The differences between present value, book value, and liquidation value
The December 31, 2011, balance sheet of Myers and Myers, prepared under generally accepted accounting principles, follows. (This problem requires knowledge of present value calculations. Refer to Appendix A.)
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Assets
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Liabilities and Shareholders" Equity
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Cash
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$ 10,000
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Current liabilities
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$ 8,000
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Short-term investments
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14,000
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Long-term liabilities
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20,000
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Land
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20,000
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Common stock
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80,000
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Buildings and machinery
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80,000
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Retained earnings
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16,000
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Total liabilities and
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Total assets
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$124,000
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Shareholder? equity
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$124,000
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An investor believes that Myers and Myers can generate 520.000 cash per year for ten years. at which time it could be sold for 580.000. The FMVs of each asset as of December 31,2011 follow:
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Cash
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$ 10,000
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Short-term investments
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14,000
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Land
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60,000
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Buildings and machinery
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40,000
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Total FMV
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$124,000
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REQUIRED:
a. What is the book value of Myers and Myers as of December 31, 2011?
b. What is the value of Myers and Myers as a going concern (i.e., present value of the net future cash inflows) as of December 31, 2011? Assume a discount rate of 10 percent.
c. What is the liquidation value of Myers and Myers (i.e., how much cash would Myers and Myers be able to generate if each asset were sold separately and each liability were paid off on December 31, 2011)?
d. Discuss the differences among the book value of the company, the present value, and the liquidation value. Calculate goodwill, and explain it in terms of these three valuation bases.