Aswan Corporation is interested in acquiring Richmond Plastics Limited. Richmond has determined that its excess earnings have averaged approximately $17 5,000 and feels that such an amount should be capitalized over an unlimited period at a 15% rate. Aswan feels that because of increased competition, the excess earnings of Richmond Plastics will continue for seven years at the most and that a 12% discount rate is appropriate.
(a) How far apart are the positions of these two parties?
(b) Is there really a difference in the two approaches being used by the parties to evaluate Richmond Plastics' goodwill? Explain.