ACCOUNTING-TMAN 625 Final Exam, Fall 2014

Question 5

Score
0

Medical Miracles, INC. (MMI), a medical products distributor, is
considering a proposal to make an acquisition of another company for $50
million. This acquisition would
increase their gross margin by 40% over their present gross margin. SG&A would increase by 30% with the
acquisition. A one time increase
in working capital of $1,250,000 would
immediately be needed (year 0). Assets
worth $30 million that came with the
acquisition could be depreciated using 10-year MACRS. The income and cash flow statements without
the acquisition are shown below.

To simplify things a little, assume that the book value and
salvage value at the end of year 5 are zero. (therefore there would be no
gain to be taxed).

Determine if the proposal is financially justified using the
following data and a 5-year time horizon.

Price of company
$50,000,000

Depreciable assets
$30,000,000
of purchased company

Gross Margin increase
40%
in all years

S.G.& A. Increase
30%
in all years

Working Capital Increase
$1,250,000
year 0

Income Tax Rate
13.5%

MARR
15%

10-year MACRS

Year
0
1
2
3
4
5
6
7
8
9
10
11

Percentage

10.00%
18.00%
14.40%
11.52%
9.22%
7.37%
6.55%
6.55%
6.56%
6.55%
3.28%

Depreciation

$3,000,000
$5,400,000
$4,320,000
$3,456,000
$2,766,000
$2,211,000
$1,965,000
$1,965,000
$1,968,000
$1,965,000
$984,000

Book value

$27,000,000
$21,600,000
$17,280,000
$13,824,000
$11,058,000
$8,847,000
$6,882,000
$4,917,000
$2,949,000
$984,000
$0

Present

Income Statement if
company not acquired

Years
0
1
2
3
4
5

Revenue

$100,000,000
$112,000,000
$125,440,000
$140,492,800
$157,351,936

COGS

($65,000,000)
($72,800,000)
($81,536,000)
($91,320,320)
($102,278,758)

Gross margin

$35,000,000
$39,200,000
$43,904,000
$49,172,480
$55,073,178

S.G.&A.

($10,000,000)
($11,000,000)
($12,000,000)
($13,000,000)
($14,000,000)

EBIT

$25,000,000
$28,200,000
$31,904,000
$36,172,480
$41,073,178

Income Tax

($3,375,000)
($3,807,000)
($4,307,040)
($4,883,285)
($5,544,879)

Net Income

$21,625,000
$24,393,000
$27,596,960
$31,289,195
$35,528,299

Cash Flow Statement if
company not acquired

Years
0
1
2
3
4
5

Net Income

$21,625,000
$24,393,000
$27,596,960
$31,289,195
$35,528,299

Depreciation

$0
$0
$0
$0
$0

Change in working capital

$0
$0
$0
$0
$0

Investment
$0

Cash flow
$0
$21,625,000
$24,393,000
$27,596,960
$31,289,195
$35,528,299

Solution