Question

Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta: Total Identifiable assets Total liabilities Owners' equity Beta Company Book Values $631,600 288,700 $342,900 Estimated Market Values $735,800 328,300 Cumulative total net cash earnings for the past five years of $927,700 Includes extraordinary cash gains of $69,800 and nonrecurring cash losses of $44,300. Alpha Company expects a retum on Its Investment of 13%. Assume that Alpha prefers to use cash earnings rather than accrual-based earnings to estimate its offering price, and that it estimates the total valuation of Beta to be equal to the present value of cash-based earnings (rather than excess earnings) discounted over five years. (Goodwill is then computed as the amount implied by the excess of the total valuation over the identifiable net assets valuation.) Compute (a) an offering price based on the Information above that Alpha might be willing to pay, and (b) the amount of goodwill included in that price. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to o decimal places e.g. 58,971.) (a) offering price $ (b) Goodwill $

Answer 1

solution o 927700 gains (69800) net cash ea earnings is for past five years less:- Extraordinary cash Add: Non recussing cash losses year cash earnings Divided by 5 years 44 300 Five 902200 5 5 annual cash earnings 18ouyo Future cash earnings Time period of future cash flow 18o4uo S Discount rate Beta's Implied value 634649 purchase price 634649 fair market value of Beta's assets 735800 Lesst fair market value of 억 Beta's liability 328300 Fair value of Net Assets 407500 Goodwill 227149