Let’s look at Microsoft and Linkedin

• Microsoft acquired Linkedin in 2016 for a whooping $27 billion

• The firm believed that the business model of the two firms would complement each
other and build synergies in the long term

• When Microsoft bought Linkedin, it took over all its assets and liabilities which means
that the firm took over the entire book

• There are some non quantifiable assets that Linkedin holds (which can not be put on
the balance sheet) like Customer loyalty, brand reputation, monopoly, etc.

• So, investors of Linkedin would also want to be paid for selling their stake in a firm which
offers so much beyond the cost

Let’s look at how the 2Q quarterly report for Microsoft shows the impact
Let’s look at Microsoft and Linkedin
What is goodwill?

Balance sheet of acquired (as of March 2021)

Asset Liabilities
Cash 25,000 Current liabilities 55,000
Account receivables 35,000 Capital stock 100,000
Inventory 42,000 Retained earning 100,000
PPE 153,000
255,000 255,000

Fair value assessment

Cash 25,000 • Cash and account receivables are liquid which means they are
Account receivables 35,000 currently traded at market. Hence, fair value is same as book value

Inventory 122,000 • Book value of PPE is lower because of depreciation

PPE 200,000
• Inventory is higher because it has WIP/ completed inventory
Current liabilities 55,000
 Let’s take another question
Total assets
Short term assets 125 Current liabilities
Cash 25 Short term debt 50
Account receivables 50 Account payables 60 Purchase price: $300
Inventory 50 Non current liabilities
Long term assets 100 Long term debt 100
PPE 100
Total 225 Equity 15

Fair value
Short term assets 115 Current liabilities
Cash 25 Short term debt 50
Account receivables 50 Account payables 80
Inventory 40 Non current liabilities
Long term assets 120 Long term debt 95
PPE 120
Total 235 Total liabilities 135
Goodwill calculations:
Full Goodwill
• Valid under both IFRS and GAAP
• Both the parent and the non-controlling interests
are identified
• Goodwill is based on Fair value of subsidiary –
Fair value of identifiable net assets
• NCI = NCI percentage X Fair value of subsidiary
• Fair value of the subsidiary is the total price that
would had been paid had the company been
sold entirely
Partial Goodwill
• Valid under IFRS
• Only the goodwill that is attributed to the
controlling stake is recognized
• Goodwill is based on acquisition price – FV
net identifiable assets X acquisition share
• NCI = NCI percentage X Fair value of net
identifiable assets
• Net identifiable assets are defined as fair
value of assets – fair value of liabilities
Goodwill calculations:
Firm A acquired 80% of the firm B for $620,000. The book value and fair value of the firm B
is given in the table below.

Calculate the goodwill and NCI by both the approaches

Firm B
Cash $ 200 $ 200 Which approach has higher assets?
Inventory $ 300 $ 300
PPE $ 1,200 $ 1,500
Total Assets $ 1,700 $ 2,000
Payables $ 400 $ 400
Which would you prefer if you are firm A
Long term debt $ 1,000 $ 1,000
Total liabilities $ 1,400 $ 1,400
What is the ROA (if profit is $500)
Net identifiable assets $ 600
Key terms in the bond market
• Face value/ Par value:
Redemption value of the bond. This is the amount an investor would get once the bond is
redeemed. If Par value > bond price, then discount else trading at premium

• Bond maturity:
Total time it will take for the bond issuer to pay back the principal from date of issuance. If
maturity < 1 then Money market securities, if maturity > 1 then capital market securities

• Coupon Payments:
Regular payments that a bond will pay as an interest to the bond issuer. Expressed as a % of par
value. Can be annual, semi-annual, quarterly, etc.

• Yield:
Indicates the annual return that an investor is going to make on the bond

• Yield to maturity:
Indicates the total return expected from the bond if held till maturity. Mathematically, it’s the IRR
of the bond considering different payments

• Tenor:
Time remaining till maturity
Types of bonds
• Sovereign bonds/ Govt. bonds/ T-bills

• Quasi govt. entities/ Govt. sponsored bonds

• Municipality/ city councils/ state (Highly relevant in India)

• Corporate firms (India still has a nascent bond market)

• Special purpose entity (MBS, ABS, CDO, etc.)

• International banking entities – World bank, IMF, etc.

• Banks (interbank lending market)

Bond valuations
Market value of the bond is the present value of future cash flows discounted at current YTM, series of
spot rates, forward rates

Value changes every day which means we can calculate the price of the bond on every day

Coupon Coupon Coupon Coupon Coupon

Market value Principal

Price (time = t) = Present value of all future cash flows

Price (time = t) = C1/(1+r) + C2/(1+r)^2 + C3/(1+r)^4 + Principal/(1+r)^4

Present value = PV(coupon, tenure, payment, Future value, payment terms)

Bond valuations
1) Calculate the current price of the bond that will pay a coupon of $10% for
the next 4 years. Currently, the bond is trading at a YTM of 12%

2) Repeat the above question, if the pay out is:

- Semi-annual
- Quarterly
- Monthly
Bond price and yields
• Bond prices are largely dependent on the interest rates in the industry

• There is an inverse relation i.e. increase in interest rates cause bond prices to decline and vice
versa

• So, it becomes imperative to look at interest rates in an economy. Upward sloping yields are visible
in an expanding market and downward sloping interest rate curve indicates an impending
slowdown

Par value = 1000

Coupon = 10% annually
Tenure = 7 years
YTM = 8%

Calculate the prices if YTM ranged between 5%-10%

‘Clean’ and ‘dirty’ price
• Clean price is the price of the bond not including accrued interest payments. It does not
include the interest accrued between coupon payments

• This is the normalized price that is available on financial terminals to avoid any disturbance
caused by accrued interest

• Dirty price is the price of the bond that includes accrued interest payments between
coupon dates

• This is the actual price that you would be buying your bond at

• On the coupon date, clean and dirty price will converge as there is no accrued interest

Par value = 1000

Coupon = 5% annually
Tenure = 7 years
YTM = 8%