Reference no: EM13516881

The differences between present value, book value, and liquidation value

The December 31, 2011, balance sheet of Myers and Myers, prepared under generally accepted accounting principles, follows. (This problem requires knowledge of present value calculations. Refer to Appendix A.)

Assets		Liabilities and Shareholders" Equity
Cash	$ 10,000	Current liabilities	$ 8,000
Short-term investments	14,000	Long-term liabilities	20,000
Land	20,000	Common stock	80,000
Buildings and machinery	80,000	Retained earnings	16,000
		Total liabilities and
Total assets	$124,000	Shareholder? equity	$124,000

An investor believes that Myers and Myers can generate 520.000 cash per year for ten years. at which time it could be sold for 580.000. The FMVs of each asset as of December 31,2011 follow:

Cash	$ 10,000
Short-term investments	14,000
Land	60,000
Buildings and machinery	40,000
Total FMV	$124,000

REQUIRED:

a. What is the book value of Myers and Myers as of December 31, 2011?

b. What is the value of Myers and Myers as a going concern (i.e., present value of the net future cash inflows) as of December 31, 2011? Assume a discount rate of 10 percent.

c. What is the liquidation value of Myers and Myers (i.e., how much cash would Myers and Myers be able to generate if each asset were sold separately and each liability were paid off on December 31, 2011)?

d. Discuss the differences among the book value of the company, the present value, and the liquidation value. Calculate goodwill, and explain it in terms of these three valuation bases.