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Marigold Corporation is interested in purchasing Lau Company Ltd. The total of Lau’s net income amounts...

Marigold Corporation is interested in purchasing Lau Company Ltd. The total of Lau’s net income amounts over the past five years is $759,000. During one of those years, Lau reported a gain on discontinued operations of $94,000. The fair value of Lau’s net identifiable assets is $695,300. A normal rate of return is 14%, and Marigold wants to capitalize excess earnings at 20%.

Calculate the estimated value of Lau’s goodwill.

Estimated value of Lau's goodwill $enter the Estimated value of Lau's goodwill in dollars
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Answer #1

SOLUTION

Average earnings [($759,000 – $94,000) X 1/5] $133,000

Normal earnings ($695,300 X 14%) (97,342)

Excess earnings 35,658

Capitalization rate 20%

Estimated goodwill $178,290 ( $ 35658 / 20% )

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