Examples that do and do not meet the 80% test. Modum Corporation was formed on January 1, 20X1, by issuing 4,000 shares of $10 par stock for $20 per share. Modum Corporation is going to engage in a leveraged buyout of Antique Company. Antique Company had the following stockholders’ equity on January 1, 20X1:
|
Common stock ($10 par, 10,000 shares outstanding) |
$100,000 |
|
Paid-in capital in excess of par |
150,000 |
|
Retained earnings |
80,000 |
|
Total equity |
$330,000 |
The fair value of Antique Company shares is $40 each. 1,000 Antique shares will be acquired from continuing members of Antique Company’s control group in exchange for 2,000 Modum Corporation shares. The equity-adjusted cost of the control group’s shares is $25 per share. Calculate the total cost of Antique Company under each of the following assumptions:
1. Modum Corporation borrows $280,000 and purchases for $40 each the remaining 9,000 shares held by parties outside the control group of Antique Company.
2. Modum Corporation borrows $240,000 and purchases 8,000 noncontrol group shares for $40 each. Modum issues 2,000 of its shares in exchange for 1,000 Antique Company shares held by noncontrol group members.
3. Modum Corporation borrows $200,000 and purchases 7,000 noncontrol group shares for $40 each. Modum issues 4,000 of its shares in exchange for 2,000 Antique Company shares held by noncontrol group members.