Problem

Jell Stores is considering expanding its operations to include the greater Boston area. Ra...

Jell Stores is considering expanding its operations to include the greater Boston area. Rather than build new stores in the Boston area, management plans to acquire existing stores and convert them into Jell outlets.

Jell is evaluating two similar acquisition opportunities. Information relating to each of these stores is presented below:

 

Carnie’s

Mell’s

Estimated normal rate of return on net assets

20%

 

20% 

Fair market value of net identifiable assets

 

$900,000

 

$980,000

Actual average net income for past five years

250,000

280,000

Instructions

a. Compute an estimated fair value for any goodwill associated with Jell purchasing Carnie’s. Base your computation upon an assumption that successful stores of this type typically sell at about 10 times their annual earnings.


b. Compute an estimated fair value for any goodwill associated with Jell purchasing Mell’s. Base your computation upon an assumption that Jell’s management wants to generate a target return on investment of 35 percent.


c. Many of Jell’s existing stores are extremely profitable. If Jell acquires Carnie’s or Mell’s. should it also record the goodwill associated with its existing locations? Explain.

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