Below are the financial statements for Arden Cosmetics and Pia's Perfume. $$\begin{array} { | l | r | r | }
\hline & \begin{array} { c }
\text { Arden } \
\text { Cosmetics } \
\text { Balance Sheet } \
\text { as of 12/31/06 } \
\text { (in millions) }
\end{array} & \begin{array} { c }
\text { Pia's } \
\text { Perfume } \
\text { Balance } \
\text { Sheet as of } \
\mathbf { 1 2 / 3 1 / 0 6 } \text { (in } \
\text { millions) }
\end{array} \
\hline \text { Assets } & & \
\hline \text { Current Assets } & \$ 9,000 & \$ 2,000 \
\hline \text { Property, Plant and Equipment } & 10,000 & 400 \
\hline \text { Total Assets } & \$ 19,000 & \$ 2,400 \
\hline & & \
\hline \text { Liabilities and Stockholders' } & & \
\text { Equity } & & \
\hline \text { Current Liabilities } & \$ 7,000 & \$ 600 \
\hline \text { Long-term Debt } & 2,000 & 600 \
\hline \text { Deferred Taxes } & 2,000 & \
\hline \text { Stockholders' Equity } & 8,000 & \$ 1,200 \
\hline & \$ 19,000 & \$2,400\
\hline
\end{array}$$

Arden is considering two alternative approaches to making the acquisition of Pia: share-for-share exchange or cash purchase. Assume the following: - The $\$ 6$ billion dollar cost of purchasing Pia at $\$ 30$ per share would be financed by debt with a 10 percent interest rate.
- All assets and liabilities of Pia have fair market values equal to their balance sheet values except property, plant and equipment, which have a fair market value of $\$ 2.4$ billion. Pia depreciates its property, plant, and equipment over 10 years using the straight-line method.
- The marginal tax rate is 40 percent.
Part a.
Assume Arden uses a share-for-share exchange to acquire Pia and accounts for the transaction as a pooling-of-interests:
i. Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.
ii. Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.
Part b.
Assume Arden pays $30 cash per share to acquire 100 percent of the common stock of Pia and accounts for the transaction as a purchase.
i. Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.
ii. Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.

Question

Below are the financial statements for Arden Cosmetics and Pia's Perfume. $$\begin{array} { | l | r | r | } 
\hline & \begin{array} { c } 
\text { Arden } \
\text { Cosmetics } \
\text { Balance Sheet } \
\text { as of 12/31/06 } \
\text { (in millions) }
\end{array} & \begin{array} { c } 
\text { Pia's } \
\text { Perfume } \
\text { Balance } \
\text { Sheet as of } \
\mathbf { 1 2 / 3 1 / 0 6 } \text { (in } \
\text { millions) }
\end{array} \
\hline \text { Assets } & & \
\hline \text { Current Assets } & \$ 9,000 & \$ 2,000 \
\hline \text { Property, Plant and Equipment } & 10,000 & 400 \
\hline \text { Total Assets } & \$ 19,000 & \$ 2,400 \
\hline & & \
\hline \text { Liabilities and Stockholders' } & & \
\text { Equity } & & \
\hline \text { Current Liabilities } & \$ 7,000 & \$ 600 \
\hline \text { Long-term Debt } & 2,000 & 600 \
\hline \text { Deferred Taxes } & 2,000 &  \
\hline \text { Stockholders' Equity } & 8,000 & \$ 1,200 \
\hline & \$ 19,000 & \$2,400\
\hline
\end{array}$$ 
  
Arden is considering two alternative approaches to making the acquisition of Pia: share-for-share exchange or cash purchase. Assume the following: - The $\$ 6$ billion dollar cost of purchasing Pia at $\$ 30$ per share would be financed by debt with a 10 percent interest rate.
- All assets and liabilities of Pia have fair market values equal to their balance sheet values except property, plant and equipment, which have a fair market value of $\$ 2.4$ billion. Pia depreciates its property, plant, and equipment over 10 years using the straight-line method.
- The marginal tax rate is 40 percent. 
Part a.
Assume Arden uses a share-for-share exchange to acquire Pia and accounts for the transaction as a pooling-of-interests:
i. Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.
ii. Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.
Part b.
Assume Arden pays $30 cash per share to acquire 100 percent of the common stock of Pia and accounts for the transaction as a purchase.
i. Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.
ii. Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.

Quizplus · Accepted Answer

The Answer of Below are the financial statements for Arden Cosmetics and Pia's Perfume. $$\begin{array} { | l | r | r | } 
\hline & \begin{array} { c } 
\text { Arden } \
\text { Cosmetics } \
\text { Balance Sheet } \
\text { as of 12/31/06 } \
\text { (in millions) }
\end{array} & \begin{array} { c } 
\text { Pia's } \
\text { Perfume } \
\text { Balance } \
\text { Sheet as of } \
\mathbf { 1 2 / 3 1 / 0 6 } \text { (in } \
\text { millions) }
\end{array} \
\hline \text { Assets } & & \
\hline \text { Current Assets } & \$ 9,000 & \$ 2,000 \
\hline \text { Property, Plant and Equipment } & 10,000 & 400 \
\hline \text { Total Assets } & \$ 19,000 & \$ 2,400 \
\hline & & \
\hline \text { Liabilities and Stockholders' } & & \
\text { Equity } & & \
\hline \text { Current Liabilities } & \$ 7,000 & \$ 600 \
\hline \text { Long-term Debt } & 2,000 & 600 \
\hline \text { Deferred Taxes } & 2,000 &  \
\hline \text { Stockholders' Equity } & 8,000 & \$ 1,200 \
\hline & \$ 19,000 & \$2,400\
\hline
\end{array}$$ 
  
Arden is considering two alternative approaches to making the acquisition of Pia: share-for-share exchange or cash purchase. Assume the following: - The $\$ 6$ billion dollar cost of purchasing Pia at $\$ 30$ per share would be financed by debt with a 10 percent interest rate.
- All assets and liabilities of Pia have fair market values equal to their balance sheet values except property, plant and equipment, which have a fair market value of $\$ 2.4$ billion. Pia depreciates its property, plant, and equipment over 10 years using the straight-line method.
- The marginal tax rate is 40 percent. 
Part a.
Assume Arden uses a share-for-share exchange to acquire Pia and accounts for the transaction as a pooling-of-interests:
i. Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.
ii. Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.
Part b.
Assume Arden pays $30 cash per share to acquire 100 percent of the common stock of Pia and accounts for the transaction as a purchase.
i. Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.
ii. Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.

Below Are the Financial Statements for Arden Cosmetics and Pia's