You have been asked to value Pacific Corporation, Inc., using an excess earnings method, given the...
You have been asked to value Pacific Corporation, Inc., using an
excess earnings method,
given the following information:
Working capital balance = $2,000,000
Fair value of fixed assets = $5,500,000
Book value of fixed assets = $4,000,000
Normalized earnings of firm = $1,000,000
Required return on working capital = 5.0 percent
Required return on fixed assets = 8.0 percent
Required return on intangible assets = 15.0 percent
Weighted average cost of capital = 10.0 percent
Long-term growth rate of residual income = 5.0 percent
Based on this information:
A. What is the value of Pacific’s intangible assets?
B. What is the market value of invested capital?
Homework Answers
| A) | ||
| Normalized earnings of firm = | $ 1,000,000.00 | |
| Less: | ||
| Return required for working capital is $ 2,000,000 x 5% | $ 100,000.00 | |
| Return required for Fixed assets is $ 5,500,000 x 8% | $ 440,000.00 | |
| Required return for working capital and Fixed asset | $ (540,000.00) | |
| Residual income for intangible assets | $ 460,000.00 | |
| Intangibles capitalized at (15% discount rate for intangibles less 5% long - term growth rate) | 10% | |
| Value of Pacific’s intangible assets = $460,000/10% | $ 4,600,000.00 | |
| B) | ||
| Working capital balance = | $ 2,000,000.00 | |
| Fair value of fixed assets = | $ 5,500,000.00 | |
| Market Value of Intangibles Assets | $ 4,600,000.00 | |
| Market Value of Invested Capital | $ 12,100,000.00 |
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