Project #21839 - Case 1

It has to be done by today 1/31/13 at 11:00pm eastern time

 

 

 

On January 1, 2013, Acme Co. is considering purchasing a 40 percent ownership invest in PHC Co., a privately held enterprise, for $700,000. PHC predicts its profit will be 185,000 in 2013, projects a 10 percent annual increase in profits in each of the next four (4) years, and expects to pay a steady annual dividend of 30,000, for the foreseeable future. Because PHC has on its books a patent that is undervalued by 375,000, Acme realizes that it will have an additional amortization expenses of 15,000 per years over the next 10 years—the patent’s estimated useful life. All of PHC’s other assets and liabilities have book values that approximate market values. Acme uses the equity method for its investment in PCH.

 

Required:

 

  1. Using an Excel spreadsheet, set the following values in cells:

    • Acme’s cost of investment in PHC

    • Percentage acquired

    • First-year PHC reported income.

    • Projected growth rate in income.

    • PCH annual dividends

    • Annual excess patent amortization

  2. Referring to the values in (1), prepare the following schedules using columns for the years 2013 through 2017.

    • Acme’s equity in PHC earnings with rows showing these:

      • Acme’s share of PHC reported income.

      • Amortization expense.

      • Acme’s equity in PCH earnings

    • Acme’s Investment in PHC balance with rows showing the following:

      • Beginning balance.

      • Equity earnings.

      • Dividends.

      • Ending Balance.

    • Return on beginning investment balance = Equity earnings/Beginning investment balance in each year.

  3. Given the preceding values, computer the average of the projected returns on beginning investment balances for the first years of Acme’s investment in PHC. What is the maximum Acme can pay for PHC if it wishes to earn at least 10 percent average return on beginning investment balance? (Hint: Under Excel’s Tools menu, use Solver or Goal Seek capability to produce a 10 percent average return on beginning investment balance by changing the cell that contains Acme’s cost of investment in PCH. Excel’s Solver should produce an exact answer white Goal Seek should produce a close approximation. You may need to first add in the Solver capability under Excel’s Tools menu.)

 

Subject Business
Due By (Pacific Time) 01/31/2014 11:00 pm
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