Answer the following questions:

QUESTION 26

Winchester Inc. acquires Target in 1999. Target has a book value of $39.5 million and a market value of $60 million. Winchester will pay $80 million in Winchester common stock to acquire all outstanding shares. Balance sheet information for Target includes:

Book Value Fair Value

Accounts Receivable $10.0 million $ 9.5 million

Inventory 14.5 21.5

Fixed Assets 20.1 26.3

Patents 0 19.0

Liabilities (5.1) (5.1)

Total $39.5 million $ 71.2 million

This acquisition was recorded as a pooling of interest; the books of Winchester will include:

	a.	Debit to patents of $19 million, other net assets of $39.5 million and a credit to cash of $58.5 million
	b.	A credit to stockholders equity of $71.2 million and debit net assets $71.2 million
	c.	Debit net assets $39.5 million (various asset & liability accounts) and credit stockholders equity $39.5 million
	d.	Debit Target acquisition of $90 million and credit stockholders equity of $90 million

2 points

QUESTION 27

America On-line (AOL) announced the acquisition of Time Warner (TWX) on January 10, 2000. The stock price reaction is shown below. This suggests that:

	a.	There was no price reaction to the merger announcement
	b.	AOL experience a significant price premium
	c.	This merger was a disaster for both Time Warner & AOL
	d.	Time Warner has a substantial price premium, but the market looked unfavorably on AOL

2 points

QUESTION 28

Octopus Inc. acquired Guppy in 1999. Guppy has a market value of $70 million. Octopus paid $95 million in Octopus common stock to acquire all outstanding shares. Balance sheet information for Guppy includes:

	Book Value	Fair Value
Accounts Receivable	$15.0 million	$14.5 million
Inventory	16.5	21.5
Fixed Assets	24.1	29.3
Patents	0	26
Liabilities	-6.1	-6.1
Total	$49.5 million	$ 85.2 million

This acquisition was recorded as a pooling of interest; the books of Octopus will include:

	a.	Debit various asset & liabilities for a total $85.2 million & credit stockholders' equity for the same amount
	b.	Debit Guppy acquisition for $70 million & credit stockholders' equity for the same amount
	c.	Record the patents at their fair value of $26 million
	d.	Debit various assets & liabilities for a total $49.5 million & credit stockholders' equity accounts for the same amount