Question

1. Darien Company acquires Cullen company by paying $1,000 and assuming Cullen's company's liability of $350. What is the fair market value of Cullen company'­s assets?

a. $1,350

b. $1,000

c. $350

2. Alex company wants to buy target: Justin Company. Justin'­s stocks are listed on the stock exchange for $10 per share, and Justin has 100,000 shares outstanding. Assume that the value of all Justin's identifiable assets are reflected in its stock price. In addition, on Justin'­s balance sheet, Justin has assets of $800,000, and shareholders'­ equities of $500,000. Alex Company estimates that Justin has goodwill of $200,000. What is Alex '­s possible purchase price for Justin Company?

a. $1,200,000

b. $1,000,000

c. $800,000

3. Which of the following is part of the process of a leverage buyout?

a. The mergerco exchanges shares with the target company and becomes the holding company of the target

b. The target company raises debts before merging into the mergerco

c. The mergerco raises equity before merging into the mergerco

d. The mergerco raises debt before merging with the target company

Answer 1

The answers are as follows,

1. Answer is $1,350. The purchase consideration paid to acquire is $1,000. The liability stood at $350. Formula for purchase consideration is fair value of assets - liabilities. Substituting the values we get the fair value of assets =$1,350.
2. Answer is $1,000,000. Formula for calculating purchase consideration is fair value of assets + goodwill if any - liabilities. There are no liabilities in Justin company except the owners equity. So on substituting the values we get the purchase consideration as $1,000,000.
3. Answer is the mergerco raises debt before merging with the target company. In a leverage buyout, the merger company will take a debt (on the security of the assets of the target company) and the cost of aquisition is met using the funding from such debt.