arden is considering two alternative approaches to making the acquisition of Pia: share-for-share exchange or cash purchase. Assume the following:

The $6 billion cost of purchasing Pia at $30 per share would be financed by debt with a 10%interest rate.

All asset and liabilities of Pia have fair market value equal to their balance sheet values expect property, plant, and equipment, which have a fair market value of $2.4 billion. Pia depreciates its property, plant, and equipment over 10 years using the straight line method.

The marginal tax rate is 40%.

Part a.

Assume Arden uses a share-for-share exchange to acquire Pia and accounts for the transaction as a pooling-of-interests:

i. Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.

ii. Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.

Part b.

Assume Arden pays $30 cash per share to acquire 100 percent of the common stock of Pia and accounts for the transaction as a purchase.

i. Prepare a pro forma December 31, 2006 balance sheet for Arden reflecting the acquisition and calculate the resulting book value per share.

ii. Prepare a pro forma estimated 2007 income statement for Arden reflecting the acquisition, and calculate the resulting earnings per share.