As Part Of A Business Combination, Mother Ryan Company Acqui

Question

As Part Of A Business Combination Mother Ryan Company Acquired A Cust As part of a business combination, Mother Ryan company acquired a customer list and a franchise agreement. Mother Ryan uses the expected cash flow approach for estimating the fair value of these two intangibles. The appropriate interest rate is 8%. The potential future cash flows from the two intangibles, and their associated probabilities, are as follows: Customer List Outcome 1: 17% probability of cash flows of $40,000 at the end of each year for five years Outcome 2: 29% probability of cash flows of $18,000 at the end of each year for four years Outcome 3: 54% probability of cash flows of $9,000 at the end of each year for three years Franchise Agreement Outcome 1: 15% probability of cash flows of $450,000 at the end of each year for 10 years Outcome 2: 19% probability of cash flows of $12,000 at the end of each year for four years Outcome 3: 66% probability of cash flows of $500 at the end of each year for three years Using the expected cash flow approach, estimate the fair value of the customer list and of the franchise agreement. Round your calculations to the nearest whole dollar. Total estimated fair value of the customer list $______________ Total estimated fair value of the franchise agreement $________________

Dr. Jack HW Helper · Accepted Answer

The valuation of intangible assets such as customer lists and franchise agreements is critical in the context of business acquisitions and mergers. Accurate valuation not only influences the purchase price but also impacts subsequent accounting, reporting, and strategic decision-making. This paper employs the expected cash flow approach, incorporating probabilistic outcomes and discounting future cash flows at an 8% interest rate to estimate the fair values of these assets, as instructed. Valuation Methodology The expected cash flow approach involves calculating the weighted average of possible future cash flows, where each outcome's probability weighs the respective cash flow estimates. This approach aligns well with intangible assets that have variable future economic benefits depending on different scenarios, which are inherently uncertain. Discounting these expected cash flows at the appropriate rate accounts for the time value of money, revealing the present value that reflects market perceptions of risk and return. Calculation of Fair Value of the Customer List Each outcome is associated with a specific probability, cash flow stream, and duration. The calculation proceeds in two steps: first determining the present value (PV) of cash flows for each outcome, then obtaining the expected value weighted by the probability of each outcome. The present value of a cash flow received at the end of year n is calculated as: PV = Future Cash Flow / (1 + discount rate)^n Applying this to each outcome: Outcome 1: 17% probability, $40,000 annually for 5 years Year 1: $40,000 / (1.08)^1 ≈ $37,037 Year 2: $40,000 / (1.08)^2 ≈ $34,298 Year 3: $40,000 / (1.08)^3 ≈ $31,787 Year 4: $40,000 / (1.08)^4 ≈ $29,393 Year 5: $40,000 / (1.08)^5 ≈ $27,216 Total PV for Outcome 1 = sum of above ≈ $159,731 Outcome 2: 29% probability, $18,000 annually for 4 years Year 1: $18,000 / (1.08)^1 ≈ $16,667 Year 2: $18,000 / (1.08)^2 ≈ $15,432 Year 3: $18,000 / (1.08)^3 ≈ $14,287 Year 4: $18,000 / (1

As Part Of A Business Combination, Mother Ryan Company Acqui

As Part Of A Business Combination Mother Ryan Company Acquired A Cust

Paper For Above instruction

Outcome 1: 17% probability, $40,000 annually for 5 years

Outcome 2: 29% probability, $18,000 annually for 4 years

Outcome 3: 54% probability, $9,000 annually for 3 years

Outcome 1: 15% probability, $450,000 annually for 10 years

Outcome 2: 19% probability, $12,000 annually for 4 years

Outcome 3: 66% probability, $500 annually for 3 years

References