An article in the financial press in early 20X9 discussed the implications of the increasing number of goodwill impairments in the U.S. in 20X8.

If goodwill assets are impaired, they are written down to their fair value and the impairment amount is charged to the income statement.

Required

1. The article stated that as goodwill write-downs become more common, investors are likely to become increasingly wary of industries with high ratios of goodwill assets to total assets.

1. Explain why investors might have reasons to be wary of industries in which companies tend to have high levels of goodwill assets.
2. If it is true that investors are indeed wary of these companies, what would be the effect, if any, on these companies cost of capital?

2. The article referenced some well-publicized cases involving recognition of goodwill assets in which certain U.S.-based companies acquired their rivals at a very high premium, resulting in very large recorded goodwill amounts, but incurred impairment charges soon after acquisition.

With respect to these acquisitions, the article stated that managers competence was brought into question. The article suggested that significantly overpaying for a rival company amounted to managerial ineptitude.

If the above statement is correct, describe the effect on managers reservation utility of overpaying for rival firms.