E15.14. Evaluating an Acquisition: PPE, Inc. (Hard) PPE, Inc. is considering an acquisition. The acquisition, to be completed within one year, will bring the acquired firm onto PPE's balance sheet using the purchase method. Manage meat has prepared the following pro forma, which anticipates this acquisition at the end of Year 1. This pro forma modifies the one in the text which yielded a valuation for PPE, Inc. without the anticipated acquisition.

(in millions of dollars) Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Income Statement Sales Core operating expenses Amortization of goodwill Operating income Balance Sheet Net operating assets other 124.50 131.15 189.00 200.34 212.36 225.10 238.61 115.10 120.86 168.87 179.00 189.74 201.13 213.19 11.00 11.00 11.00 0.00 0.00 9.80 10.29 9.13 10.34 11.62 23.97 25.42 69.90 74.42 94.50 100.17 105.18 112.55 119.30 126.46 33.00 22.00 11.00 0.00 0.00 0.00 74.42 127.50 122.17 117.18 112.55 119.30 126.46 7.70 571 than goodwil Goodwil Net operating assets 69.90 Net financial obligations Common equity 7,00 62.90 66.72 12179 The pro forma balance sheet for the combined firm at the end of Year 1 includes the net operating assets of both firms and the goodwill on the purchase. This goodwill is amortized over the three subsequent years. Forecasted sales and operating expenses for the merged firm are given for years after Year 1. The merged firm is expected to have a required return for its operations of 11 percent. Management anticipates that it will have to issue 120 shares to acquire the firm from its shareholders, PPE, Inc. currently has 100 outstanding shares and, according to the pro forma in the text, is anticipated to pay a dividend of 3.81 cents per share at the end of Year 1.

a. Review the pro forma in Exhibit 15.1 without the acquisition and compare it to the one here. Will the proposed acquisition create value for PPE shareholders? Prior to FASB Statement No. 142, applicable from 2002 onward, firms amortized goodwill purchased in an acquisition, as in the pro forma here. Statement No. 142 does not require amortization. Rather, goodwill is carried on the balance sheet until it is deemed impaired, then it is written down. Reconstruct the pro forma without any amortization of goodwill.

c. Show that the equity value is the same with the revised pro forma