Parent Manufacturing Inc. is negotiating a merger with one of its major competitors, TargetSub Manufacturing Inc. Both companies are solely owned businesses which ordinarily pay out all earnings as dividends to their respective owners at the end of each year. The merger will be achieved through an acquisition of TargetSub by Parent in two stages. On 1/1/2014 Parent will pay $60million in cash to the owner of TargetSub in exchange for 40% of TargetSub's common stock. The cash purchase will be financed with a bank loan requiring monthly interest payments at the rate of 10% per year. Principal on the bank loan is to be repaid no later than 12/31/2015 and can only be paid off on year ends. Due to its high rate of interest, the management of Parent knows that it will be prudent to pay off the loan as soon as possible -- without lowering current levels of cash reserves or altering operations. This could be done in part be forgoing the generous dividend that Parent ordinarily distributes to its owner. On 1/1/2015 Parent will complete the merger by issuing Parent Manufacturing Inc. common stock to the original owner of TargetSub in exchange for the remaining shares of TargetSub. Note that the total cost of the acquisition is $150million (= $60million/40%), meaning that Parent will have to issue $90million of stock in exchange for the remaining TargetSub shares.
Parent and TargetSub operate in a very stable and mature industry so Parent is not expecting any growth in sales following the merger. However, Parent does believe that once the merger is complete it will be able to increase prices across all product lines by 20% without any adverse effects on sales volume. Parent also believes that it will be able to reduce all salary, wages, and overhead costs 30%. Increased buying power will allow Parent to reduce raw materials costs (which account for 50% of production costs) by 10%.
Management at Parent is looking forward to a future of firing staff, gouging customers and putting the screws to its suppliers but needs to run through the numbers one last time before inking the deal. Your job is to forecast Parent Inc.'s financial performance for the years 2014 and 2015. As a starting point prepare forecasted Balance Sheets, Income Statements, and Statements of Cash Flows for Parent Inc. for 2014 and 2015. You are given the most recent Balance Sheets and Income Statements of Parent and TargetSub.
REQUIRED
Prepare forecasted Balance Sheets, Income Statements, and Statements of Cash Flow for Parent Manufacturing for years 2014 and 2015. Explain details regarding any assumptions you make to complete this task. You may also provide supporting work in the form of journal entries, consolidating entries, or the analysis of specific accounts.
INCOME STATEMENT
Parent Manufacturing, Inc.
Year Ended December 31 (in $ millions) 2013
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
Less: Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (130)
S,G&A Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32.5)
Net Income 32.5
PARENT MANUFACTURING INC.
COMPARATIVE BALANCE SHEET
($ millions)
Assets 12/31/13 12/31/12 Liabilities and OE 12/31/13 12/31/12
Cash 15 10 Accounts Payable 25 25
Accts Rec 20 20 Salaries Payable 20 20
RM Inventory 30 25 Accrued S,G&A 15 10
WIP Inventory 10 10
FG Inventory 60 55
Land 115 115
Property, Plant
& Equipment 460 460
Less: Common Stock 150 150
Accum Dep (70) (60) Retained Earnings 430 430
Total Assets 640 635 Total Liabs and OE 640 635
INCOME STATEMENT
TargetSub Manufacturing, Inc.
Year Ended December 31 (in $ millions) 2013
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Less: Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100)
S,G&A Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20)
Net Income 20
TARGETSUB MANUFACTURING INC.
COMPARATIVE BALANCE SHEET
($ millions)
Assets 12/31/13 12/31/12 Liabilities and OE 12/31/13 12/31/12
Cash 5 10 Accounts Payable 20 30
Accts Rec 15 20 Salaries Payable 15 30
RM Inventory 20 25 Accrued S,G&A 10 15
WIP Inventory 10 15
FG Inventory 40 45
Land 85 85
Property, Plant
& Equipment 200 200
Less: Common Stock 50 50
Accum Dep (180) (175) Retained Earnings 100 100
Total Assets 195 225 Total Liabs and OE 195 225