Question

Pitt Corporation is considering the purchase of Simon corporation. Pitt has collected the following data related to Simon Corporation:

• Total identifiable assets have a Book Value of $600,000

• The assets contain equipment that is undervalued by $100,000 and has a remaining useful life of 10 years. Simon Corp using the straight-line method of depreciating assets. The remaining assets are deemed to be equal to those determined by Pitt Corp.

• Total identifiable liabilities have a Book Value of $300,000

• Pitt Corporation believes that all liabilities equate with FMV calculations.

• Cumulative earnings over the past 3 years equates to $3,030,000 including an extraordinary gain of $25,000.

• The normal rate of return on similar industries is 10%, but Pitt Corp expects a return on investment of 12%.

Pitt Corporation estimates that the total valuation of Simon Corporation is equal to the present value of the expected future earnings discounted over 5 years.

Determine the Following:

1. What is the book value of Simon Corporation’s equity?

2. What is the FMV of Simon’s net identifiable asset?

3. Compute an offering price based on the information provided above.

4. Does the offer price include any goodwill? If so, how much?

Answer 1

1. Book Value of Equity= Book Value of Assets - Book Value of Liabilities

= 600000$-300000$

= 300000$ Answer

2. Fair Market Value of Simon's Net Identifiable Asset = FMV of Assts - Liabilities

= (600000+100000)- 300000

= 400000$

3. Offer Price= Cumulative earning = 3030000

Average earning = 3030000/3= 1010000

Less:- Extraordinary Gain = 25000

= 985000$

Valuation as per Normal Profits = 985000/10% =9850000 $

Expected Profit = 985000 * 12% = 1182000 $

5 Years PV of Profit Valuation = 1182000 * 3.61 = 4267020.00

4. Yes, it includes Goodwill.

Value of Goodwill = Business Valuation - FMV of Net identifiable asset

= 4267020.00- 400000.00

= 3867020.00