Section 5 Assistant lecture Alya elfedawy

Transcription

1 Section 5 Assistant lecture Alya elfedawy

2 1. Identify a normal rate of return on assets 2. Calculate normal earnings ( normal rate net assets ) { assets _ liabilities} 3. Calculate expected future earnings pre tax income + loss + any depreciation decrease _ gains _ any depreciation increase

3 4. excess earnings ( future earning normal earning ) 5.Compute estimated goodwill finite time periods (present value of an annuity) indefinitely (dividing the excess earnings by the discount rate) 6. Add goodwill to the fair value of the firm s net identifiable assets

4 A potential offering price for a company is computed by adding the estimated goodwill to the a. book value of the company s net assets. b. book value of the company s identifiable assets. c. fair value of the company s net assets. d. fair value of the company s identifiable net assets.

5 Plantation Homes Company is considering the acquisition of Condominiums, Inc. early in To assess the amount it might be willing to pay, Plantation Homes makes the following computations and assumptions. a. The normal rate of return on net assets is 15% b. identifiable assets with fair value 15,000,000$ and liabilities 8,800,000$.

6 C. Condominiums, Inc. s pretax incomes for 2008 were $1,200,000. Plantation Homes believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. The following are included in pretax earnings: Depreciation on buildings increased with 288,000 Extraordinary loss 300,000

7 Required: A. Assume further that Plantation Homes feels that it must earn a 25% return on its investment and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill. Ignore tax effects.

8 Step 1 normal rate of return on assets = 15%. Step 2 Compute the normal earnings. Fair value of assets $15,000,000 Fair value of liabilities (8,800,000) Fair value of net assets 6,200,000 Normal rate of return 15% Normal earnings $ 930,000

9 Step3: estimated the future earnings. pre tax income 1,200,000 + loss 300,000 _ dep increase ( 288,000) future earning 1,212,000

10 Step 4 Subtract the normal earnings (step 2) from the expected target earnings (step 3). The difference is excess earnings. Expected target earnings $ 1,212,000 Less: Normal earnings 930,000 Excess earnings, per year $ 282,000 Step 5 Compute estimated goodwill from excess earnings.

11 Present value of excess earnings (perpetuity) at 25%: Excess earnings $ 282,000 / 25% = $1,128,000 Estimated Goodwill Step 6 Add the estimated goodwill (step 5) to the fair value of the firm s net identifiable assets to arrive at a possible offering price. Net assets $6,200,000 Estimated goodwill 1,128,000 Implied offering price $7,328,000

12 If the good will finite excess earning the value (given) ولو تم افتراض القيمة المعطاه f= 282,000 2,28323 = 643,870,86 Offering price = 643,870,86 + 6,200,000 = 6,843,870,86

13 A Company is considering the acquisition of Condominiums, Inc. early in To assess the amount it might be willing to pay, A makes the following computations and assumptions. 1. The normal rate of return on net assets is 10%. 2. Condominiums, Inc. s pretax incomes FOR 2014 were 1000,000 $. The assets value with $, and the liabilities value with $.

14 A Company believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. The following are included in pretax earnings: Depreciation on buildings increased with 10,000$ Extraordinary loss 50,000$ Extraordinary gains 20,000$ Depreciation on equipment decreased with 5,000$

15 Required: A. Assume further that Plantation Homes feels that it must earn a 20% return on its investment and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill. Ignore tax effects.