MERGERS AND ACQUISITIONS (M-&-A) MODELING EXAM|| WALL STREET PREP: QUESTIONS AND COMPLETE SOLUTIONS
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Course
Wall Street Prep
Institution
Wall Street Prep
QUESTION 1
During acquisition accounting, a company's intangible assets were valued between $50m and $60m for both book and tax purposes. The corporation amortizes its definite-lived intangible assets. For both bookkeeping and tax purposes, use a straight-line basis spanning 15 years. Also, imagi...
MERGERS AND ACQUISITIONS (M-&-A)
MODELING EXAM ANSWERS FROM WALL
STREET PREP –QUESTIONS AND
COMPLETE SOLUTIONS
,QUESTION 1
During acquisition accounting, a company's intangible assets were valued between $50m and $60m for
both book and tax purposes. The corporation amortizes its definite-lived intangible assets. For both
bookkeeping and tax purposes, use a straight-line basis spanning 15 years. Also, imagine the acquirer
has a tax rate of 40%.
Assume that the purchase price exceeds the fair value of the net assets. How does the write-up affect
the recorded goodwill in the acquisition?
A decline in goodwill of $10m
An increase in goodwill of $6m
A decline in goodwill of $6m
An increase in goodwill of $10m
No impact on goodwill
QUESTION 2
Intangible assets of a company bought were written up for book reasons from a pre-deal value of
$50m to $60m, but not for tax purposes, where the tax basis remained $50m. Assume the target has
a set lifespan. Intangible assets are amortized straight-line over 15 years for both book and tax
purposes. Assume that the acquirer's tax rate is 40%.
What is the value of the Deferred Tax Liabilities generated as a result of the book write-up and no tax
step up? No new
Deferred Tax Liabilities
New Deferred Tax Liabilities of $4m
New Deferred Tax Liabilities of$6m New Deferred Tax Liabilities of $10m
New Deferred Tax Liabilities of $50m
QUESTION 3
The pre-deal book value of an acquired company's intangible assets was written up to $60 million for
book reasons, but not for tax purposes, where the tax basis remained at $50 million. For both book
and tax purposes, assume that the target's definite lived intangible assets are amortized over 15 years
on a straight-line basis. Assume that the acquirer's tax rate is 40% as well.
What effect does the book write-up and no tax step up have on goodwill?
No impact on goodwill
Goodwill is lower by $6m
Goodwill is higher by $6m
Goodwill is higher by$4m
QUESTION 4
It's January 1, 2017. Glocabe Networks plans to acquire competitor's Jupiter Networks through a stock
purchase target. The following details are available:
, January 1, 2017 Glocabe Jupiter
Current share price $30.00 $50.00
Offer price $60.00
Diluted shares 4.5 2.2
outstanding (mm)
2017 GAAP earnings per $3.12 $4.51
share (EPS) forecast
Glocabe and Jupiter's diluted share outstanding has not changed since January 1, 2016. You may
assume that the companies pay the same tax rate.
What is the 2017 accretion/dilution in Glocabe's GAAP EPS, assuming the transaction occurred on
January 1, 2017?
$0.19
$0.96
-$0.43
-$1.54
-$0.24
QUESTION 5
The following information will be used to answer Questions 5-8. It will be repeated for each question.
It is January 1, 2017, and Pegasus is considering acquiring competitor Chimera. The following
information is provided.
($ in millions except per share data):
January 1, 2017 ($ in Pegasus Chimera
millions)
GAAP revenue $150.40 $112.00
GAAP net income $14.04 $9.92
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