Question 1 of 11
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Pharoah Homes Company is considering the acquisition of Sheridan, Inc. early in 2025. To assess the amount, it might be willing to pay,
Pharoah Homes makes the following computations and assumptions.
A. Sheridan, Inc. has identifiable assets with a total fair value of $15,018,000 and liabilities of $8,822,000. The assets include
office equipment with a fair value approximating book value, buildings with a fair value 30% higher than book value, and land
with a fair value 75% higher than book value. The remaining lives of the assets are deemed to be approximately equal to
those used by Sheridan, Inc.
B. Sheridan, Inc.'s pretax incomes for the years 2022 through 2024 were $1,202,700, $1,501,700, and $950,300, respectively.
Pharoah Homes believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite
future. However, it may need to consider adjustments to the following items included in pretax earnings:
Depreciation on buildings (each year) 960,900
Depreciation on equipment (each year) 51,400
Extraordinary loss (year 2024) 301,400
Sales commissions (each year) 254,500
C. The normal rate of return on net assets for the industry is 15%.
(a) Assume further that Pharoah Homes feels that it must earn a 25% return on its investment and that goodwill is determined by
capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Sheridan, Inc. Indicate how
much of the price consists of goodwill. Ignore tax effects. (Round present value factor calculations to 5 decimal places, e.g. 1.25124
and final answers to 0 decimal places e.g. 58,971.)
Goodwill $
Offering price $
