During the past several years the annual net income of Avery Company has averaged $540,000.
At the present time the company is being offered for sale. Its accounting records show the book value of net assets (total assets minus all liabilities) to be $2,800,000. The fair value of Avery’s net identifiable assets, however, is $3,000,000.
An investor negotiating to buy the company offers to pay an amount equal to the fair value for the net identifiable assets and to assume all liabilities. In addition, the investor is willing to pay for goodwill an amount equal to the above-average earnings for five years.
On the basis of this agreement, what price should the investor offer? A normal return on the fair value of net assets in this industry is 15 percent.