Reference no: EM132577970
Macho Inc. has recently become interested in acquiring a South American plant to handle many of its production functions in that market. One possible candidate is De Fuentes SA, a closely held corporation, whose owners have decided to sell their business if a proper settlement can be obtained.
De Fuentes's statement of financial position is as follows:
Current assets $125,000
Fair value-net income investments 55,000
Buildings (net) 405,000
Total assets $585,000
Current liabilities $85,000
Notes payable 105,000
Share capital 225,000
Retained earnings 170,000
Total equities $585,000
- Macho has hired Yardon Appraisal Corporation to determine the proper price to pay for De Fuentes SA. The appraisal firm finds that the fair value-net income investments have a fair value of $75,000 and that inventory is understated by $40,000. All other assets and liabilities have book values that approximate their fair values. An examination of the company's income for the past four years indicates that the net income has steadily increased. In 2020, the company had a net operating income of $110,000, and this income should increase by 15% each year over the next four years. Macho believes that a normal return in this type of business is 15% on net assets. The asset investment in the South American plant is expected to stay the same for the next four years.
Question 1: Yardon Appraisal Corporation has indicated that De Fuentes SA's fair value can be estimated in several ways. Prepare estimates of the value of De Fuentes SA, with the value based on each of the following independent assumptions:
Question 2: Goodwill is based on the purchase of average excess earnings over the next four years. (Round answer to 0 decimal places, e.g. 5,275.)
Question 3: The fair value based on this assumption