Computation of Goodwill Chopin Corporation Has Net Assets (Total Assets Minus Total Liabilities)

question 101

Essay

Computation of goodwill
Chopin Corporation has net assets (total assets minus total liabilities) valued at $880,000 and has earned an average profit of $132,000 per year for the past several years. Sands Company is negotiating the purchase of the company and has agreed to pay an amount equal to the value of the net identifiable assets, assume the liabilities, and pay a sum for goodwill equal to the earnings in excess of 12% on net assets, expected to continue for five years. What is the amount for goodwill Sands is including in its offer? $_______________
Computations

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Definitions:

Interest Rate Risk

The risk of losing money on investments because of changes in interest rates.

Zero Coupon Bond

A debt security that does not pay periodic interest (coupon) payments and is instead issued at a substantial discount to its face value, with the return being the difference between the purchase price and the face value at maturity.

Current Yield

The current yield is a financial metric that calculates the annual income (interest or dividends) an investment generates, divided by its current price.

Yield to Maturity

The complete yield expected from a bond assuming it is retained until it matures.