Question

Psyche Company wants to acquire Trim Company. Trim's ROI has been above average for its industry; net income has averaged $140,000 a year more than the industry average. These ""excess"" earnings are expected to continue at this amount for 5 years. Assuming a discount rate of 8%, how much goodwill will arise from Psyche's purchase of Trim?

A. $558,978
B. $700,000
C. $81,672
D. $176,314

Answer 1

The goodwill that will arise from Psyche's purchase of Trim is approximately $558,978.

Step-by-step explanation:

To calculate the goodwill that will arise from Psyche's purchase of Trim, we need to find the present value of the excess earnings. The excess earnings are the difference between Trim's net income and the industry average, which is $140,000 per year. We assume that this amount will continue for 5 years. Using the formula for present value and a discount rate of 8%, we can calculate the present value of the excess earnings to be $558,978. Therefore, the goodwill that will arise from Psyche's purchase of Trim is approximately $558,978.