Question

ABC Corporation is exploring the opportunity to purchase DEF Corporation.  DEF Corporation is able to earn higher profits than its competitors
due to its high level of service and quality products.  ABC Corporation will pay 5 times the actual net income for DEF Corporation because of this.
Calculate the amount of goodwill from the purchase given the folloiwng information: Industry DEF Corporation Fair Market Value of Net Identifiable Assets $1,250,000 $1,250,000 Normal Rate of Return 14.50% 14.50% Normal Earnings $200,000 $200,000 Average Actual Net Income - Past 5 Years $200,000 $275,000 Earnings In Excess of Industry Norm $ -    $75,000

Answer 1

Fair Market Value of Net Identifiable Assets	$12,50,000.00
Normal rate of return	14.50%
Normal earnings	$1,81,250.00
Earnings of DEF Corpration	$2,75,000.00
Excess earnings	$93,750.00
No.of years purchased	5 Years
Goodwill     =	Excess earnings x No.of years purchased
Goodwill     =	$4,68,750.00