Question

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

	Firm X			Firm Y
Total earnings	$	97,000		$	23,000
Shares outstanding		54,000			19,000
Per-share values:
Market	$	54		$	16
Book	$	13		$	5

Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $4 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

With the purchase method, the assets of the combined firm will be the book value of Firm X, the acquiring company, plus the market value of Firm Y, the target company, so:

Assets from X = 54,000($13) = $702,000 (book value)

Assets from Y = 19,000($16) = $304,000 (market value)

The purchase price of Firm Y is the number of shares outstanding times the sum of the current stock price per share plus the premium per share, so:

Purchase price of Y = 19,000($16 + 4) = $380,000

The goodwill created will be:

Goodwill = $380,000 – 304,000 = $76,000

And the total asset of the combined company will be:

Total assets XY = Total equity XY = $702,000 + 304,000 + 76,000 = $1,082,000

Assets from X	$702,000
Assets from Y	304,000
Goodwill	76,000
Total Assets XY	$1,082,000