12.12 Acquiring Company buys 100% of Target Company’s equity for $5 million in cash. As an analyst, you are given the premerger balance sheets for the two companies (Table 12.7). Assuming plant and equipment are revalued upward by $500,000, what will be the combined companies’ shareholders’ equity plus total liabilities? What is the difference between Acquiring Company’s shareholders’ equity and the shareholders’

equity of the combined companies?

Answer: The combined companies’ shareholders’ equity plus total liabilities is $7.1 million, and the change between the combined companies’ and Acquiring Company’s shareholders’ equity is $5 million. Note that the change in the acquirer’s equity equals the purchase price.

Acquiring company Target company Current assets 600,000 800,000 Plant and equipment 1200,000 1,500,000 Total assets 1,800,000 2,300,000 Long-term debt 500,000 300,000 Shareholders’ equity 1,300,000 2000,000 Shareholders’ equity + total liabilities 1,800,000 2.300,000