QUESTION $1$

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 approximating book value, buildings with a fair value $25\%$ higher than book value, and land with a fair value $30\%$ 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.$\text{'}$s pretax incomes for the years $2015$ and $2016$ were $$470,000,$ $$570,000,$ 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$)$

$380,000$

$30,000$

$130,000$

$170,000$

Depreciation on Equipment $($each year$)$

Extraordinary Loss $(year2016)$

Salary Expense $(each$ year$)$

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

Required:

A$.$ Assume that Hopkins feels that it must earn a $20\%$ return on its investment, and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill.

B$.$ Assume that Hopkins feels that it must earn a $15\%$ return on its investment, but that average excess earnings are to be capitalized for five years only. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill. Note: The Present value of an ordinary annuity for five years at $15\%$ from the table is $3\mathrm{.}35216$

Expected earnings of the target company:

Normal Earnings for similar firms $=$