Question

QUESTION 24 Today, Company "A" purchases 100% of Company B Common Stock and assumes all of the outstanding Company B Liabilities. Immediately Before the acquisition, Company B had reported the following Balance Sheet Totals and supplemental information: • Physical (non-financial)Liabilities = $42,680.000 • Face Value of Outstanding Bond Liabilities =$640.000.000 • Time to Maturity for Outstanding Bonds = 18 years • Annual Coupon Rate for Bonds with annual coupon payments = 5% • Cost of Debt for Company B = 4% • Cost of Debt for Company A = 6.5% Required: Compute the value of the Company B Bonds that would flow into the Company A Balance Sheet immediately after the acquisition. Do not use the dollar sign and round to the nearest whole dollar. 721019501

Answer 1

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Answer:

We use the following formula for calculating the total value of liabilties that would flow into the balance sheet of Company Y

=> Bond Value + Total physical liabilities

Now for Value of bonds, we take the sum of present value of all future coupons and the prinicipal par value

= [640,000,000 x 0.05 x Present Value Annuity Factor (4%, 18 years)] + [640,000,000 x Present Value Factor(4%, 18 years)]

where 5% is the coupon rate and 640,000,000 is the face value

=> Value of bonds =  405,097,600 + 315904000 = = $721001600

Now we add it for the value of liabilities calculation

=> $721001600 + $42,680,000 = $763,681,600