the proposed acquisition of Procras Corporation, its price/earnings (PIE) ratio will be 18.5.
Liquidation of Procras Corporation Procras Corporation was denied its petition for reorganization, and the court-appointed trustee was expected to charge $150,000 for his services in liquidating the firm. In addition, $100,000 in unpaid bills were expected to be incurred between the time of filing the bankruptcy petition and formal action by the court. The firm’s preliquidarion balance sheet is shown below. Use the liquidation example (“Order of Priority of Claims in Liquidation”).
The trustee expects to liquidate the assets for $3.2 million—$2.5 million from current assets and $700,000 from fixedassets.

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Corporation $180,000 60,000 Earnings available for common stock Number of shares of common stock outstanding400,000 5640,000 et price per share rorporation Balance Sheet Liabilirties ind Stockbolders Equsty S 20,000 1,000 1,800,000 3,000,000 14.000 Total current assets $4,835,000 S 415,000 200,000 $2,700,000 1,300,000 120,000 60,000 70,000 S4,250,000 S 300,000 200,000 400,000 900,000 S 120,000 480,000 Accounts payable Marketable securities Accounts reccivab [nventories Prepaid expenses Uasecured customer deposits Taxes payable Total curren liabilides Net plant Net equipment Total fixed assets Total s 965 Toal long-tem debt 55,300,000 mmon stock (60,000 shares) Paid-in capital in cxcess of par Total stockholders' equity S 650,000 S5,800,000