On January 1, 2024, Delta Co. is considering purchasing a 40 percent ownership interest in Omega Co., a privately held enterprise, for $700,000. Omega predicts its profit will be $185,000 in 2024, projects a 10 percent annual increase in profits in each of the next four years, and expects to pay a steady annual dividend of $30,000 for the foreseeable future. Because Omega has on its books a patent that is undervalued by $375,000, Delta realizes that it will have an additional amortization expense of $15,000 per year over the next 10 years—the patent’s estimated remaining useful life. Any remaining excess paid by Delta over Omega’s fair value was attributable to indefinite-lived intangible assets. All of Omega’s other assets and liabilities have book values that approximate market values. Delta uses the equity method for its investment in Omega.

Required

1. Using an Excel spreadsheet, set the following values in cells:
∙ Delta’s cost of investment in Omega.
∙ Percentage acquired.
∙ First-year Omega reported income.
∙ Projected growth rate in income.
∙ Omega annual dividends.
∙ Annual excess patent amortization.
2. Referring to the values in (1), prepare the following schedules using columns for the years 2024 through 2028.
∙ Delta’s equity in Omega earnings with rows showing these:
∙ Delta’s share of Omega reported income.
∙ Amortization expense.
∙ Delta’s equity in Omega earnings.
• Delta’s investment in Omega balance with rows showing the following:
∙ Beginning balance.
∙ Equity earnings.
∙ Dividends.
∙ Ending balance.
∙ Return on beginning investment balance = Equity earnings/Beginning investment balance in each year.
3. Given the preceding values, compute the average of the projected returns on beginning investment balances for the first five years of Delta’s investment in Omega. What is the maximum Delta can pay for Omega if it wishes to earn at least a 10 percent average return on beginning investment balance over the next five years?