EXFRCISE $1-1$ Estimating Goodwill and Potential Offering Price L$07$

Plantation Homes Company is considering the acquisition of Condominiums, Inc. early in $2020.$ To assess the amount it might be willing to pay, Plantation Homes makes the following computations and assumptions.

A$.$ Condominiums, lnc$.$ has identifiable assets with a total fair value of $$15,000,000$ and liabilities of $$8,800,000.$ The assets include office equipment with a fair value approximating book value, buildings with a fair value $30\%$ higher than book value, and land with a fair value $75\%$ higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Condominiums, Inc.

B$.$ Conduminiums, Inc.$\text{'}$s pretax incomes for the years $2017$ through $2019$ were $$1,200,000,$ $$1,500,000,$ and $$950,000,$ respectively. Plantation Homes believes that an average of these carnings represents a fair estimate of annual earnings for the indefinite fulure, However, it may need to consider adjustments to the following items included in pretax earnings:

$\backslash$table$[[$Depreciation on buildings $($each year$),960,000],[$Depreciation on equipment $($each year$),50,000],[$Extraordinary loss $($year $2019),300,000],[$Sales commissions $($each year$),250,000]]$

C$.$ The normal rate of return on net assets for the industry is $15\%.$

Required:

A$.$ Assumc further thal Plantation Homes feels that it must earn a $25\%$ return on its investment and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill, Ignore tax effects.

B$.$ Assume that Plantation Homes feels that it must earn a $15\%$ return on its investment, but that average excess earnings are to be capitalized for three years only. Based on these assump. tions, calculate a reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill. Ignore tax effects.