Alpha Company is considering the purchase of Beta Company. Alpha has collected t

Question

Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta:

Cumulative total net cash earnings for the past five years of $806,100 includes extraordinary cash gains of $65,400 and nonrecurring cash losses of $49,900.

Alpha Company expects a return on its investment of 12%. Assume that Alpha prefers to use cash earnings rather than accrual-based earnings to estimate its offering price, and that it estimates the total valuation of Beta to be equal to the present value of cash-based earnings (rather than excess earnings) discounted over five years. (Goodwill is then computed as the amount implied by the excess of the total valuation over the identifiable net assets valuation.)

Compute (a) an offering price based on the information above that Alpha might be willing to pay, and (b) the amount of goodwill included in that price. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places e.g. 58,971.)

Beta Company
Book Values Estimated
Market Values Total identifiable assets $558,400 $814,700 Total liabilities 303,400 312,100 Owners’ equity $255,000

Explanation / Answer

Computation of Offering Price Particular Amount Total Net Cash Earning $806,100.00 Less: Extraordinary Cash Gain -$65,400.00 Add: Non-Recurring Cash losses $49,900.00 Net Operating Operating Cash Flow for $790,600.00 Average Operating cashflow in 5 Year $158,120.00 PVAF@ 12% , 5 year $3.60 Cummulative Present Value of Cash Flow in 5 year/Offering Price $569,987.18 Hence, Offering Price will be $569987.3 Computation of Goodwill Particulars Amount Amount Market Value of Asset $814,700.00 Less: Market Value of Liabilities -$312,100.00 Net Asset $502,600.00 Offering price $569,987.18 Goodwill ( Offering Price-Net Asset) $67,387.18

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