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

Kappa Ltd has net assets at fair value of $20.0m. Its earnings are $4.0m a year, and the sector P/E ratio is 8 with 5.0m shares in issue. An acquirer uses the net asset value as a floor and the earnings-based value as another reference. What is the implied value of Kappa's internally generated goodwill (earnings-based equity value less net asset value)?

The implied goodwill is $12.0m. The earnings-based equity value is $4.0m multiplied by a P/E of 8, giving $32.0m. Subtracting the fair value of net assets of $20.0m leaves $12.0m attributable to goodwill and unrecognised intangibles.

  1. A$12.0mCorrect
  2. B$32.0m
  3. C$8.0m
  4. D$16.0m

Explanation

Earnings-based equity value = 4.0m x 8 = 32.0m. Goodwill implied = 32.0m - 20.0m = 12.0m. The 32.0m figure is the total equity value, not the goodwill, and ignoring net assets overstates the premium.

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