The December 31, 2017 balance sheet of Myers and Myers, prepared under generally accepted accounting principles, follows.

An investor believes that Myers and Myers can generate $20,000 cash per year for ten years, at which time it could be sold for $80,000. The FMVs of each asset as of December 31, 2017, follow:

Cash ........................................................................$ 10,000
Short-term investments ..........................................14,000
Land ...........................................................................60,000
Buildings ...................................................................40,000
Total FMV ..............................................................$124,000

REQUIRED:
a. What is the book value of Myers and Myers as of December 31, 2017?
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, 2017? 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, 2017)?
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.

Transcribed Image Text:

Liabilities and Shareholders' Equity Current liabilities Assets $ 10,000 $ 8,000 Cash Long-term liabilities Common stock Retained earnings Total liabilities and shareholders' equity Short-term investments 14,000 20,000 Land 20,000 80,000 Buildings 80,000 16,000 Total assets $124,000 $124,000