4. RELATO AUTOBIOGRÁFICO
4.1 TEJIENDO ENTRE LUCES Y SOMBRAS
4.1.1 TEJIENDO LO INESPERADO
Multiple Choice – Theory 1. D
2. B 3. A 4. A
Multiple Choice – Computational Answers at a glance:
1. D 6. B 11. A
2. A 7. A 12. D
3. A 8. D 13. B
4. C 9. D 14. A
5. C 10. B
Solution:
1. D Solution:
Total earnings for the last 5 years 27,600,000
Less: Expropriation gain (1,600,000)
Normalized earnings for the last 5 years 26,000,000
Divide by: 5
(a) Average annual earnings 5,200,000
Fair value of acquiree's net assets 40,000,000 Multiply by: Normal rate of return 12%
(b) Normal earnings 4,800,000
Excess earnings (a) – (b) 400,000
Multiply by: Probable duration of excess
earnings 5
Goodwill 2,000,000
2. A Solution:
Average earnings (27.6M – 1.6M expropriation gain) ÷ 5 yrs. 5,200,000 Normal earnings in the industry (40M x 12%) (4,800,000)
Excess earnings 400,000
Divide by: Capitalization rate 25%
Goodwill 1,600,000
3. A Solution:
Average earnings (27.6M – 1.6M expropriation gain) ÷ 5 yrs. 5,200,000
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Divide by: Capitalization rate 12.5%
Estimated purchase price 41,600,000
Fair value of XYZ’s net assets (40,000,000)
Goodwill 1,600,000
4. C Solution:
Average earnings (27.6M – 1.6M expropriation gain) ÷ 5 yrs. 5,200,000 Normal earnings in the industry (40M x 12%) (4,800,000)
Excess earnings 400,000
Multiply by: PV of an ordinary annuity @10%, n=5 3.79079
Goodwill 1,516,316
5. C Solution:
Average earnings (2,600,000 ÷ 5 years) 520,000 Normal earnings on average net assets [10% x (11M ÷ 5)] (220,000)
Excess earnings 300,000
Divide by: Capitalization rate 30%
Goodwill 1,000,000
Add: Fair value of net identifiable assets acquired 2,360,000
Estimated purchase price 3,360,000
6. B Solution:
Average earnings (2,600,000 ÷ 5 years) 520,000 Divide by: Capitalization rate 16%
Estimated purchase price 3,250,000
Fair value of net identifiable assets acquired (2,360,000)
Goodwill 890,000
7. A (See solution above) 8. D
Solution:
Average earnings 5,200,000
Normal earnings (12% x 40M*) (4,800,000)
Excess earnings 400,000
Multiply by: PV of an ordinary annuity @10%, n=5 3.79079 Goodwill 1,516,316
*The fair value of XYZ’s net assets is computed as follows:
Carrying amount of equity 36,000,000 Excess of fair value of one asset over its carrying amount 4,000,000 Fair value of XYZ’s net assets 40,000,000
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Purchase price (squeeze) 41,516,316 Fair value of net assets acquired (40,000,000) Goodwill 1,516,316 9. D
Solution:
Average earnings (squeeze) 5,200,000 (squeeze) Normal earnings on net assets [12% x 40M*] (4,800,000)
Excess earnings 400,000 Divide by: Capitalization rate 25%
Goodwill (given) 1,600,000 (start)
*The net assets of XYZ is computed as follows:
Purchase price (given) 41,600,000 Fair value of net assets acquired (squeeze) (40,000,000)
Goodwill (given) 1,600,000
10. B Solution:
Goodwill is computed as follows:
DREARY DISMAL
Average annual earnings 320,000 480,000 Normal earnings on net assets (160,000) (240,000) Excess earnings 160,000 240,000
Divide by: Capitalization rate 20% 20%
Goodwill 800,000 1,200,000
Total contributions are computed as follows:
DREARY DISMAL Totals
Total contributions
(squeeze) 2,400,000 3,600,000 6,000,000
Fair value of net assets (1,600,000) (2,400,000) (4,000,000)
Goodwill 800,000 1,200,000 2,000,000
11. A (See solution above) 12. D
Solution:
DREARY DISMAL Totals Net asset contributions ,1600,000 2,400,000 4,000,000
Divide by: Par value per share of PS 400 400 400
Number of preference shares issued 4,000 6,000 10,000 Total contributions 2,400,000 3,600,000 6,000,000 Net asset contributions (1,600,000) (2,400,000) (4,000,000) Excess of total contributions 800,000 1,200,000 2,000,000
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Divide by: Par value per share of OS 200 200 200
Number of ordinary shares issued 4,000 6,000 10,000
Total PS and OS issued 8,000 12,000 20,000
Ratio of shares issued 40% 60% 100%
13. B Solution:
Analyses:
ZYX, Inc. lets itself be acquired (legal form) for it to gain control over the legal acquirer (substance).
Legal form of the agreement: (ZYX lets itself be acquired)
CBA Co. issues 40,000 ordinary shares to ZYX, Inc.’s shareholders in exchange for all of ZYX, Inc.’s 8,000 shares outstanding.
Substance of the agreement: (ZYX gains control over legal acquirer) After the combination, ZYX, Inc. gains control because it now owns 80% of CBA Co.
Accounting acquiree (CBA Co.) issues shares – Actual:
CBA's currently issued shares 10,000 20%
Shares to be issued to ZYX (5 sh. x 8,000 sh.) 40,000 80%
Total shares of CBA Co. after the combination 50,000 Accounting acquirer (ZYX, Inc.) issues shares – Reverse:
ZYX's currently issued shares 8,000 80%
Shares to be issued to CBA's shareholders to enable them to have the same interest in ZYX, Inc.
[(8,000 ÷ 80%) x 20%] 2,000 20%
Total 10,000
The consideration transferred is computed as follows:
Shares of ZYX effectively transferred to CBA 2,000 Multiply by: Fair value per share of ZYX’s shares 800 Fair value of consideration effectively transferred 1,600,000 Goodwill (gain on bargain purchase) is computed as follows:
Consideration transferred 1,600,000
Non-controlling interest in the acquiree - Previously held equity interest in the acquiree -
Total 1,600,000 Fair value of net identifiable assets acquired (6.4M –
5.2M) (1,200,000)
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Goodwill 400,000
14. A Solution:
Consideration transferred 4,000,000
Non-controlling interest in the acquiree - Previously held equity interest in the acquiree - Total 4,000,000 Fair value of net identifiable assets acquired (3,200,000)
Goodwill 800,000
Exercises 1. Solutions:
Method #1: Multiples of average excess earnings
Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000 Normal earnings in the industry (20M x 12%) (2,400,000)
Excess earnings 200,000
Multiply by: Probable duration of excess earnings 5
Goodwill 1,000,000
Method #2: Capitalization of average excess earnings
Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000 Normal earnings in the industry (20M x 12%) (2,400,000)
Excess earnings 200,000
Divide by: Capitalization rate 25%
Goodwill 800,000
Method #3: Capitalization of average earnings
Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000 Divide by: Capitalization rate 12.5%
Estimated purchase price 20,800,000
Fair value of acquiree’s net assets (20,000,000)
Goodwill 800,000
Method #4: Present value of average excess earnings
Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000 Normal earnings in the industry (20M x 12%) (2,400,000)
Excess earnings 200,000
Multiply by: PV of an ordinary annuity @10%, n=5 3.79079
Goodwill 758,158
36 2. Solutions:
Case #1: Excess earnings
Average earnings (1,300,000 ÷ 5 years) 260,000 Normal earnings on average net assets [10% x (5.5M ÷ 5)] (110,000)
Excess earnings 150,000
Divide by: Capitalization rate 30%
Goodwill 500,000
Add: Fair value of net identifiable assets acquired 1,180,000
Estimated purchase price 1,680,000
Case #2: Average earnings
Average earnings (1,300,000 ÷ 5 years) 260,000 Divide by: Capitalization rate 16%
Estimated purchase price 1,625,000
Fair value of net identifiable assets acquired (1,800,000)
Goodwill 445,000
3. Solution:
Average earnings 2,600,000
Normal earnings (12% x 20M*) (2,400,000)
Excess earnings 200,000
Multiply by: PV of an ordinary annuity @10%, n=5 3.79079
Goodwill 758,158
*The fair value of THICKEN’s net assets is computed as follows:
Carrying amount of equity 18,000,000 Excess of fair value of one asset over its carrying amount 2,000,000 Fair value of THICKEN’s net assets 20,000,000 Purchase price (squeeze) 20,758,158 Fair value of net assets acquired (20,000,000) Goodwill 758,158 4. Solution:
Average earnings (squeeze) 2,600,000 (squeeze) Normal earnings on net assets [12% x (20M) (2,400,000)
Excess earnings 200,000 Divide by: Capitalization rate 25%
Goodwill (given) 800,000 (start)
*The net assets of HISS is computed as follows:
Purchase price (given) 20,800,000 Fair value of net assets acquired (squeeze) (20,000,000)
Goodwill (given) 800,000
37 5. Solutions:
Requirement (a):
Goodwill is computed as follows:
DREARY
Co. DISMAL,
Inc.
Average annual earnings 160,000 240,000 Normal earnings on net assets (80,000) (120,000) Excess earnings 80,000 120,000
Divide by: Capitalization rate 20% 20%
Goodwill 400,000 600,000
Total contributions are computed as follows:
DREARY Co.
DISMAL,
Inc. Totals
Total contributions
(squeeze) 1,200,000 1,800,000 3,000,000
Fair value of net
assets (800,000) (1,200,000) (2,000,000)
Goodwill 400,000 600,000 1,000,000
Requirement (b):
The number of preference shares to be issued to each of the combining constituents is computed as follows:
DREARY
Co. DISMAL,
Inc. Totals Net asset contributions 800,000 1,200,000 2,000,000 Divide by: Par value per share
of PS 200 200 200 Number of preference shares
issued 4,000 6,000 10,000
Total contributions 1,200,000 1,800,000 3,000,000 Net asset contributions (800,000)
(1,200,000) (2,000,000) Excess of total contributions 400,000 600,000 1,000,000 Divide by: Par value per share
of OS 100 100 100
Number of ordinary shares
issued 4,000 6,000 10,000 Total PS and OS issued 8,000 12,000 20,000
Ratio of shares issued 40% 60% 100%
38 6. Solution:
Accounting acquiree (CBA Co.) issues shares – Legal form:
Actual %
CBA's currently issued shares 10,000 20%
Shares to be issued to ZYX (5 sh. x 8,000 sh.) 40,000 80%
Total shares of CBA Co. after the combination 50,000 Accounting acquirer (ZYX, Inc.) issues shares – Substance:
Reverse %
ZYX's currently issued shares 8,000 80%
Shares to be issued to CBA's shareholders to enable them to have the same interest in ZYX, Inc.
[(8,000 ÷ 80%) x 20%] 2,000 20%
Total 10,000
As a result, the fair value of the consideration effectively transferred by ZYX and the group’s interest in CBA is P800,000 (2,000 shares of ZYX, Inc. with a fair value per share of P400).
Goodwill (gain on bargain purchase) is computed as follows:
(1) Consideration transferred (2,000 x P400) 800,000 (2) Non-controlling interest in the acquiree -(3) Previously held equity interest in the acquiree -Total 800,000 Fair value of net identifiable assets acquired (600,000)
Goodwill 200,000
7. Solution:
(1) Consideration transferred 2,000,000 (2) Non-controlling interest in the acquiree -(3) Previously held equity interest in the acquiree -Total 2,000,000 Fair value of net identifiable assets acquired (1,600,000)
Goodwill 400,000
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