The Plank Company surrenders $5,000,000 cash plus 250,000 shares of 2 its own $l par value stock worth $10,000,000 for Stud Company, in a statutory merger. Management of Plank also makes the following guarantees to the former shareholders of Stud:
1. If total earnings from continuing operations of the combined entity exceed $2,000,000 over the next two years, additional shares of Plank will be issued to the former shareholders of Stud. Sufficient shares will be issued so that the market value of the additional shares equals the amount by which total earnings exceed $2,000,000. In no case, however, will additional shares having a market value in excess of $500,000 be issued to satisfy this provision. Plank's management expects the following outcomes related to this earnings contingency:
Value of additional shares issued at the end of two years Probability
$200,000 ................................................................ 0.25
400,000 .................................................................. 0.40
500,000 .................................................................. 0.35
If the total market value of the original shares issued to Stud is less than $ 10,000,000 at the end of two years, Plank will issue sufficient additional shares to the former owners of Stud in order to restore the market value of all Plank shares issued in the acquisition to $10,000,000. Plank's management expects the following outcomes related to this contingency:
Value of originally issued shares at the end of two years Probability
$ 6,000,000 ................................................................... 0.10
9,000,000 ..................................................................... 0.20
12,000,000 .................................................................... 0.70
Stud has the following assets and liabilities reported on its balance sheet at the date of acquisition:
DATE
Question answered on Jul 22, 2018
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Solution~000590317.zip (18.37 KB)