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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
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 assumptions.
A Richfield, Inc. has identifiable assets with a total fair value of $ and liabilities of $ The assets include office equipment with a fair value approximating book value, buildings with a fair value higher than book value, and land with a fair value 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 and were $ $ 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
Depreciation on Equipment each year
Extraordinary Loss
Salary Expense year
C The normal rate of return on net assets for the industry is
Required:
A Assume that Hopkins feels that it must earn a 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 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 from the table is
Expected earnings of the target company:
Normal Earnings for similar firms
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