Question
Hopkins Company is considering the acquisition of Richfield, Inc. To assess the amount it might be willing to pay, Hopkins makes the following computations and
Hopkins Company is considering the acquisition of Richfield, Inc. To assess the amount it might be willing to pay, Hopkins makes the following computations and assumptions.
A.Richfield, Inc. has identifiable assets with a total fair value of $6,000,000 and liabilities of $3,700,000. The assets include office equipment with a fair value 10% lower than book value, buildings with a fair value 25% higher than book value, and land with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Richfield, Inc.
B.Richfield, Inc.'s pretax incomes for the years 2011 through 2013 were $470,000, $570,000, and $370,000, respectively. Hopkins 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 for the following items included in pretax earnings:
Depreciation on Buildings (each year)380,000
Depreciation on Equipment (each year) 30,000
Extraordinary gain (year 2012) 69,000
Extraordinary Loss (year 2013)190,000
Salary Expense (each year) 170,000
C.The normal rate of return on net assets for the industry is 15%.
Required:
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