- Purchase accounting method for mergers and its effect on cash flows and EPS. Merger: Merger occurs when the shareholders of two or more companies pool the resources of their company into one separate legal entity and as a result a new company comes into existence. Merger is basically the result of merge the two or more companies into one.

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Answer 1

Question

Chapter 29, Problem 1CQ

Summary Introduction

To explain:-Purchase accounting method for mergers and its effect on cash flows and EPS.

Merger:

Merger occurs when the shareholders of two or more companies pool the resources of their company into one separate legal entity and as a result a new company comes into existence. Merger is basically the result of merge the two or more companies into one.

Expert Solution & Answer

Answer to Problem 1CQ

In the purchase accounting method the assets of the targeted company has to be recorded into the current market value in the books of acquiring company and goodwill assets account has to be created. Goodwill is the difference of current market value and purchase price.
There will be no effect on cash flows.
The EPS (earning per share) will reduce.

Explanation of Solution

Goodwill is an intangible asset that cannot be touched or seen but it has some value because of the brand image of the company. It is a long term assets but it is never depreciated. When the value of acquired assets becomes lower than its original cost then the goodwill has to be written off.
It does not have any effect on cash flow because Goodwill has no cash flow consequences.
The EPS will get reduced because the number of outstanding shares will be increased and the amount of goodwill that has to be written off will decrease the earnings of the company.

Conclusion

There is no effect on cash flows and the EPS will get reduce.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

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Answer 2

Question

Chapter 29, Problem 1CQ

Summary Introduction

To explain:-Purchase accounting method for mergers and its effect on cash flows and EPS.

Merger:

Merger occurs when the shareholders of two or more companies pool the resources of their company into one separate legal entity and as a result a new company comes into existence. Merger is basically the result of merge the two or more companies into one.

Expert Solution & Answer

Answer to Problem 1CQ

In the purchase accounting method the assets of the targeted company has to be recorded into the current market value in the books of acquiring company and goodwill assets account has to be created. Goodwill is the difference of current market value and purchase price.
There will be no effect on cash flows.
The EPS (earning per share) will reduce.

Explanation of Solution

Goodwill is an intangible asset that cannot be touched or seen but it has some value because of the brand image of the company. It is a long term assets but it is never depreciated. When the value of acquired assets becomes lower than its original cost then the goodwill has to be written off.
It does not have any effect on cash flow because Goodwill has no cash flow consequences.
The EPS will get reduced because the number of outstanding shares will be increased and the amount of goodwill that has to be written off will decrease the earnings of the company.

Conclusion

There is no effect on cash flows and the EPS will get reduce.

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Answer 3

Question

Chapter 29, Problem 1CQ

Summary Introduction

To explain:-Purchase accounting method for mergers and its effect on cash flows and EPS.

Merger:

Merger occurs when the shareholders of two or more companies pool the resources of their company into one separate legal entity and as a result a new company comes into existence. Merger is basically the result of merge the two or more companies into one.

Expert Solution & Answer

Answer to Problem 1CQ

In the purchase accounting method the assets of the targeted company has to be recorded into the current market value in the books of acquiring company and goodwill assets account has to be created. Goodwill is the difference of current market value and purchase price.
There will be no effect on cash flows.
The EPS (earning per share) will reduce.

Explanation of Solution

Goodwill is an intangible asset that cannot be touched or seen but it has some value because of the brand image of the company. It is a long term assets but it is never depreciated. When the value of acquired assets becomes lower than its original cost then the goodwill has to be written off.
It does not have any effect on cash flow because Goodwill has no cash flow consequences.
The EPS will get reduced because the number of outstanding shares will be increased and the amount of goodwill that has to be written off will decrease the earnings of the company.

Conclusion

There is no effect on cash flows and the EPS will get reduce.

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Answer 4

Question

Chapter 29, Problem 1CQ

Summary Introduction

To explain:-Purchase accounting method for mergers and its effect on cash flows and EPS.

Merger:

Merger occurs when the shareholders of two or more companies pool the resources of their company into one separate legal entity and as a result a new company comes into existence. Merger is basically the result of merge the two or more companies into one.

Expert Solution & Answer

Answer to Problem 1CQ

In the purchase accounting method the assets of the targeted company has to be recorded into the current market value in the books of acquiring company and goodwill assets account has to be created. Goodwill is the difference of current market value and purchase price.
There will be no effect on cash flows.
The EPS (earning per share) will reduce.

Explanation of Solution

Goodwill is an intangible asset that cannot be touched or seen but it has some value because of the brand image of the company. It is a long term assets but it is never depreciated. When the value of acquired assets becomes lower than its original cost then the goodwill has to be written off.
It does not have any effect on cash flow because Goodwill has no cash flow consequences.
The EPS will get reduced because the number of outstanding shares will be increased and the amount of goodwill that has to be written off will decrease the earnings of the company.

Conclusion

There is no effect on cash flows and the EPS will get reduce.

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Answer 5

Chapter 29, Problem 1CQ

Summary Introduction

To explain:-Purchase accounting method for mergers and its effect on cash flows and EPS.

Merger:

Merger occurs when the shareholders of two or more companies pool the resources of their company into one separate legal entity and as a result a new company comes into existence. Merger is basically the result of merge the two or more companies into one.

Expert Solution & Answer

Answer to Problem 1CQ

In the purchase accounting method the assets of the targeted company has to be recorded into the current market value in the books of acquiring company and goodwill assets account has to be created. Goodwill is the difference of current market value and purchase price.
There will be no effect on cash flows.
The EPS (earning per share) will reduce.

Explanation of Solution

Goodwill is an intangible asset that cannot be touched or seen but it has some value because of the brand image of the company. It is a long term assets but it is never depreciated. When the value of acquired assets becomes lower than its original cost then the goodwill has to be written off.
It does not have any effect on cash flow because Goodwill has no cash flow consequences.
The EPS will get reduced because the number of outstanding shares will be increased and the amount of goodwill that has to be written off will decrease the earnings of the company.

Conclusion

There is no effect on cash flows and the EPS will get reduce.

Answer 6

Chapter 29, Problem 1CQ

Summary Introduction

To explain:-Purchase accounting method for mergers and its effect on cash flows and EPS.

Merger:

Merger occurs when the shareholders of two or more companies pool the resources of their company into one separate legal entity and as a result a new company comes into existence. Merger is basically the result of merge the two or more companies into one.

Expert Solution & Answer

Answer to Problem 1CQ

In the purchase accounting method the assets of the targeted company has to be recorded into the current market value in the books of acquiring company and goodwill assets account has to be created. Goodwill is the difference of current market value and purchase price.
There will be no effect on cash flows.
The EPS (earning per share) will reduce.

Explanation of Solution

Goodwill is an intangible asset that cannot be touched or seen but it has some value because of the brand image of the company. It is a long term assets but it is never depreciated. When the value of acquired assets becomes lower than its original cost then the goodwill has to be written off.
It does not have any effect on cash flow because Goodwill has no cash flow consequences.
The EPS will get reduced because the number of outstanding shares will be increased and the amount of goodwill that has to be written off will decrease the earnings of the company.

Conclusion

There is no effect on cash flows and the EPS will get reduce.

Answer 7

Chapter 29, Problem 1CQ

Summary Introduction

To explain:-Purchase accounting method for mergers and its effect on cash flows and EPS.

Merger:

Merger occurs when the shareholders of two or more companies pool the resources of their company into one separate legal entity and as a result a new company comes into existence. Merger is basically the result of merge the two or more companies into one.

Answer 8

Expert Solution & Answer

Answer to Problem 1CQ

In the purchase accounting method the assets of the targeted company has to be recorded into the current market value in the books of acquiring company and goodwill assets account has to be created. Goodwill is the difference of current market value and purchase price.
There will be no effect on cash flows.
The EPS (earning per share) will reduce.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

Goodwill is an intangible asset that cannot be touched or seen but it has some value because of the brand image of the company. It is a long term assets but it is never depreciated. When the value of acquired assets becomes lower than its original cost then the goodwill has to be written off.
It does not have any effect on cash flow because Goodwill has no cash flow consequences.
The EPS will get reduced because the number of outstanding shares will be increased and the amount of goodwill that has to be written off will decrease the earnings of the company.

Answer 12

Conclusion

There is no effect on cash flows and the EPS will get reduce.

Answer 13

Ch. 29 - Prob. 1CQ Ch. 29 - Prob. 2CQ Ch. 29 - Prob. 3CQ Ch. 29 - Prob. 4CQ Ch. 29 - Prob. 5CQ Ch. 29 - Prob. 6CQ Ch. 29 - Economies of Scale What does it mean to say that a...Ch. 29 - Prob. 8CQ Ch. 29 - Prob. 9CQ Ch. 29 - Prob. 10CQ

Answer to Problem 1CQ

Explanation of Solution

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