Question

Consider the following premerger information about Firm X and Firm Y:

	Firm X			Firm Y
Total earnings	$	78,000		$	13,500
Shares outstanding		35,000			10,000
Per-share values:
Market	$	50		$	15
Book	$	10		$	5

Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $7 per share, and that neither firm has any debt before or after the merger.

List the assets of the combined firm assuming the purchase accounting method is used.

Assets from X	$
Assets from Y
Goodwill
Total Assets XY	$

Answer 1

Under purchase accouting method the asset value of a combined firm is given by -

= Book Vaue of firm X (Acquiring company) + Market Value of acquired firm Y (Target Company) + goodwill

Book Value of Firm X = 35000*10 = $350,000

Market Value of Firm Y = 10000*15 = $150,000

The purchase price for Firm X is at a premium of $7 per share which causes the purchase price to be =

10000*(15+7)

= 220,000

Hence a goodwill is created which can be valued at = $220,000 - $150,000 = $70,000

Therefore Total Assets from XY = 350,000+150000+70000 = $570,000