Problem 1 Please help

Pierce Company is trying to decide whether to acquire Hager Inc. The following balance sheet for Hager Inc. provides information about book values. Estimated market values are also listed, based upon Pierce Company's appraisals.

Hager Inc. Hager Inc.

Book Values Market Values

Current Assets $ 450,000 $ 450,000

Property, Plant & Equipment (net) 1,140,000 1,300,000

Total Assets $1,590,000 $1,750,000

Total Liabilities $700,000 $700,000

Common Stock, $10 par value 280,000

Retained Earnings 610,000

Total Liabilities and Equities $1,590,000

Pierce Company expects that Hager will earn approximately $290,000 per year in net income over the next five years. This income is higher than the 14% annual return on tangible assets considered to be the industry "norm."

Required:

A. Compute an estimation of goodwill based on the information above that Pierce might be willing to pay (include in its purchase price), under each of the following additional assumptions:

(1) Pierce is willing to pay for excess earnings for an expected life of 4 years (undiscounted).

(2) Pierce is willing to pay for excess earnings for an expected life of 4 years, which should be capitalized at the industry normal rate of return.

(3) Excess earnings are expected to last indefinitely, but Pierce demands a higher rate of return of 20% because of the risk involved.

B. Determine the amount of goodwill to be recorded on the books if Pierce pays $1,300,000 cash and assumes Hager's liabilities.