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ACCA Strategic Professional · Advanced Financial Management · Valuation for acquisitions and mergers

Brandt Co is valuing a trademark acquired with a target using the relief-from-royalty method. The trademark supports sales of $50m a year for 4 years (then it is expected to cease). A comparable royalty rate is 6% of sales, tax is 25%, and the discount rate is 10%. The 4-year annuity factor at 10% is 3.170. What is the trademark value, to the nearest $0.01m?

The trademark is worth $7.13m. The royalty saved is 6% of $50m, or $3.0m a year; after 25% tax it is $2.25m, and discounting at 10% over four years with a factor of 3.170 gives about $7.13m. Ignoring tax would overstate the value.

  1. A$7.13mCorrect
  2. B$9.51m
  3. C$6.34m
  4. D$11.80m

Explanation

Annual royalty saved = 6% x $50m = $3.0m. After tax at 25% = $2.25m. Multiply by the 3.170 annuity factor: 2.25 x 3.170 = $7.1325m, i.e. $7.13m. The $9.51m option ignores tax (3.0 x 3.170). $6.34m uses a wrongly applied 4-year factor of 2.82 (a 3-year factor mix-up).

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