The management of Pratt Engineering Company had agreed in principle to a proposal from Hardin Tool Company to acquire all its stock in exchange for Hardin securities. The two managements were in general agreement that Hardin would issue 100,000 shares of its authorized but unissued stock in exchange for the 40,000 shares of Pratt common stock. Hardin's investment banking firm had given an opinion that a new public offering of 100,000 shares of Hardin common stock could be made successfully at $8 per share.

Questions
1. Prepare consolidated balance sheets as of the proposed acquisition date, assuming the exchange of 100,000 shares of Hardin common stock on a purchase basis.
2. Assuming that in its first year of operations the combined company would achieve the same results of operations as the sum of the two firms' independent operations, what would be the combined company's net income and earnings per share on a pooling basis? (Assume plant and equipment life of 10 years, straight-line depreciation, and an income tax rate of 35 percent. Round results-except earnings per share-to the nearest thousand dollars.)
3. What would be the combined net income and earnings per share under (a) the preferred stock package and (b) the debenture package? Is either of these proposals preferable to the all-common-stock proposal?

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EXHIBIT 1 Condensed Balance Sheets As of the Proposed Acquisition Date (thousands of dollars) Hardin Pratt Assets Current assets Plant and equipment Total assets S 432 690 $1,122 $246 312 $558 Liabilities and Equity Current liabilities Long-term debt Common stock ($1 par) Additional paid-in capital Retained earnings Total liabilities and equity S 263 195 100 218 346 51,122 5107 10 40 94 307 S558 Condensed Income Statements For the First Year after Combination (thousands of dollars) Sales Expenses Income Income tax expense Net income 2,100 1,620 480 168 S 312 $1,500 1,120 380 133 S 247