# FSA: Reading 21 page 33

Q1: Why doesn’t the retained earnings of the purchasing company (i.e. the buying company) decrease along with the cash during a buyout of the Target Company? Q2: Does minority interest, using the consolidated method, decrease when the target company’s payout is 0% (another words, they reinvest all earnings)? In the Equity method, the INVESTMENT IN COMPANY S account increases on a pro-rata basis to the amount of retained earnings of S. Is there an analog for this for CONSOLIDATING companies? Q3: For page 58, problem 1E: Calculate Bart’s total investment return (mark-to-market basis) on each investment for 2001. WHY IS THIS DONE MUCH DIFFERENTLY THAN THE EXAMPLE GIVEN ON PAGE 22, WHICH TAKES THE DIFFERENCE IN THE MARKET VALUE - COST? Q4: What to do in the following: If 20% of Target Co. is bought by Buyer Co. for \$20 (\$1/share). Target paid 100% of it’s net income as dividends, so Buyer CO’s investment did *NOT* increase. But how do we account for this investment if: i. Target’s share price is now \$0.20? ii. Target’s share price is now \$5.00? Q5: Page 37: ISSUANCE OF STOCK BY SUBSIDIARY Why not the investment not worth 3000*\$50 = \$150,000? Are the two shares of stocks treated differently because they IPOed at different prices? The way I look at it is this: You owed 60% of the company. You bought the shares at \$10. Now, they issued more shares, and your ownership has been diluted to 30%. The shares sold at \$50. This means that you’re shares that you bought at \$10 are now worth \$50 - doesn’t it? The book makes the following adjustment: TOTAL VALUE = 5000*\$10/sh + 5000*\$50/share = \$300,000, and you own 30% of this, which is \$90,000.