Beatty, Inc

Multiple Choice

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2020 for $80,000, consisting of $20,000 in cash and 6,000 shares of stock. A contingent payment of $12,000 in cash will be paid on April 1, 2021 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability-weighted approach, is $3,461. A contingent payment of $20,000, payable in stock, will be paid to the former owners of Gataux on April 1, 2021 if the market value of Beatty stock drops below $10 per share. Beatty estimates there is a 15% probability that its share price will not exceed that threshold. Using the same interest rate and probability-weighted approach, Beatty calculates the market value of the stock contingency to be $2,884.On April 1, 2021, Beatty stock closes with a market value of $8.98 per share. How many shares of stock, rounded to the next whole number, must it issue to the former owners of Gataux?

A) 682
B) 2,000
C) 2,228
D) 2,884
E) 6,000