Question
Companies ABC Inc is a Dairy Farm owner . They own and operate a Dairy Processing plant which was built by the family/owner of ABC
Companies ABC Inc is a Dairy Farm owner . They own and operate a Dairy Processing plant which was built by the family/owner of ABC Inc using their own capital with zero debt. The Dairy Factory is currently appraised at $10 million.
Here is the Income Statement of ABC Inc for year 2021. (in thousands)
Sales 3000
COGS 2000
Interest 0
Tax (25%) 250
Net Income 750
On January 10, 2022 the family/owner of ABC Inc accepts an offer to sell ABC Inc to a larger competitor XYZ Ltd for $12 million paid in cash!
XYZ Ltd is financing the acquisition using $2.0 million of their own equity and available debt (borrow $10 million from a local bank with interest of 8% per year for 10 years).
XYZ did not make any operational changes in the operations of ABC Inc. If at the end of 2022 ABC Inc assets produced the same sales with identical COGS as in 2021, then calculate:
a) ROA
b) ROE
for each owner, first the ABC Inc and then XYZ Ltd assuming that XYZ Ltd has an identical tax margin rate (25%) post-acquisition as does ABC Inc prior to the acquisition.
c) If nothing has changed in the operations and profitability of the factory, explain any potential differences in the ROE between ABC Inc and XYZ Ltd.
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