In this workout Olbia is planning to offer to buy 75% of Cagliari and wants to understand what the proforma income statement might look like for the following 12 months Current assumptions involve using 1,180 of balance sheet cash An issuance of debt of 3,500 and an equity issuance of 3,750 Forecast interest rates are 6.5% for deal debt and 1.25% for cash Synergies of 56 million per annum are expected to be realized by cutting Cagliari SG&A costs Looking back at those last three items, the two interest rates and the SG&A synergies, they are going to impact on the income statements Deal goodwill is expected to 1,500 (that's not going to impact the income statement at all) The tax rate is 30% (that is going to affect the income statement) Using the forecast information given below, build the proforma income statement So we have Olbia (the acquirer's income statement) and Cagliari's and then we've got some consolidation effects The synergies, the financing and that then gets us to our combo I want to start by calculating the combo and that's going to be investor plus investee plus the consolidation effects I'm going to copy that down to the individual line items But I won't copy into the subtotals, I need to do those subtotals individually So sales minus COGS is gross profit So the first thing we need to do is start going through our consolidation effects, the first of which is synergies We were told that our SG&A synergies were going to be 56, that's going to mean our SG&A costs go down Next up we had the financing, the balance sheet cash being used is going to lead to less interest income So it was 1,180 of cash times the 1.25% of interest that's going to be lost And because it's going to be lost, my interest income goes down as a negative so I times by minus 1 After that, there's going to be extra interest expense due to the extra deal debt The extra deal debt was 3,500 and that's going to cost us 6.5% interest. That will make my interest expense go up (so it's a positive) Last up I need to the tax effect on each of these Well firstly SG&A, that's making my SG&A go down but it's making my profit go up and if profit goes up tax has to go up as well So I'll times that by the tax rate of 30% But I'm going to times it by minus 1 to make sure it's a positive, to make sure tax goes up The tricky one, comes with our interest income and interest expense I need to work out which way these are going. Interest income down means profit goes down, tax goes down But interest expense up will also means profit down, tax down. So they're both meaning tax goes down So I'm going to start by taking the negative 14.8 and then subtracting 227.5, giving me roughly 240 negative I'll then times the both of them by 30% to get me to my tax expense decrease of 72.7 So my combo columns are almost all finished now The only thing I need to do now is I need to say "oops hang on, we've just added 100% of sales from the target, 100% of COGs from the target" But we didn't buy 100%, we only bought 75% So some of this net income is going to be due to the parent shareholders But some of it is going to be due away to the NCI (the non-controlling interests). So how do we calculate that? Well I know it's going to be 25% and to start with it's going to be 25% of Cagliari's net income But are there any other items? Yes, yes indeed there are I'm going to assume that synergies occur in Cagliari. So that means that my profits go up in Cagliari initially by 56 So I'm going to subtract the negative 56 to add 56 However net income will go down due to the tax on that, so I need to subtract off the tax of 16.8 (again times by 25%) So I start with 25% of net income, I add on the 25% of synergies and I subtract off 25% of the tax Getting me to an ending NCI of 181.8