Question
Estimating Goodwill and Valuation Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta: Beta Company Book Values
Estimating Goodwill and Valuation
Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta:
| Beta Company Book Values | Estimated Market Values |
Total identifiable assets | $585,000 | $750,000 |
Total liabilities | 320,000 | 320,000 |
Owners' equity | $265,000 |
|
Cumulative total net cash earnings for the past five years of $850,000 includes extraordinary cash gains of $67,000 and nonrecurring cash losses of $48,000.
Alpha Company expects a return on its investment of 15%. Assume that Alpha prefers to use cash earnings rather than accrualbased earnings to estimate its offering price and that it estimates the total valuation of Beta to be equal to the present value of cashbased earnings (rather than excess earnings) discounted over five years. (Goodwill is then computed as the amount implied by the excess of the total valuation over the identifiable net assets valuation.)
Required:
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