Firm B (Buyer) Agreed to Buy All the Outstanding Common

question 144

Essay

Firm B (buyer) agreed to buy all the outstanding common shares of firm S (seller).Relevant data for S at the time of the purchase: $$\begin{array} { | l | l | } \hline \text { Total owners' equity } & \$ 10,000 \\\hline \text { Total market value of identifiable assets } & 50,000 \\\hline \text { Total market value of liabilities } & 20,000 \\\hline \text { Average earnings per year } & 20,000 \\\hline\end{array}$$ The average rate of return for S's industry is 30%,based on net assets.B demands a 10% return on its investment,but allows the average rate of return to be applied to S's market value of net assets for purposes of computing goodwill.Any earnings in excess of the industry average are considered to extend for 5 years after purchase.How much did B pay for S's shares if the two parties agree to value goodwill at the present value of excess earnings over the industry average?

---

Definitions:

Cytotoxic

Adj. Referring to a substance or process that is toxic to cells, leading to cell damage or death.

Antitoxic

Having the ability to counteract or neutralize toxins, often pertaining to substances or antibodies.

Cytokinetic

Cytokinesis refers to the process during cell division where the cytoplasm of a parental cell is divided into two daughter cells.

Negative Selection

A process in the immune system where T cells that strongly react against self-antigens are eliminated to prevent autoimmunity.