| Investing Lesson 3 |
| Quiz: How to Analyze a Balance Sheet |
Explanation $1,000,000 Question...
| Okay, take a breath.
This problem isn't that difficult if you take it a step at a time. First, we know that the acquisition company paid $3,498,029,210 for Ruby's Coffee Roasters. According to the balance sheet, Ruby's had $400,478,489 in tangible assets (which is the same as book value). We know from the lesson that accounting goodwill is the premium over book value. We need to take the purchase price of $3,498,029,210 and subtract it by the book value of Ruby's Coffee to find out how much that premium is. $3,498,029,210 (purchase price) - $400,478,489 (book value) = Goodwill $3,097,550,721 The acquisition company is going to amortize the goodwill over the course of 40 years (the maximum allowable). To find out the goodwill charges per year, divide the $3,097,550,721 by 40 years. $3,097,550,721 Goodwill The answer is $77,438,768.03. According to the question, the acquisition company had annual earnings of $240,300,918.29. They will now be required to subtract $77,438,768.03 in goodwill charges from the earnings each year. To find out the earnings per share before goodwill charges, take the $240,300,918.29 and divide it by the number of shares outstanding (147,209,398 shares). The answer is $1.632374 per share. Now, we have to find out the amount of goodwill charges per share. Take the $77,438,768.03 in goodwill charges divided by the total number of shares outstanding (147,209,398). The answer is $0.52604. You now have everything necessary to answer the question. Before goodwill charges, earnings per share were $1.63237. There are $0.52604 goodwill charges per share. $1.63237 - $0.52604 = $1.10633 earnings per share after goodwill charges. Another (simpler) way of looking at the problem is to take the annual profit of $240,300,918.29 and subtract the $77,438,768.03 in annual goodwill charges. The answer ($162,862,150.26) should then be divided by the number of shares, 147,209,398. The answer is $1.11. That's all there is to it! If you still have questions, send an email to beginnersinvest.guide@about.com.
|
