Push-Down: Evaluation of Applicability Press Inc. acquired 100% of the outstanding common stock of Serch Inc. by issuing a new class of common stock (Class B) valued at $700 million. The terms of the issuance call for dividends to be based on Serch’s audited net income using its histor¬

ical cost basis. Serch remains a separate legal entity under the terms of the acquisition and contin¬

ues to use its own auditors.

For the year following the acquisition, assume that Serch expected the following:

1. To have net income of $100 million.

2. To pay cash dividends of $80 million to the Class B stockholders.

3. To have net income of only $60 million if push-down accounting is used.

1. Evaluate whether the push-down basis of accounting makes sense in this situation.

2. If push-down accounting were used, could the dividends still be based on the earnings exclud¬

ing the additional depreciation and amortization of $40 million resulting from push-down ac¬

counting?

Financial Analysis Problems