Question

You are considering the purchase of all outstanding preferred and common stock of Finex, Inc., for $700,000 on January 2, Year 2. Finex’s financial statements for Year 1 are reproduced below:
FINEX, INC.
Balance Sheet
As of December 31, Year 1
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,000
U.S. government bonds. . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 230,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Buildings, net(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,000
Equipment, net(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,000
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $990,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,000
Notes payable, current . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Bonds payable, due Year 12(c). . . . . . . . . . . . . . . . . . . . . 200,000
Preferred stock, 6%, $100 par . . . . . . . . . . . . . . . . . . . . 100,000
Common stock, $100 par . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Paid-in capital in excess of par. . . . . . . . . . . . . . . . . . . . 43,000
Retained earnings(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000
Total liabilities and equity. . . . . . . . . . . . . . . . . . . . . . . . $990,000
Income Statement
For Year Ended December 31, Year 1
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $860,000
Cost of good sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,000
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314,000
Selling and administrative expenses. . . . . . . . . . . . . . . . 240,000
Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,000
Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,000

You need to adjust net income to estimate the earnings potential of an acquisition. The company uses the FIFO method of inventory valuation and all inventories can be sold without loss. With the change in ownership you expect an additional 5% of net accounts receivable to be uncollectible. You assume sales and all remaining financial relations are constant.

Required:
a. What reported value would be individually assigned to land, buildings, and equipment after the proposed purchase assuming that we allocate the excess purchase price to these three assets in proportion to their respective book values on the Year 1 balance sheet? (This implicitly assumes that these assets are undervalued by this amount.)
b. Prepare a balance sheet for Finex, Inc., immediately after your proposed purchase.
c. Estimate Finex, Inc.’s net operating income for Year 2 under your ownership.
d. Assuming your minimum required ratio of net operating income to net sales is 8%, should you purchase Finex, Inc.?



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  • CreatedJanuary 22, 2015
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