This workout says, using the forecast information given below, build the proforma income statement So let's have read through the question and as we go through each item we come to let's decide how that's going to affect the income statement So we start off, Modena is planning to offer to buy 100% of Genoa and wants to understand what the proforma income statement might look like for the following 12 months Current assumptions involve using 200 million of balance sheet cash So how's that going to affect our income statements? Well that's going to affect our interest income, that will go down Next up, it involves an issuance of debt of 1,500 million (that will mean our interest expense goes up) And an equity issuance of a 1,000 million; that won't have an impact on our income statement but it would affect your earnings per share if you were asked to calculate that Forecast interest rates are 5.5% for deal date and 1% for cash Great! That's going to help us calculate the interest income and interest expense adjustments Next up, SG&A (selling, general and admin) synergies are expected to be 20 million per annum Great! So that's going to mean our SG&A costs come down and our profits go up Deal goodwill is expected to be 960 million Well that doesn't affect our income statement unless there's going to be amortization on that The tax rate is 25%, so each transaction effect that we're going to put into the income statement is going to affect the tax So let's start consolidating the income statement with those transaction effects And we start with synergies Synergies, the figure was 20 so we're going to put that into our SG&A line So SG&A will come down by 20 That's going mean my profits go up and my tax goes up and I know it's going to be 25% tax on that So my tax expense will go up by 5, 25% on the 20 Next up, financing, we had a few items here My interest income was going to be affected because we were going to be spending cash So 200 of cash was being spent. That was earning an interest income of 1%, that's been lost so interest income goes down Interest expense was affected by the new debt, the new debt was 1,500 million And the cost of that 5.5% Now think of these two together, interest income going down is bad for profits and interest expense going up is also bad for profits If they're both bad for profits (profits go down), that means that your tax will also go down (both going in the same direction) So the calculation here is we need to make them both negative So I got the negative 2 subtract the 82.5 means profits go down 84.5 I times that by 25% to get to 21.1, tax reduces 21.1 Last up, I now need to combine my income statements so I now add across Modena sales plus Genoa sales plus any transaction effects I now do exactly the same for each of the line items down And we now get to our consolidated income statements, which has net income of 989.0