Question

Airmedia Corporation acquires Bridgeline Inc. for cash and stock on January 1, 2019. One of Bridgeline’s previously unreported identifiable intangible assets is developed technology, which Airmedia can use to produce unique media services demanded by customers, thereby increasing revenues. Management estimates related to the incremental effect of the developed technology on future cash flows are as follows: • Projected revenue for 2019 is $25,000,000. • Projected annual revenue growth rate is 25%. • Cost of sales and operating expenses are 85% of revenue. • The effective income tax rate is 30%. • Average remaining useful life of the developed technology is 5 years. • The appropriate risk-adjusted discount rate is 20%. Additional management estimates, by year, are: Year 2019 2020 2021 2022 2023 Projected additional capital expenditures $1,000,000 $700,000 $200,000 $500,000 $400,000 Depreciation expense included in operating expenses 800,000 825,000 900,000 850,000 900,000 Capital charge on the use of contributory assets 200,000 220,000 230,000 250,000 250,000 Airmedia uses the income approach to value the acquired developed technology, at the present value of operating cash flow, net of taxes, capital charges and additional capital expenditures. For convenience, cash flows are assumed to occur at year-end. Required Calculate the fair value of the acquired developed technology. Round your answer to the nearest million dollars. $Answer million

Answer 1

Ans.                            Calculation of fair value of the acquired developed technology (value in $)

                                             2019        2020         2021               2022          2023

Revenue                            25000000       31250000         39062500             48828125           61035156

Cost of sale other exp.      21250000        26562500        33203125              41503906           51879883

Gross margin                    3750000          4687500           5859375                7324219             9155273

Tax @30%                        1125000          1406250    1757813    2197266            2746582

net margin                        2625000          3281250            4101562                5126953            6408691

Less: capital exp.            (1000000)    (700000)    (200000)    (500000) (400000)

Add: depreciation exp.     800000          825000               900000                  850000              900000

Less: capital charge        (200000)          (220000)    (230000)    (250000) (250000)

Net inflow                         2225000          3186250             4571562                 5226953            6658691

Discount factor @20%      .833                   .694                   .579                        .482                  .402

Discounted cashflow        1853425    2211258 2646934 2519391    2676794

Net present value or fair value acquired developed technology = $11907802 or $11.90 million