Part a. Assume Arden uses a share-for-share exchange to acquire Pia and accounts for the transaction as a
pooling-of-interests:
- Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.
- Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.
Arden Cosmetics Balance Sheet as of 12/31/06 (in millions) Pia's Perfume Balance Sheet as of 12/31/06 (in millions) Assets Current Assets Property, Plant and Equipment Total Assets $9,000 10,000 $19,000 $2,000 400 $2,400 Liabilities and Stockholders Equity Current Liabilities Long-term Debt Deferred Taxes Stockholders' Equity $600 600 $7,000 2,000 2,000 8,000 $19,000 1.200 $2,400 Arden Cosmetics Income Statement for year ended December 31 (S millions except per share data) 2006 2007 Actual Expected $20.000 $21,000 (4,000) (5,000) (5,400) (5.400) (400) (400) (200) (200) (2.000) (2.000) $ 8.000 S 8,000 (2,400) (2.400) $ 5.600 S 5,600 Pia's Perfume Income Statement for year ended December 31 (S millions except per share data) 2006 2007 Actual Expected $5.000 $6.720 (4,260) (5,760) (160) (220) (40) (40) (40) (40) Sales Cost of Goods Sold Marketing and Administration Depreciation Interest Research Pre-Tax Income Income Tax Expense Net Income $ 500 (200) 300 $ 660 (264) $ 396 $ Earnings per share Dividends per share Shares Outstanding $2.80 $1.10 2 Billion S2.80 S1.14 $1.50 None 200 Million $1.98 None Arden is considering two alternative approaches to making the acquisition of Pia: share-for-share exchange or cash purchase. Assume the following: The $6 billion dollar cost of purchasing Pia at S30 per share would be financed by debt with a 10 percent interest rate. All assets and liabilities of Pia have fair market values equal to their balance sheet values except property, plant and equipment, which have a fair market value of $2.4 billion. Pia depreciates its property, plant, and equipment over 10 years using the straight-line method. The marginal tax rate is 40 percent. Arden Cosmetics Balance Sheet as of 12/31/06 (in millions) Pia's Perfume Balance Sheet as of 12/31/06 (in millions) Assets Current Assets Property, Plant and Equipment Total Assets $9,000 10,000 $19,000 $2,000 400 $2,400 Liabilities and Stockholders Equity Current Liabilities Long-term Debt Deferred Taxes Stockholders' Equity $600 600 $7,000 2,000 2,000 8,000 $19,000 1.200 $2,400 Arden Cosmetics Income Statement for year ended December 31 (S millions except per share data) 2006 2007 Actual Expected $20.000 $21,000 (4,000) (5,000) (5,400) (5.400) (400) (400) (200) (200) (2.000) (2.000) $ 8.000 S 8,000 (2,400) (2.400) $ 5.600 S 5,600 Pia's Perfume Income Statement for year ended December 31 (S millions except per share data) 2006 2007 Actual Expected $5.000 $6.720 (4,260) (5,760) (160) (220) (40) (40) (40) (40) Sales Cost of Goods Sold Marketing and Administration Depreciation Interest Research Pre-Tax Income Income Tax Expense Net Income $ 500 (200) 300 $ 660 (264) $ 396 $ Earnings per share Dividends per share Shares Outstanding $2.80 $1.10 2 Billion S2.80 S1.14 $1.50 None 200 Million $1.98 None Arden is considering two alternative approaches to making the acquisition of Pia: share-for-share exchange or cash purchase. Assume the following: The $6 billion dollar cost of purchasing Pia at S30 per share would be financed by debt with a 10 percent interest rate. All assets and liabilities of Pia have fair market values equal to their balance sheet values except property, plant and equipment, which have a fair market value of $2.4 billion. Pia depreciates its property, plant, and equipment over 10 years using the straight-line method. The marginal tax rate is 40 percent
