Increasing eps reducing debt interest of shareholders

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Business Law: Principles for Today's Commercial Environment
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Chapter 27 / Exercise 2
Business Law: Principles for Today's Commercial Environment
Jennings/Twomey
Expert Verified
Increasing EPS Reducing debt Interest of shareholders in subsidiary Spin Off o New company formed to receive some assets from the distributing corporation in exchange for the new corporation’s stock. o Transaction in which the parent company distributes shares it owns in the subsidiary to its current shareholders Rewarding existing shareholders with a non-taxable dividend Non-cash transaction New entity is more independent of the parent Managers of the entity have a greater incentive to improve the performance of the new entity
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Business Law: Principles for Today's Commercial Environment
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Chapter 27 / Exercise 2
Business Law: Principles for Today's Commercial Environment
Jennings/Twomey
Expert Verified
Managers buy substantial amounts if shares following the spin off Improving transparency Different strategy Undervaluation Venturesome subsidiary No synergy between parent and subsidiary Takeover defense Conflicts within the organization Parent does not receive any income anymore Problems 17. Determine whether the following transactions are taxable. If a transaction is not taxable, indicate what type of reorganization is affected, if any. a. Alpha Corporation owns assets valued at $400,000 and liabilities of $100,000. Beta Corporation transfers $160,000 of its voting stock and $40,000 in cash for 75% of Alpha’s assets and all of its liabilities. Alpha distributes its remaining assets and the Beta stock to its shareholders. Alpha then liquidates.
b. Beta Corporation owns assets valued at $1 million with liabilities of $200,000, and Alpha holds assets valued at $350,000 with liabilities of $150,000. Beta transfers 200,000 shares of stock and $50,000 cash, and it accepts $100,000 of Alpha’s liabilities, in exchange for all of the Alpha assets.
c. Alpha Corporation obtained 200,000 shares of Beta Corporation’s stock 10 years ago. In the current year, Alpha exchanges 40% of its stock for 500,000 of the remaining 600,000 shares of Beta stock. After the transaction, Alpha owns 700,000 of the 800,000 Beta shares outstanding.

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