Question

1. Parsons Corporation acquires all of the assets and liabilities of Sonata Company at the beginning of 2019, in an acquisition reported as a merger. Developed technology, not reported on Sonata’s balance sheet, is appropriately reported as an acquired identifiable intangible asset. Parsons uses the income approach to value this intangible asset, at the present value of forecasted operating cash flow, net of taxes, capital charges and additional capital expenditures, for the next four years. The following information is collected as part of the valuation process:

• Projected 2019 operating income derived from the developed technology is $4 million before tax. This amount is expected to grow at a rate of 6% yearly.
• Depreciation and amortization expense included in operating income is $1 million. This amount is expected to be constant during 2019-2022.
• The tax rate for 2019-2022 is 25%.
• Additional capital expenditures related to the developed technology are forecasted to be $500,000 in 2019, growing at a rate of 2% yearly.
• The capital charge on contributory assets is estimated at $200,000. This amount is expected to be constant during 2019-2022.
• The appropriate risk-adjusted discount rate is 20%.

Required

Calculate the value of the developed technology, reported by Parsons as an acquired identifiable intangible asset. Round answers to the nearest dollar and assume cash flows occur at year-end.

Answer 1

value of the Developed technology by persons an an acquired identifiable intangible Asset i calculated an follow (Amount in $) - aftes Tax 2019 2020 2021 2022 operating Inome yooooo0 4240,000 | uug4ooo uy 640 64 less-in ware Tex 1000, voo | 1060,000 | 1123,500 191016 Expenses 27 - operating Inome 3000,ooo 3180,000 | 33 70,500 3513,048 Add Depreciation (100,000 1,000,000,000,000/1000.000 less copitel expendit (500,000 (510.000) (520200) ($30,604) les contaibutory asset 1200,000) 1200,000) 1200,000) (200,000) upital changes. I 3 Net cash flow 13300,000 3470,000 36 50300 38 42444 wie. VT 3 Now, we have to discount the net ash flow p 2041, Het ush flow factor @ 201 Present value 3300.000 0.833 2,148,900 3470,000 0.694 2408,180 3,650,00 2,113,524 38424uy 0.482 1952,058 $ 9,122,6 62 9:579 Answe