Target is a wholly owned subsidiary of MegaCorp Inc. MegaCorp supplies a number of services to target. Target sells some of its products to other MegaCorp subsidiaries. Target also buys products from other MegaCorp subsidiaries that are used as inputs in producing Target's products. Which of the following adjustments should the acquirer make to Target's financial statements before valuing the firm?
A) Deduct the actual cost of services required by Target that are being supplied by the parent without charge from target's cost of sales.
B) Deduct the difference between the cost of products purchased from other MegaCorp subsidiaries at below market prices and the actual market prices for such products from Target's cost of sales.
C) Deduct the difference between the cost of products purchased from other MegaCorp subsidiaries at above market prices and actual market prices from Target's cost of sales
D) A and B only.
E) None of the above.

Question

Quizplus · Accepted Answer

The acquirer should adjust for any overstatement in costs due to above-market pricing by deducting the difference from Target's cost of sales to reflect a more accurate market-based cost structure.

Target Is a Wholly Owned Subsidiary of MegaCorp Inc