Finance Assignment

RUNNING HEAD: TEAM 1 TASK 9 1

TASK 9

Team 1:

Adetolani Adeosun

Lawrence Henderson

Ayoub Mfinanga

Brittany Raines

Matthias Wurster

Memo to CFO

Executive Summary:

Goodwill is an intangible asset that is recorded when a company purchases another company. The amount the company pays beyond the book value of these assets is recorded as a separate asset known as “goodwill”. Acme Iron is considering buying Martin & Sons for $60 million. Martin & Sons has $4.2 million in net working capital. The firm has total assets with a book value of $48.6 million and a market value of $53.4 million. Goodwill is calculated by taking the sum of the market value of assets and net working capital and subtracting that number from the cash acquisition. Based on the following calculation, Acme’s amount of goodwill will be recorded on its balance sheet as $2.4 million. Goodwill is recorded as a noncurrent asset on the balance sheet. Acme does not have the liquidity available to finance this acquisition using cash, so they will have to issue debt or equity for the same. This will reduce liquidity risk. A liquidity issue could damage Acme’s finances to the point where bankruptcy is a potential. A company experiencing liquidity problems is an indicator that there are underlying problems in its practice and this leads to an investment risk.

Analysis:

Goodwill = cash acquisition – (market value of assets + net working capital).

= $60 million – ($53.4 million + $4.2 million)

= $60 million - $57.6 million

= $2.4 million

Goodwill recorded is $2.4 million.

I recommend that the whole consideration should not be paid in cash rather issue debt or equity for the same which reduces liquidity risk.

Yes, there is a liquidity issue which could damage their finances to the point that bankruptcy becomes a potential.

Conclusion:

Goodwill will be reported at $2.4 Million. Paying for this investment using debt or newly issued equity will reduce the liquidity risk of the investment, so this is recommended. This investment should not threaten bankruptcy as long as liquidity is maintained using the above recommended financing options.