Kronin Enterprises Ltd. is a public corporation operating a successful retail business that generates profits in excess of $700,000 annually. The company is about to acquire a wholesale business operated by KTL Ltd. A recent balance sheet for KTL is presented below.

For tax purposes, the building (class 1) has an undepreciated capital cost of $300,000, and the equipment (class 8) has an undepreciated capital cost of $350,000. With respect to the goodwill, the amount of cumulative eligible capital is $100,000.

KTL has offered to sell the assets to Kronin for the following values and payment terms:

Values:
Current assets ……………………………..	$ 100,000
Land ……………………………..	75,000
Building ……………………………..	550,000
Equipment ……………………………..	600,000
Goodwill ……………………………..	400,000
……………………………..……………………………..	$1,725,000
Terms of payment
Assumption of KTL liabilities ………………………	$ 600,000
Cash ………………………	1,125,000
………………………………………………	$1,725,000

Last year, KTL earned a pre-tax accounting profit of $220,000 after deducting $30,000 of amortization. Kronin is confident that it can achieve at least the same level of profits after acquisition. Kronin has virtually decided to purchase the assets of KTL, provided that the investment will generate a minimum acceptable return on investment of 12% after tax.

At a recent meeting, the KTL executives stated that they may want to sell the shares, rather than the assets, and do so at a price different from the asset price. They will present an offer to Kronin shortly. Kronin thinks it would be useful to learn what share price would provide the same rate of return as would be achieved after a purchase of assets. The company could then make a quick assessment of the forthcoming share price. 

Kronin is subject to a 25% corporate tax rate.

Required:

1. Assuming that an acquisition would be in the form of an asset purchase, should the purchase be made, considering Kronin’s minimum return-on-investment requirement?

2. What share price would provide Kronin with the same rate of return as on a purchase of assets? Show calculations.

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Assets S 100,000 Current assets Land (at cost) Building (at cost) Equipment (at cost) 50,000 S 400,000 700.000 1,100,000 (400,000 700,000 200,000 Accumulated amortization Goodwill (at cost) S1050.000 Liabilities and Shareholders' Equity Liabilities 600,000 Shareholders equity: Common shares S 20,000 Retained earnings 430.000 450,000 $1.050.000