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