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

question 70

Essay

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.

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