As the president of Victoria Recording Corp., you are considering purchasing Moose Jaw CD Corp., whose statement of financial position is summarized as follows:
Current assets ............... $400,000
Plant and equipment (net) .......... 750,000
Other assets ................ 325,000
Total .................. $1,475,000
Current liabilities ............. $350,000
Long-term liabilities ........... 600,000
Common shares .............. 425,000
Retained earnings ............ 100,000
Total ................. $1,475,000
The current assets' fair value is $l50,000 higher than their carrying amount because of inventory undervaluation. All other assets and liabilities have book values that approximate their fair value. The normal rate of return on net assets for the industry is 15%. The expected annual earnings for Moose Jaw CD Corp. are $125,000.
Instructions
Assuming that the excess earnings are expected to continue for five years, how much would you be willing to pay for goodwill, and for the company? (Estimate goodwill by the present value method.)