On 12/12/06, a leveraged buyout occurred for Oldco, whereby it became a subsidiary of Newco. Information concerning the leveraged buyout follows:
a. Oldco has 10,000 shares of common stock outstanding.
b. Management, which owned 500 shares of Oldco before the leveraged buyout (at a collective individual cost of $14,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 40% ownership interest in Newco).
c. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
d. Newco borrowed $500,000 from a financial institution.
e. Newco gave $600,000 cash and 500 shares of Newco common stock to the nonmanagement shareholders of Oldco for the shareholders' entire ownership interest in Oldco (9,500 shares).
f. Oldco's fixed assets are undervalued by $400,000.
g. Oldco's stockholders' equity was $100,000 just before the leveraged buyout.
Required:
a. Calculate Newco's total cost of its investment in Oldco.
b. Calculate the change in basis for the fixed assets.
c. Calculate the goodwill paid for.

Question

On 12/12/06, a leveraged buyout occurred for Oldco, whereby it became a subsidiary of Newco. Information concerning the leveraged buyout follows:
a. Oldco has 10,000 shares of common stock outstanding.
 b. Management, which owned 500 shares of Oldco before the leveraged buyout (at a collective individual cost of $14,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 40% ownership interest in Newco).
 c. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
 d. Newco borrowed $500,000 from a financial institution.
 e. Newco gave $600,000 cash and 500 shares of Newco common stock to the nonmanagement shareholders of Oldco for the shareholders' entire ownership interest in Oldco (9,500 shares).
 f. Oldco's fixed assets are undervalued by $400,000.
 g. Oldco's stockholders' equity was $100,000 just before the leveraged buyout.
 Required:
 a. Calculate Newco's total cost of its investment in Oldco.
 b. Calculate the change in basis for the fixed assets.
 c. Calculate the goodwill paid for.

Quizplus · Accepted Answer

The Answer of On 12/12/06, a leveraged buyout occurred for Oldco, whereby it became a subsidiary of Newco. Information concerning the leveraged buyout follows:
a. Oldco has 10,000 shares of common stock outstanding.
 b. Management, which owned 500 shares of Oldco before the leveraged buyout (at a collective individual cost of $14,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 40% ownership interest in Newco).
 c. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
 d. Newco borrowed $500,000 from a financial institution.
 e. Newco gave $600,000 cash and 500 shares of Newco common stock to the nonmanagement shareholders of Oldco for the shareholders' entire ownership interest in Oldco (9,500 shares).
 f. Oldco's fixed assets are undervalued by $400,000.
 g. Oldco's stockholders' equity was $100,000 just before the leveraged buyout.
 Required:
 a. Calculate Newco's total cost of its investment in Oldco.
 b. Calculate the change in basis for the fixed assets.
 c. Calculate the goodwill paid for.

On 12/12/06, a Leveraged Buyout Occurred for Oldco, Whereby It