DeFond Company wishes to secure a reliable supply of a key component for its production processes, and its management is considering two alternative investments. Verduzco Company produces exactly the supply that DeFond needs, so DeFond could use cash to purchase 100% of the common stock of Verduzco. Lin Company produces twice as much of the component that DeFond needs, but DeFond could form a joint venture with another company where each would purchase 50% of Lin Company's common stock and each take 50% of Lin Company's output.

The table that follows gives the balance sheet information for all three companies prior to any investment by DeFond. For the questions below, assume that DeFond would be able to purchase shares at the investee companies' book values and that the investee companies' assets and liabilities have fair values equal to their book values.

a. Suppose that DeFond purchases 100% of Verduzco's common stock for $300. Produce the consolidated balance sheet for DeFond immediately after the acquisition.

b. Suppose that DeFond purchases 50% of Lin's common stock for $300. Produce the balance sheet for DeFond immediately after the investment (using the equity method).

c. From a business perspective, either of these investments will accomplish the objective of obtaining a reliable supply of components. How will the financial ratios differ between the two alternatives?

Transcribed Image Text:

DeFond Verduzco Lin Company Company Company Cash... $ 800 $ 100 $ 200 Investrnent Noncash assets 2,000 900 1,800 Liabilities... 2.200 700 1,400 Shareholders' Equity 600 300 600 ... ....