Charging Corporation and Sparking Electrical Company are competitors in the business of electrical components distribution. Sparking is the smaller firm and has attracted the attention of the management of Charging, for Sparking has taken away market share from the larger firm by increasing its sales force over the past few years. Charging is considering a takeover offer for Sparking and asked you to serve on the acquisition valuation team that will turn into due diligence team if an offer is made and accepted. Given the financial information and proposal assumptions that follows, how would you respond to (a) and (b)? Sparking Electrical Company Condensed Income Statement Previous five years (in $ million) 2009 2008 2007 2006 2005 Revenues 1,626.50 1614.10 1485.20 1380.50 1373.40 – Cost of goods sold 1,488.10 1490.90 1359.50 1271.40 1268.00 Gross profits 138.40 123.20 125.70 109.10 105.40 SG&A expenses 41.1 36.8 41.2 35 36.1 Noncash expense (depreciation & amortization) 7.3 6.7 7.1 6.6 6.4 Less : Operating expense 48.4 43.5 48.3 41.6 42.5 Operating income 90.00 79.70 77.40 67.50 62.90 – Interest expense 11.5 12 12 12 12 Earnings before taxes (EBT) 78.5 67.70 65.40 55.50 50.90 Less: Taxes paid (31%) 24.3 20.8 19.9 16.8 15.3 Net Income 54.2 46.90 45.50 38.70 35.60 Sparking Electrical Company Condensed Balance Sheet Previous Year ($ million) Item 2009 Current Asset 12.2 Fixed Asset 347.8 Total Asset 360 Current liabilities 10.1 Long Term debt 150 Total Liabilities 160.1 Shareholders' equity 199.9 Total Liabilities and equity 360 Assumptions i) Sparking would become a wholly owned subsidiary of Charging. ii) Revenues will continue to grow to 4.3% for the next five years and will level off at 4% thereafter. iii) The cost of goods sold will represent 95% of revenue going forward. iv) Sales-force layoff will reduce Sales, general and Administration (SG&A) expenses to $22 million next year, with a 2% growth rate going forward. v) These layoff and other restructuring charges are expected to result in expensed restructuring charges of $30 million, $15 million, and $5 million (respectively) over the three years period. vi) Noncash expenses are expected to remain around $7 million going forward. vii) Interest expense are expected to remain around $11.5 million going forward A tax rate of 31% is assumed going forward. ix) Charging’s cost of equity is 12% x) Sparking’s current market capitalization is $250 million. xi) Charging will offer Sparking a takeover premium of 20% over current market capitalization. QUESTIONS Make your recommendation about whether or not the acquisition should be pursued. If Charging has 30 million shares outstanding that are currently trading at $60.00, then how many shares should Charging offer for every share of Sparking?

Charging Corporation and Sparking Electrical Company are competitors in the business of electrical components distribution. Sparking is the smaller firm and has attracted the attention of the management of Charging, for Sparking has taken away market share from the larger firm by increasing its sales force over the past few years. Charging is considering a takeover offer for Sparking and asked you to serve on the acquisition valuation team that will turn into due diligence team if an offer is made and accepted. Given the financial information and proposal assumptions that follows, how would you respond to (a) and (b)? Sparking Electrical Company Condensed Income Statement Previous five years (in $ million) 2009 2008 2007 2006 2005 Revenues 1,626.50 1614.10 1485.20 1380.50 1373.40 – Cost of goods sold 1,488.10 1490.90 1359.50 1271.40 1268.00 Gross profits 138.40 123.20 125.70 109.10 105.40 SG&A expenses 41.1 36.8 41.2 35 36.1 Noncash expense (depreciation & amortization) 7.3 6.7 7.1 6.6 6.4 Less : Operating expense 48.4 43.5 48.3 41.6 42.5 Operating income 90.00 79.70 77.40 67.50 62.90 – Interest expense 11.5 12 12 12 12 Earnings before taxes (EBT) 78.5 67.70 65.40 55.50 50.90 Less: Taxes paid (31%) 24.3 20.8 19.9 16.8 15.3 Net Income 54.2 46.90 45.50 38.70 35.60 Sparking Electrical Company Condensed Balance Sheet Previous Year ($ million) Item 2009 Current Asset 12.2 Fixed Asset 347.8 Total Asset 360 Current liabilities 10.1 Long Term debt 150 Total Liabilities 160.1 Shareholders' equity 199.9 Total Liabilities and equity 360 Assumptions i) Sparking would become a wholly owned subsidiary of Charging. ii) Revenues will continue to grow to 4.3% for the next five years and will level off at 4% thereafter. iii) The cost of goods sold will represent 95% of revenue going forward. iv) Sales-force layoff will reduce Sales, general and Administration (SG&A) expenses to $22 million next year, with a 2% growth rate going forward. v) These layoff and other restructuring charges are expected to result in expensed restructuring charges of $30 million, $15 million, and $5 million (respectively) over the three years period. vi) Noncash expenses are expected to remain around $7 million going forward. vii) Interest expense are expected to remain around $11.5 million going forward A tax rate of 31% is assumed going forward. ix) Charging’s cost of equity is 12% x) Sparking’s current market capitalization is $250 million. xi) Charging will offer Sparking a takeover premium of 20% over current market capitalization. QUESTIONS Make your recommendation about whether or not the acquisition should be pursued. If Charging has 30 million shares outstanding that are currently trading at $60.00, then how many shares should Charging offer for every share of Sparking?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

	Sparking Electrical Company
	Condensed Income Statement
	Previous five years (in $ million)
	2009	2008	2007	2006	2005
Revenues	1,626.50	1614.10	1485.20	1380.50	1373.40
– Cost of goods sold	1,488.10	1490.90	1359.50	1271.40	1268.00
Gross profits	138.40	123.20	125.70	109.10	105.40
SG&A expenses	41.1	36.8	41.2	35	36.1
Noncash expense (depreciation & amortization)	7.3	6.7	7.1	6.6	6.4
Less : Operating expense	48.4	43.5	48.3	41.6	42.5
Operating income	90.00	79.70	77.40	67.50	62.90
– Interest expense	11.5	12	12	12	12
Earnings before taxes (EBT)	78.5	67.70	65.40	55.50	50.90
Less: Taxes paid (31%)	24.3	20.8	19.9	16.8	15.3
Net Income	54.2	46.90	45.50	38.70	35.60

	Sparking Electrical Company Condensed
	Balance Sheet Previous Year ($ million)

	Item	2009
	Current Asset	12.2
	Fixed Asset	347.8
	Total Asset	360
	Current liabilities	10.1
	Long Term debt	150
	Total Liabilities	160.1
	Shareholders' equity	199.9
	Total Liabilities and equity	360

Assumptions

i) Sparking would become a wholly owned subsidiary of Charging.
ii) Revenues will continue to grow to 4.3% for the next five years and will level off at 4% thereafter.

iii) The cost of goods sold will represent 95% of revenue going forward.

iv) Sales-force layoff will reduce Sales, general and Administration (SG&A) expenses to $22 million next year, with a 2% growth rate going forward.
v) These layoff and other restructuring charges are expected to result in expensed restructuring charges of $30 million, $15 million, and $5 million (respectively) over the three years period.
vi) Noncash expenses are expected to remain around $7 million going forward.

vii) Interest expense are expected to remain around $11.5 million going forward
A tax rate of 31% is assumed going forward.

ix) Charging’s cost of equity is 12%
x) Sparking’s current market capitalization is $250 million.
xi) Charging will offer Sparking a takeover premium of 20% over current market capitalization.

QUESTIONS

Make your recommendation about whether or not the acquisition should be pursued.

If Charging has 30 million shares outstanding that are currently trading at $60.00, then how many shares should Charging offer for every share of Sparking?

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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