BU 487 Assignment 4-Part 1 Mr. Sharp, the CEO of Homewonder Ltd., is considering acquiring a company to facilitate the company's online ordering and sales. The estimated fair value of the target company is close to $300,000. The acquisition could increase Homewonder's earnings by 4%. Regarding the financing policy for this acquisition and the acquisition mode i.e., wholly owned vs. non-wholly owned, there are disagreements between Mr. Sharp and Mr. Armstrong, the CFO of the company. To prepare for the board meeting scheduled for August 1, 2022, Mr. Armstrong asked you, the accountant, to provide detailed quantitative analysis for all the combinations of the following alternatives: i) Financing policy: the company can pay 20% of the acquisition price using its own cash. For the remaining 80%, the company can either borrow from its bank or issue shares. Currently, the company has 40,000 shares outstanding with a market price of $12 per share. If the company enters another long-term debt contract, the interest rate charged by the bank could be 6%. ii) Acquisition mode: the company can select between a wholly owned vs. non-wholly owned subsidiary. Mr. Armstrong currently is considering 70% ownership if non-wholly owned mode is selected. Both Homewonder and the target company has June 30 as the end of the financial reporting period. | The balance sheets of Homwwonder and the potential Sub as well as the estimated fair values of this potential Sub as of June 30, 2022, are as follows: Sub Homewonder Sub FV-Jan.1 Cash $340,000 $ 30,000 $ 30,000 Accounts Receivable 60,000 75,000 75,000 Inventory 80,000 80,000 90,000 Equipment (net) (15 years) 120,000 100,000 110,000 Building (50 years) 40,000 20,000 25,000 Goodwill 20,000 5,000 $ 660.000 $310,000 Accounts payable $ 40,000 30,000 29,000 Bank loan (6 years) 200,000 60,000 65,000 Common stock 300,000 150,000 (10,000 shares) Retained earnings 120,000 70,000 $660,000 $ 310,000 Statements For the period ended June 30, 2022 Parent Sub Sales Cost of Sales $800,000 $700,000 500,000 550,000 Gross profit 300,000 150,000 Gain on sale of land 30,000 Expenses: Amortization of equipment & building 11,000 8,000 Bad debts 15,000 29,000 Loss on sale of equipment 6,000 Interest on long term debt 8,000 6,000 Other expenses including taxes 206,000 66,000 240,000 115,000 Net income for the year 90,000 35,000 Retained earnings, beginning of year 570,000 65,000 Dividends (20,000) Retained earnings, end of year $ 640,000 $ 100,000 Required: 1. Prepare consolidated balance sheet assuming the acquisition took place on July 1, 2022, for the following assumed combinations: a) The company will choose debt financing and go for wholly owned Sub, b) The company will choose debt financing and go for non-wholly owned Sub (use Entity theory), c) The company will choose equity financing and go for wholly owned Sub, d) The company will choose equity financing and go for non-wholly owned Sub (use Entity theory). 2. Based on the prepared consolidated balance sheets and the other given information, analyze: a) The combined entity's liquidity and solvency indicated by the balance sheets under 1), b) Assess Homewonder's EPS dilution and impacts on its dividends using July 1, 2022-June 30, 2023, as the window. 3. Based on your analysis in 2), provide your recommendations regarding the financing policy and the acquisition mode. Your preparations and analyses are based on the given information. You may search for additional information that you think relevant