Acquisition of Cats Rule: On January 1, 2019, Buddy Dog Food Company acquired Cats Rule Food Company for $3,000,000 cash and 2,500,000 shares of Buddy, $5 par common stock which had a fair value of $12 per share on 1/1/19. These amounts were paid to acquire all of the shares of Cats Rule Food Company. Buddy immediately delisted those shares and decided to treat the acquisition as a merger. Buddy also has agreed to pay the stockholders additional compensation based upon the realized Cats Rule EBITDA over the first 3 years that Buddy owns Cats Rule. The compensation will be 10% of the excess of the 3-year cumulative EBITDA over $2,000,000. A discount rate of 10% is reasonable. The probability distribution that Buddy has estimated for Cats Rule’s cumulative EBITDA is: 3 year Cumulative EBITDA Probability $1,000,000 .3 $2,100,000 .2 $3,000,000 .4 $5,000,000 .1
Acquisition of Cats Rule: On January 1, 2019, Buddy Dog Food Company acquired Cats Rule Food Company for $3,000,000 cash and 2,500,000 shares of Buddy, $5 par common stock which had a fair value of $12 per share on 1/1/19. These amounts were paid to acquire all of the shares of Cats Rule Food Company. Buddy immediately delisted those shares and decided to treat the acquisition as a merger. Buddy also has agreed to pay the stockholders additional compensation based upon the realized Cats Rule EBITDA over the first 3 years that Buddy owns Cats Rule. The compensation will be 10% of the excess of the 3-year cumulative EBITDA over $2,000,000. A discount rate of 10% is reasonable. The probability distribution that Buddy has estimated for Cats Rule’s cumulative EBITDA is: 3 year Cumulative EBITDA Probability $1,000,000 .3 $2,100,000 .2 $3,000,000 .4 $5,000,000 .1 Other information about the acquisition: The 1/1/19 Buddy’s balance sheet before the acquisition is recorded and Cats Rule balance sheet and related booked asset and liability fair values are below: Buddy - Book Values Cash $7,000,000 Inventory
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