Discussion Questions
1. Using the common motives for cross-border deals discussed in this chapter, speculate as to the reasons Actavis acquired Forest Labs.
2. What alternatives to acquisition could Actavis have pursued? Speculate as to why a takeover was the preferred option?
3. Speculate as to how Actavis’s takeover of Forest Labs may have created shareholder value?
4. Do you believe firms should be allowed to engage in tax inversions?
5. Why is Actavis organized as a holding company in Ireland?
6. Speculate as to why investors for both firms responded so favorably when news of the deal was announced?
END OF CHAPTER CASE STUDY: IRELAND-BASED DRUG MAKER ACTAVIS BUYS U.S. PHARMACEUTICALS FIRM FOREST LABS
Case Study Objectives: To Illustrate • Alternative motives for cross-border acquisitions • How taxes impact cross-border deals and capital flows • How activist investors can impact corporate decisions.
Reflecting the escalating costs of developing blockbuster drugs (i.e., those with the potential to deliver more than $1 billion in annual revenue) and the loss of patent protection on many substantial revenue producing medications, the pharmaceutical industry has been undergoing a wave of consolidation for more than a decade. The takeover strategy in many instances appeared to be largely formulaic: acquire rivals, slash costs, and minimize taxes. While Valeant Pharmaceuticals and Endo Health Solutions have employed this strategy effectively, drug maker Actavis is perhaps the most successful, tripling its market value during the last 3 years. Actavis is a global, integrated specialty pharmaceutical company focused on developing, manufacturing, and distributing generic and branded products in more than 60 countries. Structured as a holding company, its global headquarters is located in Dublin, Ireland. The firm’s US administrative headquarters is in Parsippany, NJ. Actavis historically has focused on generic drugs, but in recent years it has expanded through acquisition into branded drugs. Actavis on February 18, 2014, announced that it had reached an agreement to buy Forest Laboratories for $25 billion in cash and stock to create a pharmaceuticals firm with substantial exposure to branded and generic drugs. Forest Labs is a fully integrated specialty pharmaceutical firm focused on the US market, with a portfolio of branded products. The combined revenues of the two specialty pharmaceutical companies are expected to be more than $15 billion in 2015. The new company announced that it would be increasing its annual budget for pharmaceutical research and development to more than $1 billion. Strategically, Forest Labs represented an opportunity for Actavis to diversify into branded drugs and for Forest Labs to penetrate foreign markets not currently survived. Forest Labs also has an impressive number of drugs in the pipeline. In 2012, US-based Watson Pharmaceuticals bought Actavis, then headquartered in Switzerland, for nearly $6 billion and adopted its name. In 2013, the firm bought Irish-based Warner Chilcott for about $5 billion expanding its presence in specialty pharmaceuticals and moved its headquarters to Ireland to take advantage of the country’s favorable corporate tax environment. The takeover of Forest Labs needed an assist from famed activist investor Carl Icahn. Icahn has a track record of investing in drug makers and profiting from their turnarounds or sales to larger companies. His previous investments included ImClone Systems which was sold to Eli Lilly & Co. in 2008 for $6.3 billion and in Genzyme Corp which was sold to Sanofi in 2011 for $19.4 billion. In 2012, Icahn investments that were later sold included Amylin Pharmaceuticals which was acquired by Bristol-Myers Squibb for $5.1 billion. Icahn, who owns 11% of Forest’s stock through his firm Icahn Enterprises, played a key role in making this deal happen by prodding Forest Labs to install a new CEO in 2013 who was more amenable to selling the firm. To avoid a third proxy fight in as many years, Forest added an Icahn representative to its board in 2013 increasing his influence on board decisions. Under the terms of the deal, Forest shareholders will receive $26.04 in cash and 0.3306 of a share of Actavis, equivalent to $89.48 per share. This represents a premium of 25% from Forest Lab’s closing price the prior day. Forest shareholders will own 35% of the combined firms. Forest Labs agreed to pay a termination fee of $875 million if it backs out of the agreement in favor of a competing takeover proposal or if the firm’s shareholders do not approve the deal. The acquisitive Actavis has completed seven deals since January 2013. Like those deals, the firm expects to realize substantial costs savings. However, in this case, the takeover of Forest Labs will be accretive to earnings immediately following closing. This is relatively unusual as cost savings in most deals in the first year are negated by a combination of severance expenses and other integration-related costs. Actavis announced that it expects to realize a combination of operating and tax savings of $1 billion annually to be realized beginning in the first full year of operation of the combined firms. Assuming a discount rate of 12%, the present value of these savings in perpetuity is $8.3 billion ($1 billion/0.12), well in excess of the $5 billion acquisition premium paid for Forest Labs. Not surprisingly, investors greeted news of the merger favorably. Shares of Forest rose 30% and those of Actavis were up 12%. The takeover of Warner Chilcott in 2012 allowed Actavis to complete a “tax inversion” in which it relocated its headquarters to Ireland to escape the higher American statutory corporate tax rate. A big advantage of a “tax inversion” besides the lower statutory tax rate is that acquisitions become more affordable. Cash held overseas because of the more favorable tax rates can be used to pay for a deal and the earnings from the acquired firm are also taxed at Actavis’s lower tax rate. Tax inversions are not viewed as tax evasion strategies by the US taxing authorities as long as they can be justified by good business reasons such as getting nearer to a firm’s customers or suppliers. Tax evasion is the avoidance of taxes through illegal means such as misrepresenting income on a tax return. The maximum corporate tax rate in Ireland is 12.5% compared to 35% in the United States. Forest Labs earnings which had been taxed at the higher US rate will be taxed at the lower Irish rate currently paid by Actavis. Annual tax savings are expected to amount to at least $100 million. This gave Actavis a huge advantage in bidding for Forest Labs over other potential suitors by enabling it to offer a larger premium. From a legal perspective, an inversion is simply the process by which a corporate entity, established in another country, “buys” an established American company. The transaction takes place when the overseas entity purchases either the shares or assets of a domestic corporation. The shareholders of the domestic company typically become shareholders of the new foreign parent company. In essence, the legal location of the company changes through a corporate inversion from the United States to another country. An inversion typically does not change the operational structure or location of a company. In most cases, an inversion simply means the addition of a small office in the company’s new foreign “home.” Therefore, a re-incorporation rarely, if ever, leads to the loss of American jobs. However, it does lead to a loss of tax revenue.
In: Biology
Prior to 2019, the accounting income and taxable income for Bridgeport Corporation were the same. On January 1, 2019, the company purchased equipment at a cost of $576,000. For accounting purposes, the equipment was to be depreciated over 9 years using the straight-line method. For income tax purposes, the equipment was subject to a CCA rate of 20% (half-year rule applies for 2019). Bridgeport’s income before tax for accounting purposes for 2020 was $1,892,000. The company was subject to a 25% income tax rate for all applicable years and anticipated profitable years for the foreseeable future. Bridgeport Corporation follows IFRS.
a) Calculate taxable income and taxes payable for 2020.
| Taxable income, 2020 | $ | |
| Taxes payable, 2020 | $ |
b) Prepare the journal entries to record 2020 income taxes (current and deferred). (If no entry is required, select "No Entry" )
|
Account Titles and Explanation |
Debit |
Credit |
|
(To record current income taxes) |
||
|
(Record the net change from 2019 to 2020.) |
In: Accounting
The accompanying data represent the total compensation for
12
randomly selected chief executive officers (CEO) and the company's stock performance in a recent year. Complete parts (a) through (d) below.
LOADING...
Click the icon to view the CEO data.
(a) One would think that a higher stock return would lead to a higher compensation. Based on this, what would likely be the explanatory variable?
Stock return
Compensation
(b) Draw a scatter diagram of the data. Use the result from part (a) to determine the explanatory variable. Choose the correct graph below.
A.
0160025Stock ReturnCompensation
A scatter diagram has a horizontal axis labeled "Stock Return" from 0 to 160 in increments of 20 and a vertical axis labeled "Compensation" from 0 to 25 in increments of 5. The following 12 approximate points are plotted, listed here from left to right: (0, 14.5); (10, 4); (24, 7); (30, 1); (32, 2); (32, 4); (56, 12); (58, 7.5); (64, 8.5); (70, 4); (76, 21); (142, 6.5).
B.
0160025Stock ReturnCompensation
A scatter diagram has a horizontal axis labeled “Stock Return” from 0 to 160 in increments of 20 and a vertical axis labeled “Compensation” from 0 to 25 in increments of 5. The following 12 approximate points are plotted, listed here from left to right: (0, 12); (10, 2); (24, 21); (30, 4); (32, 1); (32, 6.5); (56, 4); (58, 8.5); (64, 4); (70, 7.5); (76, 14.5); (142, 7).
C.
0250160CompensationStock Return
A scatter diagram has a horizontal axis labeled "Compensation" from 0 to 25 in increments of 5 and a vertical axis labeled "Stock Return" from 0 to 160 in increments of 20. The following 12 approximate points are plotted, listed here from left to right: (1, 32); (2, 10); (4, 30); (4, 56); (4, 64); (6.5, 32); (7, 142); (7.5, 70); (8.5, 58); (12, 0); (14.5, 76); (21, 24).
D.
0250160CompensationStock Return
A scatter diagram has a horizontal axis labeled "Compensation" from 0 to 25 in increments of 5 and a vertical axis labeled "Stock Return" from 0 to 160 in increments of 20. The following 12 approximate points are plotted, listed here from left to right: (1, 76); (2, 64); (4, 10); (4, 32); (4, 142); (6.5, 30); (7, 0); (7.5, 70); (8.5, 58); (12, 56); (14.5, 24); (21, 32).
(c) Determine the linear correlation coefficient between compensation and stock return.
requals=nothing
(Round to three decimal places as needed.)
(d) Does a linear relation exist between compensation and stock return? Does stock performance appear to play a role in determining the compensation of a CEO?
The linear correlation coefficient is close to
▼
1 comma1,
0 comma0,
negative 1 comma−1,
so
▼
no
a positive
a negative
linear relation exists between compensation and stock return. It appears that stock performance plays
▼
no
a negative
a positive
role in determining the compensation of a CEO.
Data Company Compensation ($mil) Stock
Return (%)
Company A 14.55 75.44
Company B 4.08 63.96
Company C 7.11 142.05
Company D 1.05 32.68
Company E 1.99 10.67
Company F 3.78 30.67
Company G 12.02 0.77
Company H 7.65 69.41
company I 8.45 58.69
Company J 4.08 55.95
Company K 20.92 24.28
Company L 6.65 32.15
In: Statistics and Probability
Bella Groove and Frankie Jay commenced a new business on 1
January 2020. The business will operate a hip-hop dance studio,
called ‘Groovy Dancing’ . Bella and Frankie will operate the
business as a partnership. The dance studio will offer dance
classes to children and adults. People will sign-up for classes for
a period of 3 months at a time (with people attending one class
each week), and sessions will run from February – April, May –
July, August – October each year. The classes
Charles Sturt University Subject Outline ACC566 202030 S I Version
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cost $50 per month (with $150 payable for each 3-month session),
and people can pay as follows:
• $150 paid upfront for 3-months of dance classes; or • $50 per
month, payable on the last day of each month (for each of the 3
months of dance classes).
During the first six months of operations, the following events and
transactions occurred. Note: all payments made by Groovy Dancing
were made from the business bank account.
Date Detail 3 Jan Bella Groove and Frankie Jay each contributed
$10,000 of personal funds into the business bank account.
5 Jan Groovy Dancing rented a studio for the business, for a period
of 12 months (starting on 1 February 2020 – 31 January 2021). Rent
is to be paid 3-monthly in advance. Groovy Dancing paid $3,000 to
the landlord for rent for February – April 2020.
10 Jan Groovy Dancing contracted Choice Flooring to supply and
install a floating dance floor at the studio. The dance floor was
installed, and Groovy Dancing received an invoice for $5,000. The
due date for payment of the invoice is 8 February 2020.
22 Jan Groovy Dancing purchased and paid for a computer and sound
system for the business. The computer cost $2,600 and the sound
system cost $1,200.
25 Jan Groovy Dancing purchased and paid for advertising materials
(flyers, balloons, fridge magnets) from Swift Promotions Ltd for
$900.
26 Jan At the Australia Day celebrations that were held in town,
Groovy Dancing held two free outdoor community hip-hop dance
classes with the aim of: promoting the new business, and to
advertise the new hip-hop dance classes that were going to commence
at their studio on 1 February 2020. Bella and Frankie handed out
all of the advertising materials on the day. They received lots of
positive interest from community members about their new
business.
27 Jan Groovy Dancing received a number of telephone calls from
people interested in signing up for the new hip-hop dance classes.
32 people signed up for classes for February – April 2020, and each
of these people paid the $150 fee for these classes (via direct
deposit into Groovy Dancing’s bank account).
28 Jan Groovy Dancing received more telephone calls from people
interested in signing up for the new hip-hop dance classes. Another
40 people signed up for classes for February – April 2020. 30 of
these people paid the $150 fee for these classes (via direct
deposit into Groovy Dancing’s bank account), and the other 10
people agreed to pay $50 on 28 February, 31 March, and 30
April.
Charles Sturt University Subject Outline ACC566 202030 S I Version
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31 Jan Groovy Dancing received more telephone calls from people
interested in signing up for the new hip-hop dance classes. Another
25 people signed up for classes for February – April 2020, and each
of these people paid the $150 fee for these classes (via direct
deposit into Groovy Dancing’s bank account).
1 Feb Groovy Dancing paid $2,400 for business insurance, for the
period 1 February 2020 – 31 January 2021.
1 Feb Groovy Dancing paid the local radio station $580 for radio
advertising (for advertising provided on 1 February, promoting the
grand opening of the dance studio).
5 Feb Groovy Dancing paid the $5,000 owing to Choice Flooring
(owing in relation to the floating dance floor supplied and
installed in January).
28 Feb Groovy Dancing received $500 from the 10 customers that
agreed to pay $50 per month (in February, March and April) for
their dance classes.
28 Feb Bella Groove withdrew $1,000 from the bank account for
personal expenses, and Frankie Jay withdrew $2,000 from the bank
account for personal expenses.
31-Mar Groovy Dancing received $500 from the 10 customers that
agreed to pay $50 per month (in February, March and April) for
their dance classes.
1 Apr Groovy Dancing received an invoice from Telstra, for
telephone and internet used by the business. The amount payable on
the invoice is $300, and payment is due by 28 April 2020.
27 Apr Groovy Dancing paid Telstra the $300 that was owing.
28 Apr 60 people signed up for classes for May - July 2020, and
each of these people paid the $150 fee for these classes (via
direct deposit into Groovy Dancing’s bank account).
29 Apr Another 50 people signed up for classes for May - July 2020.
30 of these people paid the $150 fee for these classes (via direct
deposit into Groovy Dancing’s bank account), and the other 20
people agreed to pay $50 on 31 May, 30 June, and 31 July.
30 Apr Groovy Dancing received $500 from the 10 customers that
agreed to pay $50 per month (in February, March and April) for
their dance classes.
30 Apr Groovy Dance paid $3,000 to the landlord for rent for May -
July 2020.
10 May Groovy Dancing received an invoice from Origin Energy, for
electricity used at the dance studio. The amount payable on the
invoice is $750, and payment is due by 4 June 2020.
Charles Sturt University Subject Outline ACC566 202030 S I Version
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Page 16 of 41
31 May Groovy Dancing received $1,000 from the 20 customers that
agreed to pay $50 per month (in May, June and July) for their dance
classes.
2 Jun Groovy Dancing paid Origin Energy the $750 that was
owing.
30 Jun Groovy Dancing received $1,000 from the 20 customers that
agreed to pay $50 per month (in May, June and July) for their dance
classes.
30 Jun Groovy Dancing received an invoice from Telstra (for
telephone and internet used by the business), with an amount
payable of $380. The due date for payment is 28 July 2020.
30 Jun Groovy Dancing needs to recognise an accrued expense for
electricity, amounting to $420.
Additional information as at 30 June 2020:
• Depreciation to be recognised in the financial statements up to
30 June 2020 is: $100 for the floating dance floor, $200 for the
computer and; $160 for the sound system. • Ignore any GST.
Required:
i. Prepare journal entries for January – June 2020 transactions
listed above (including any adjusting entries). In relation to
adjusting entries for prepaid expenses, depreciation and unearned
revenue, prepare these entries as at 30 June 2020 (rather than at
the end of each month). Include dates, references and narrations.
(7.5 marks) ii. Prepare T-accounts in an Excel spreadsheet. Post
all of the above journal entries to the T-accounts. Include dates
and references for each entry. Total all of the T-accounts to
determine their balances at the end of June 2020. iii.
Prepare the ‘Adjusted Trial Balance’ in an Excel spreadsheet as at
30 June 2020. Use formulas to generate all of the figures in the
‘Adjusted Trial Balance’ from the balances in the T-Accounts. iv. Prepare the income statement, balance sheet, and
statement of changes in equity in Excel. Use formulas to generate
all of the figures in the financial statement reports from the
‘Adjusted Trial Balance’ .
In: Accounting
For the year ended Dec 31, 2020, King Inc. reported pretax accounting income of $800,000.
Select information is listed below:
1) In 2019, the company purchased a piece of equipment with a cost of $500,000. For financial reporting purposes, the company used the straight-line method over a 5-year service life with no residual value expected. For tax purposes, the equipment was scheduled to be depreciated by $160,000, $140,000, $120,000, $50,000 and $30,000 in years 2019 through 2023, respectively.
2) During 2020 loss contingency accrued for financial reporting purpose was $45,000. The loss contingency was due to the pending patent lawsuit brought by its long-time competitor, Queen Inc. The payment for the lawsuit is expected to be paid in 2022.
3) In 2020, the company earned $10,000 interest income from municipal bonds. The interest earned on municipal bonds are exempted for tax purposes. King Inc.’s income tax rate is 30%. At January 1, 2020, the deferred tax asset balance was $0 and the deferred tax liability was $12,000.
Required:
What is taxable income for 2020?
What is the ending balance of DTA on 12/31/2020?
What is the ending balance of DTL on 12/31/2020?
Prepare journal entry to record income taxes for year 2020.
In: Accounting
Identify the skills of the leader that are key in leading a team to move a company toward a social entrepreneurial model.
2. Discuss:
In: Operations Management
QUESTION 2 ( 12 marks)
The following situations refers to threats to the
Auditor’s independence.You are asked to state what
the different threats to the Auditor’s independence are and explain
how these threats impact on the Auditor’s independence and
any other implications for yourself and your firm.
SITUATION 1
Enid Blyton has been working as an auditor for the Anthony Don
Chartered Accounting firm for the past four years and has just
started an audit on the Green Thumbs environmental company, a small
newly listed public company which has just listed as a public
company one month ago.The
Green Thumbs environmental company has just started using a
new contractor to dispose of its toxic waste .You know that this
new contractor has won tenders in the past and there have been
several unfavourable articles about this contractor in the local
press.
Your Audit Manager ,Peter Don , has stated that it is your
responsibility just to provide an opinion
on the financial statements with the emphasis being on providing an
opinion on whether the financial statements are true and fair and
whether there are any material misstatements.
SITUATION 2
Jean Douglas has just started to do the audit on the latest
financial statements and has just made the following notes from
your opening interview with John Dooley,CEO of Dooleys.
John has apologised for not making the final payment of 30% of the
prior years audit fee but has explained that he will ensure the
cheque is written once he is happy with the progress on the current
audit. At this stage John Dooley has advised that the firm will be
able to start deliberations
about the selection of Auditor for the following year.The Dooleys
audit comprises forty percent of the annual audit fees for the firm
.
John has advised that they will be providing a free trip to Europe
for an Auditor from the Audit firm and his partner once the audit
is successfully completed.
Jean is concerned with several aspects of the current audit as
Dooleys do not appear to be following the accounting standards in
their valuation of inventory as they are not taking into
account the reductions in fair value of inventory and the impact on
the financial statements is material.
In: Accounting
(b) On 1 July 2018, Maxwell Chemical Ltd acquired a plant at a cost of $1,000,000. Maxwell depreciated the assets on a straight line basis. As at 30 June 2020, the machinery had accumulated depreciation of $200,000 and an expected remaining useful life of four years. On 30 June 2020, Maxwell Chemical Ltd conducted an impairment test on asset. It was assessed that the plant could be sold to other entities for $600,000 with costs of disposal of $25,000. The management expect to use the plant for another four years and it is expected that net cash flow to be generated by the plant would be $195,000 over each of the next four years. The rate of return by the market on this plant is 8% as at 30 June 2020.
Note: The present value of an annuity of $1 for four years discounted at 8 per cent is $3.3121
Required: (a) Determine whether the plant is impaired. If so, provide appropriate journal entry at 30 June 2020.
(b) Provide the journal entry to account for the depreciation in 2021.
In: Accounting
On 1 July 2018, Maxwell Chemical Ltd acquired a plant at a cost of $1,000,000. Maxwell depreciated the assets on a straight line basis. As at 30 June 2020, the machinery had accumulated depreciation of $200,000 and an expected remaining useful life of four years. On 30 June 2020, Maxwell Chemical Ltd conducted an impairment test on asset. It was assessed that the plant could be sold to other entities for $600,000 with costs of disposal of $25,000. The management expect to use the plant for another four years and it is expected that net cash flow to be generated by the plant would be $195,000 over each of the next four years.
The rate of return by the market on this plant is 8% as at 30 June 2020.
Note: The present value of an annuity of $1 for four years discounted at 8 per cent is $3.3121
Required:
(a) Determine whether the plant is impaired. If so, provide appropriate journal entry at 30 June 2020.
(b) Provide the journal entry to account for the depreciation in 2021.
In: Accounting
Answer:
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Extra Points Question: The article points out that the fiscal multiplier is found to be higher when the interest rate is at the zero lower bound (ZLB) compared to the situation when it is above zero and is not kept constant by monetary policy. What factors may explain the higher fiscal multiplier at the ZLB? Please use the IS-LM model to make a case for your answer
In: Economics