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Wk1 HW

# Wk1 HW - Week#1 HW Assignments Exercise 1-1 Part A Normal...

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Week #1 HW Assignments Exercise 1-1 Part A Normal earnings for similar firms = (\$15,000,000 - \$8,800,000) x 15% = \$930,000 Expected earnings of target: Pretax income of Condominiums, Inc., 2008 \$1,200,000 Subtract: Additional depreciation on building (\$960,000 × 30%) (288,000 ) Target’s adjusted earnings, 2008 912,000 Pretax income of Condominiums, Inc., 2009 \$1,500,000 Subtract: Additional depreciation on building (288,000 ) Target’s adjusted earnings, 2009 1,212,000 Pretax income of Condominiums, Inc., 2010 \$950,000 Add: Extraordinary loss 300,000 Subtract: Additional depreciation on building (288,000 ) Target’s adjusted earnings, 2010 962,000 Target’s three year total adjusted earnings 3,086,000 Target’s three year average adjusted earnings (\$3,086,000 ÷ 3) 1,028,667 Excess earnings of target = \$1,028,667 - \$930,000 = \$98,667 per year Present value of excess earnings (perpetuity) at 25%: = \$394,668 (Estimated Goodwill) Implied offering price = \$15,000,000 – \$8,800,000 + \$394,668 = \$6,594,668. Part B Excess earnings of target (same as in Part A) = \$98,667 Present value of excess earnings (ordinary annuity) for three years at 15%: \$98,667 × 2.28323 = \$225,279 Implied offering price = \$15,000,000 – \$8,800,000 + \$225,279 = \$6,425,279.

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