Question
Please help me finish this problem, I'm stuck. Plantation Homes Company is considering the acquisition of Condominiums, Inc. early in 2015. To asses the amount
Please help me finish this problem, I'm stuck.
Plantation Homes Company is considering the acquisition of Condominiums, Inc. early in 2015. To asses the amount it might be willing to pay, Plantation Homes makes the following computations and assumptions.
A. Condominiums, In.c 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. Condominiums, Inc.'s pretax incomes for the years 2012 through 2014 were $1,200,000, $1,500,000 and $950,000, 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) $960,000
Depreciation on equipment (each year) 50,000
Extraordinary loss (year 2014) 300,000
Sales commissions (each year) 250,000
C. The normal rate of return on net assets for the industry is 15%.
Required:
A. Assume further that 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 assumptions, calculate a reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill. Ignore tax effects.
This is what I've been able to do:
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