ABC Co. is contemplating on acquiring XYZ Inc. The following information was gathered through a diligence audit: The actual earnings of SXYZ, Inc. for the past 5 years are shown below: Year Earnings 2015 2,400,000 2016 2,600,000 2017 2,700,000 2018 2,500,000 2019 3,600,000 Total 13,800,000 Earnings in 2019 included an expropriation gain of ₱800,000. The fair value of XYZ net assets as of the end of 2019 is ₱20,000,000. The industry average rate of return is 12%. Probable duration of “excess earnings” is 5 years. How much is the estimated goodwill under the multiples of average excess earnings method? How much is the estimated goodwill under the capitalization of average excess earnings method? Use a capitalization rate of 25%.
ABC Co. is contemplating on acquiring XYZ Inc. The following information was gathered through a diligence audit: The actual earnings of SXYZ, Inc. for the past 5 years are shown below: Year Earnings 2015 2,400,000 2016 2,600,000 2017 2,700,000 2018 2,500,000 2019 3,600,000 Total 13,800,000 Earnings in 2019 included an expropriation gain of ₱800,000. The fair value of XYZ net assets as of the end of 2019 is ₱20,000,000. The industry average rate of return is 12%. Probable duration of “excess earnings” is 5 years. How much is the estimated goodwill under the multiples of average excess earnings method? How much is the estimated goodwill under the capitalization of average excess earnings method? Use a capitalization rate of 25%.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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ABC Co. is contemplating on acquiring XYZ Inc. The following information was gathered through a diligence audit:
The actual earnings of SXYZ, Inc. for the past 5 years are shown below:
|
Year |
Earnings |
|
2015 |
2,400,000 |
|
2016 |
2,600,000 |
|
2017 |
2,700,000 |
|
2018 |
2,500,000 |
|
2019 |
3,600,000 |
|
Total |
13,800,000 |
- Earnings in 2019 included an expropriation gain of ₱800,000.
- The fair value of XYZ net assets as of the end of 2019 is ₱20,000,000.
- The industry average
rate of return is 12%. - Probable duration of “excess earnings” is 5 years.
- How much is the estimated
goodwill under the multiples of average excess earnings method? - How much is the estimated goodwill under the capitalization of average excess earnings method? Use a capitalization rate of 25%.
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