Exercise 1-1

Plantation Homes Company is considering the acquisition of Condominiums, Inc. early in 2015. To assess the amount it might be willing to pay, Plantation Homes makes the following computations and assumptions.

A.		Condominiums, Inc. has identifiable assets with a total fair value of $14,404,000 and liabilities of $8,545,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 28% higher than book value, and land with a fair value 82% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Condominiums, Inc.
B.		Condominiums, Inc.s pretax incomes for the years 2012 through 2014 were $1,136,000, $1,377,000, and $1,004,000, respectively. Plantation Homes believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments to the following items included in pretax earnings:

Depreciation on buildings (each year)		948,000
Depreciation on equipment (each year)		49,800
Extraordinary loss (year 2014)		323,000
Sales commissions (each year)		260,000

C.

The normal rate of return on net assets for the industry is 16%.