Computation of Goodwill The Income of Greystone,Inc. ,During the Last Several Years Has

question 138

Essay

Computation of goodwill
The income of Greystone,Inc. ,during the last several years has averaged $765,000 annually.The company is now being offered for sale as a going concern.The value of Greystone's net identifiable assets (total assets minus all liabilities)at the present time is $4,675,000.
One of several corporations interested in buying Greystone,offers to pay an amount equal to the value of the net identifiable assets and to assume all liabilities.In addition,this prospective buyer is willing to pay for goodwill an amount equal to net earnings in excess of 10% on net assets,expected to continue four years.
You are to use the above information as a basis for computing the price that the investing corporation will offer for Greystone,Inc.$________

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Definitions:

Principle of Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio to reduce exposure to any single asset's volatility.

Positively Correlated Stocks

Stocks whose prices tend to move in the same direction due to similar underlying factors or market conditions.

Volatility

A statistical measure of the dispersion of returns for a given security or market index, often associated with the degree of risk or uncertainty.

Systematic Risk

The risk inherent to the entire market or a whole market segment, which cannot be mitigated through diversification alone.