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Regarding Klimecki’s and Alsen’s statements about the impact of the Beta Systems acquisition on Beta Blocker Systems is a leading drug research and development facility. In the beginning of 2004, it was widely expected to receive approval to market a new beta blocker that it had developed internally. The new drug has significantly fewer side effects than the competing medications currently on the market. Beta blockers are widely prescribed for a variety of medical conditions, including hypertension, angina, arrhythmias and congestive heart failure. They are also given to heart attack patients to prevent future heart attacks. Because of the widespread use of beta blockers, the market for them is large and their profitability is enormous. Analysts put the value of the in-process research and development (R&D) for Beta Blocker Systems’ new drug at a whopping $500 million. The expected approval of the drug, and the consequent benefits to any parent companythat might own it, effectively put Beta Blocker Systems into play as an acquisition candidate. Alphanumeric Research Laboratories, originally founded by Dr. Alka Klimecki, had grown to become a conglomerate with wide-ranging interests in nanotechnology, computer software, biotech, and other industries heavily reliant on research and development. Because of Alphanumeric’s diverse asset base, it was in a position to outbid other firms for Beta Blocker Systems. Alphanumeric Research Labs won the bidding war with an offer of $4.9 billion in Alphanumeric equity to buy out Beta Blocker shareholders. The transaction closed on June 30, 2004. (All balance sheet figures are calculated as of this date.) Alphanumeric recorded the acquisition as a purchase. The buyout was a windfall for Beta Blocker Systems shareholders. Although the company had very valuable research facilities (shown on its balance sheet at $500 million below its fair market value), it had only $75 million in cash, not enough to fund the necessary development and marketing of the drug on its own without adversely impacting ongoing operations. It had also mismanaged its inventory, allowing much of it to become obsolete and forcing a write-down to its fair market value of $800 million. The good news on Beta Blocker’s balance sheet was that it had virtually no debt. Owners’ equity stood at $3.335 billion, with the rest of the liabilities side of the balance sheet captured by a small level of current liabilities. However, this lack of debt seriously diluted the return to equity shareholders. Beta Blocker would have earned $40 million in net income in FY2004 (equally distributed throughout the year) if the acquisition had not taken place, providing a paltry return on owners’ equity. Alphanumeric Research had an even more remarkable lack of leverage. Current liabilities of only $20 million paled in comparison with Alphanumeric’s stunning $4.530 billion in owners’ equity. Alphanumeric also managed its inventory much better than Beta Blocker Systems had. Its balance sheet showed only $500 million in inventory, all of which was current. In fact, Alphanumeric’s inventory had a fair market value 20 percent higher than book value. Dr. Klimecki was pleased that the acquisition would further reduce Alphanumeric’s already miniscule total liabilities/owners’ equity ratio because of the additional equity issued to fund the purchase. The auditor, Nancy Alsen, added that the current assets/current liabilities ratio would also improve due to the write-up of inventory to fair market value. Alphanumeric also had $50 million in cash. The remainder of Alphanumeric Systems’ assets were its research facilities, which had a fair market value of $4.2 billion, much larger than the $3 billion fair market value of Beta Blocker’s facilities. Both Alphanumeric Research Laboratories and Beta Blocker Systems use fiscal years that match the calendar year and report in accordance with IAS standards. They amortize tangible assets over 20 years, and use the straight-line method for depreciation and amortization of both tangible and intangible assets. Part 6) Regarding Klimecki’s and Alsen’s statements about the impact of the Beta Systems acquisition on Alphanumeric’s consolidated balance sheet: A)Klimecki’s statement is correct and Alsen’s statement is incorrect. B)Klimecki’s statement is correct and Alsen’s statement is correct. C)Klimecki’s statement is incorrect and Alsen’s statement is incorrect. D)Klimecki’s statement is incorrect and Alsen’s statement is correct.
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