Byron is concerned whether the investment should affect his “buy†rating on NinMount common stock. He knows NinMount could choose one of several accounting methods to report the results of its investment, but NinMount has not announced which method it will use. Byron forecasts that both companies’ 2019 financial results (excluding any merger accounting adjustments) will be identical to those of 2018.
NinMount’s and Boswell’s condensed income statements for the year ended 31 December 2018, and condensed balance sheets at 31 December 2018, are presented in Exhibits 1 and 2, respectively.
Exhibit 1:
NinMount PLC and Boswell Company Income Statements for the Year Ended 31 December 2018 (£ millions)
NinMount | Boswell | ||
Net sales | 950 | 510 | |
Cost of goods sold | (495) | (305) | |
Selling expenses | (50) | (15) | |
Administrative expenses | (136) | (49) | |
Depreciation & amortization expense | (102) | (92) | |
Interest expense | (42) | (32) | |
Income before taxes | 125 | 17 | |
Income tax expense | (50) | (7) | |
Net income | 75 | 10 |
Exhibit 2:
NinMount PLC and Boswell Company Balance Sheets at 31 December 2018 (£ millions)
NinMount | Boswell | ||
Cash | 50 | 20 | |
Receivables—net | 70 | 45 | |
Inventory | 130 | 75 | |
Total current assets | 250 | 140 | |
Property, plant, & equipment—net | 1,570 | 930 | |
Investment in Boswell | 320 | — | |
Total assets | 2,140 | 1,070 | |
Current liabilities | 110 | 90 | |
Long-term debt | 600 | 400 | |
Total liabilities | 710 | 490 | |
Common stock | 850 | 535 | |
Retained earnings | 580 | 45 | |
Total equity | 1,430 | 580 | |
Total liabilities and equity | 2,140 | 1,070 |
Note: Balance sheets reflect the purchase price paid by NinMount, but do not yet consider the impact of the accounting method choice.
Based on Byron’s forecast, if NinMount deems it has acquired control of Boswell, NinMount’s consolidated 2019 depreciation and amortization expense (in £ millions) will be closest to:
- 102.
- 148.
- 204.
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