In this workout we're told Acquirer company bought 100% of Target company and closed the deal on August 31st Now that's going to create a stub period, that means the acquirer company only gets the last four months of the year from the target company's income statement Carrying on, Acquirer company reports to a December year end (the last four months) The financing involved using 300 million of balance sheet cash, an issuance of debt of 1,500 million and an equity issuance of 2,400 million The cash and debt will lead to interest income and interest debt changing on the income statement We're then given interest rates, we're told there are SG&A synergies of 10 million per annum and there's deal goodwill and a tax rate No adjustments have yet been made as a result of the deal and we're asked to complete the table to produce the consolidated income statements So the first thing we need to do is come up with some headings, our first one is to change that target column into a stub period column I then want to work out what other consolidation effects will occur We're gonna have consolidation effects arising from the synergies, from the cash, from the debt And lastly, we'll put it altogether to get to our combo or consolidated set of accounts Now I'm going to come up with my combo column first That means I want to sum together all of the consolidation effects (those three there) Then I want to consolidate the target stub period that we're allowed to include Plus the acquirer So I'll do that for sales, I'll copy that down to COGS, SG&A, interest income/interest expense and tax expense The other items are going to be subtotals, so for instance gross profit will be sales minus COGS Operating profit is gross profit minus SG&A. Profit before tax is operating profit plus interest income minus interest expense And net income, profit before tax minus tax expense So the first thing I want to do is work on that stub period, I want to take the target full year sales and then times that by 4/12 We're only getting the last four months of the year Again I'm going to copy that down to sales, SG&A, interest income/interest expense and the tax expense I'll then fill in the subtotals Now let's move on to those consolidation effects, the first one we had was the synergies The synergies are going to affect SG&A and they're going to make the synergies go down by 10 However that's for a full year and remember we're only getting 4/12 of that, so I'll times that by 4/12 And because it's going to make SG&A go down, I'm going to times that by minus 1 So when you add across it will be included as a negative There we go, makes SG&A go down Next up, we had cash being used. If cash is being used, that means the interest income earned from cash will go down The amount of cash being used was 300 and the interest income being earned was 1.5% but again that was only over 4/12 of the year I want to make that a negative because my interest income has gone down Next is the affect of debt Debt will mean that incur extra interest expense, so the extra debt was 1,500 million The cost of it was 6% but we'll only have to pay it for 4/12 of the first year So my interest expense goes up (that's our positive), next up I need the tax effect of all of these So the tax rate was 25%, now if I think here my synergies here have made my SG&As go down They made my profits go up, that should make my tax go up But at the moment it's a negative, so I'll times it by minus one, make it a positive. There we go! The effect of cash was interest income down, so I can times that by 25% and my tax has gone down Last up the effect of debt I can times that by 25%, but again the effect of debt made my interest go up which makes my profit go down (should make my tax go down) And at the moment it's a positive so I need to change that to a negative All of our figures then consolidated to the right and we then get to our eventual net income of 1,166.4