Question

Exercise 1-2 Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta: Beta Company Estimated Book Values Market Values Total identifiable assets $541,800 $734,700 Total liabilities 317,800 309,500 Owners' equity $224,000 Cumulative total net cash earnings for the past five years of $906,800 includes extraordinary cash gains of $64,800 and nonrecurring cash losses of $46,000. Alpha Company expects a return 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.) (a) x Your answer is incorrect. Try again. 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 eg. 58,971.) X (a) offering price $ 656390.88 231191 (b) Goodwill Click if I would like to Show Work for this question: John Wiley & Sons, Inc. Onen Show Work

Answer 1

Part A             Cumulative 5 years net cash earnings                                                                    $906,800

                        Add nonrecurring losses 46,000

      Subtract extraordinary gains (64,800)

Five-years adjusted cash earnings $888,000

                        Average annual adjusted cash earnings ($888,000 / 5) $177,600

(a)        Estimated purchase price = present value of ordinary annuity of $177,600 (n=5, rate= 13%) $177,600 ´ 3.51723 = $624,660

                        (b)        Less: Market value of identifiable assets of Beta       $734,700

                                    Less: Liabilities of Beta     309,500

                                    Market value of net identifiable assets     425,200

                                    Implied value of goodwill of Beta    $199,460.