NATIONAL COLLEGE OF BUSINESS ADMINISTRATION

Business Combinaton
QUIZ#6

use the following informaon for the next three quesons:

Gamer Co. and Player Co. are planning to combine their businesses and put up a new enty
called APP Corporaon.

> App will issue 100,000 ordinary shares which are to

t o be subdivided between Gamer
and Player based on their total contribuons, including goodwill.

> Goodwill is computed by capitalizing excess earnings at 20%

> the industry normal earnings are 5% of net assets.

Gamer Co. Player Co.

Fair value of net idenable Assets 500,000 380,000
Average annual earnings 40,000 39,000

1 How much is the total goodwill expected to arise from the business combinaon?

a. 175,000 c. 75,000
b. 100,000 d. 0

2 How many shares will be issued to Gamer and Player, respecvely?

Gamer Co. Player Co.

a. 45,500 54,500
b. 64,500 35,500
c. 25,500 74,500
d. 54,500 45,500

Cloudy Co. plans to acquire all the net assets and liabilies
liabilies of Day Co. Cloudly expects that
it will need to pay premium equal to the discounted amount of Day's excess average annual
earnings in order to eect the transacon. The appropriate discount rate is 10%

> Day's earnings in the past 5 years:

Y e ar Earnings #3

2001 120,000 Average e

2002 130,000 normal ea
2003 135,000 excess ear
2004 125,000 10% n=5
2005 140,000 GOODWIL
total 650,000 FVNA
Purchase P
> the 20x4 earnings include an expropriaon
e xpropriaon loss of P40,000
> Day net assets have a current fair value of P590,000
> the industry average rate of return on net assets is 12%
> the probable duraon of "excess earnings" is 5 years

3. How much is he estmaed purchase price?

a. 932,432 c.817,447
b. 844,741 d.798,324

Sunday Co., a publicly listed enty, and Monday Co., a private company,
c ompany, exchnge
 

equity interests In a business combinaon.

> Sunday Co. issues 12 shares for all outstanding shares of Monday.
> Sunday's share are qouted at P60 per share, while Monday's shares
have a fair value of P200 per share.
> the net assets of the enes immediately before the combinaon
are shown below( the amount approximte the acquision - date fair values)

EQUITY SUNDAY Co. MONDAY Co.

Share Capital:
12,000 ordinary shares P10 par 120,000
9,000 ordinary shares, P100 par 900,000
Retained earnings 10,000 800,000
Total Equity 130,000 1,700,000

4. How much is he goodwill?

a. 50,000 c. 70,000
b. 60,000 d. 90,000

5. Which of the following factors is used as multiplier of super prots in valuation of goodwill of

a. Average capital employed in the business d. Normal rate of return

 b. Simple prots e. Normal prots.
c. Number of years’ purchase

6. This
This ty
type
pe of business
business combinati
combinationon occurs
occurs when
when,, for example,
example, a priva
private
te en
entity
tity decides
decides tto
o hav
havee it
 by a smaller public entity in order to obtain a stock exchange listing.

a. Step acquisition c. Reverse acquisition

 b. Rewind acquisition d. Stock acquisition

UNFLEDGED Co. is contemplating on acquiring IMMATURE, Inc. The following information

was gathered through a diligence audit:

·  The actual earnings of IMMATURE, Inc. for the past 5 years are shown below:

Year Earnings

20x1 2,400,000
20x2 2,600,000
20x3 2,700,000
20x4 2,500,000
20x5 3,600,000
Total 13,800,000

·  Earnings in 20x5 included an expropriaon gain of ₱800,000.

·  The fair value of IMMATURE’s net assets as of the end of 20x5 is ₱20,000,000.
·  The industry average rate of return is 12%.
·  Probable duraon of “excess earnings” is 5 years.

7. How much is the esmated goodwill under the mulples of average excess earnings  method?

a. 1,000,000 c. 800,000
b. 1,800,000 d. 2,000,000

8. How much is the esmated goodwill under the capitalizaon of average excess earnings  method?
 

use a capitalizaon rate of 25%

a. 1,000,000 c. 800,000
b. 1,800,000 d. 2,000,000

9. How much is the esmated goodwill under the capitalizaon of average earnings  method?
use a capitalizaon rate of 12.5%

a. 758,158 c. 800,000
b. 1,800,000 d. 2,000,000

10. How much is the esmated

e smated goodwill under the present value of average excess earnings method?
use discount rate of 10%

a. 758,158 c. 800,000
b. 1,800,000 d. 2,000,000

"PUSH YOURSELF, BECAUSE NO ONE ELSE IS GOING TO DO IT FOR YOU."

 

#1 gamer co. player co. total/combined

aver
averag
age
e ea
earn
rniings
ngs 40
40,0
,000
00.0
.00
0 39
3900
000
0
normal earnings 25,000.00 19000
excess earnings 15,000.00 20000
capitalizaon rate 20% 20%
GOODWILL 75,000.00 100000 175,000.00

#2 TOTAL
Considearon transferred 575000 480000 1,055,000.00

FVNA 500000 380000 880,000.00

GOODWILL 75000 100000 175,000.00

rnings 138000
  niings
n 70800
  ings
in 67200
3.79079
254741.1
590000
  ri
r ice 844741.1
 

#4
Consideraon transferred 200000
NCI 0
Prev held equity 0
total 200000
FVNA 130000
GOODWILL 70000

Legal form
Shares issued 12000 10%
Shares to Monday co. 108000 90%
total share 120000 100%

Substance
Shares issued 9000 90%
Shares to Sunday co. 1000 10%
total share 10000 100%
  a business?

elf “acquired”

#7
Total earnings fro 5 years 13,800,000.00
Expropriaon gain 800,000.00
Normalized earnings for the last 5 years 13,000,000.00
5.00
average annual earnings 2,600,000.00
FV of net assets 20,000,000.00
rate 12%
  2,400,000.00 2,400,000.00
Excess earnin
earnings
gs (2,400,000.0
(2,400,000.00)
0) 200,000
200,000.00
.00
GOODWILL 1,000,000.00

#8 #9
avergae earnings 2,600,000.00 avergae earnings 2,600,000.00
(13.8-.8)/5 capitalizaon rate 12.50%
norma
ormall ea
earn
rnin
ings
gs 2,
2,40
400,
0,00
000.
0.00
00 es
esm
mat
ated
ed purch
urchas
ase
e price
rice 20
20,8
,800
00,0
,000
00.0
.00
0
(20m*.12) 200,000.00 FV immature inc's net asset 20,000,000.00
capitalizaon rate 0.25 goodwill 800,000.00
 

GOODWILL 800,000.00

#10
avergae earnings 2,600,000.00
normal earnings 2,400,000.00
Excess earnings 200,000.00
PV 10% n=5 3.79
GOODWILL 758,158.00