Exercise 1-2

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 $635,100 $823,500

Total liabilities 340,900 304,900

Owners equity $294,200

Cumulative total net cash earnings for the past five years of $783,900 includes extraordinary cash gains of $61,200 and nonrecurring cash losses of $45,800.

Alpha Company expects a return on its investment of 11%. Assume that Alpha prefers to use cash earnings rather than accrual-based earnings to estimate its offering price and that it estimates the total valuation of Beta to be equal to the present value of cash-based 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.)