NATIONAL COLLEGE OF BUSINESS ADMINISTRATION

Business Combination
QUIZ#6

use the following information for the next three questions:

Gamer Co. and Player Co. are planning to combine their businesses and put up a new entity
called APP Corporation.

> App will issue 100,000 ordinary shares which are to be subdivided between Gamer
and Player based on their total contributions, 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 identifiable 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 combination?

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

2 How many shares will be issued to Gamer and Player, respectively?

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 liabilities 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 effect the transaction. The appropriate discount rate is 10%

> Day's earnings in the past 5 years:

Year Earnings #3
2001 120,000 Average earnings
2002 130,000 normal earnings
2003 135,000 excess earnings
2004 125,000 10% n=5
2005 140,000 GOODWILL
total 650,000 FVNA
Purchase Price
> the 20x4 earnings include an expropriation 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 duration of "excess earnings" is 5 years

3. How much is the estimated purchase price?

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

Sunday Co., a publicly listed entity, and Monday Co., a private company, exchnge
equity interests In a business combination.

> 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 entities immediately before the combination
are shown below( the amount approximte the acquisition - 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 the 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 profits in valuation of goodwill of a business?

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

b. Simple profits e. Normal profits.
c. Number of years’ purchase

6. This type of business combination occurs when, for example, a private entity decides to have itself “acquired”
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 expropriation 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 duration of “excess earnings” is 5 years.

7. How much is the estimated goodwill under the multiples 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 estimated goodwill under the capitalization of average excess earnings method?
use a capitalization rate of 25%

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

9. How much is the estimated goodwill under the capitalization of average earnings method?
use a capitalization rate of 12.5%

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

10. How much is the estimated 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
average earnings 40,000.00 39000
normal earnings 25,000.00 19000
excess earnings 15,000.00 20000
capitalization rate 20% 20%
GOODWILL 75,000.00 100000 175,000.00

#2 TOTAL
Consideartion transferred 575000 480000 1,055,000.00
FVNA 500000 380000 880,000.00
GOODWILL 75000 100000 175,000.00

Average earnings 138000

normal earnings 70800
excess earnings 67200
3.79079
GOODWILL 254741.1
590000
Purchase Price 844741.1
 #4
Consideration 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%
oodwill of a business?

s to have itself “acquired”

#7
Total earnings fro 5 years 13,800,000.00
Expropriation 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 earnings (2,400,000.00) 200,000.00
GOODWILL 1,000,000.00

#8 #9
avergae earnings 2,600,000.00 avergae earnings 2,600,000.00
(13.8-.8)/5 capitalization rate 12.50%
normal earnings 2,400,000.00 estimated purchase price 20,800,000.00
(20m*.12) 200,000.00 FV immature inc's net asset 20,000,000.00
capitalization 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