Question

ABC Inc. has acquired GHW Corporation for $13.2 million. One year after acquisition, GHW had sales of $9 million, a gross margin of $3.5 million, net income of $1.2 million, and total assets of $24 million.. Assume no issuance or buybacks of stock after the acquisition.

a. What is ABC’s ROI on its investment in GHW after one year?

b. If GHW paid $200,000 in dividends near the end of its first year of acquisition, what is the stockholders’ equity of GHW one year after acquisition?

c. What was GHW’s profit margin (percentage)

Answer 1

A) given net income =$1. 2 million

Investment amount =$13.2 million

Hence return on investment =net income / investment amount *100

=1.2/13.2*100

=9.09%

B) given net income =1200000

Dividend distributed =200000

Hence amount transfered to shareholders equity

=net income - dividend =1200000-200000

=1000000

If the investment amount is the opening shareholders equity then

Closing shareholders equity = opening equity + amount transfered to shareholders equity

=13200000+1000000

=14200000

C) net profit margin = net income / sales *100

=1.2/9*100=13.33%

Also gross profit margin =gross profit /sales *100=

3.5/9*100=38.89%

(note : in answer b it is assumed that the opening shareholders equity is equal to invested amount, however if the amount of shareholders equity is given separately the closing amount will be opening shareholders equity + amount transfered to shareholders equity(1000000))