Homework Answers
Answer
a. Goodwill will be $ 2,700,000 ($ 8,100,000 minus $ 5,400,000)
b. Return on investment for Target Co.= Operating income / Net assets * 100
= 1,215,000 / 5,400,000 * 100
= 22.5%
c. Return on investment for Takeover Co. = Operating income / Net assets * 100
= 1,215,000 / 8,100,000 * 100
= 15%
d. Takeover co. is willing to pay $ 2,700,000 more than fair value for the net assets acquired from Target co., because Target Co. is already a profit making company. The excess amount paid by Takeover Co. can easily be recovered within 2-3 years after the acquisition. Also, Target Co. may already has an established market for its products, superior management or a favourable reputation in the market, etc.
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