You are a financial analyst with a major corporation, High Hopes Company. You have been assigned the task of evaluating a potential acquisition candidate, Roll-the-Dice, Inc. Selected accounting information for the two companies is presented on the next page. Information for 2003 and 2004 reports actual company results. Results for 2005 are projected from information available at the beginning of the year.
The acquisition, if it were to occur, would result in High Hopes purchasing all of the common stock of Roll-the-Dice at a price of 130 million. To finance the acquisition, High Hopes plans to issue 130 million of long-term debt at 10.7% annual interest. The debt principal would be repaid in equal installments over 10 years. The interest would be paid annually on the unpaid principal. The fair market value of Roll-the-DiceĂ˘â‚¬â„˘s identifiable assets is 107 million. The fair market value of its liabilities is 35.8 million. Goodwill from the acquisition will not be amortized. There are no intercompany transactions between High Hopes and Roll-theDice. Assume that High HopesĂ˘â‚¬â„˘ income tax rate is 34%.
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Required Prepare a summary pro forma income statement and statement of cash flows for High Hopes for 2005, assuming it acquires Roll-the-Dice at the beginning of 2005. What recommendation would you make to High HopesĂ˘â‚¬â„˘ management concerning the acquisition?