At the beginning of 2010, Billy Co.purchased Willie Corp.The agreed fair value of Willie's net assets was $900, 000.The expected annual income for Willie was $60, 000.The normal return for the industry was 6%.Excess earnings were capitalized at 10%.How much of a premium (in excess of $900, 000)did Billy pay for Willie?

Question

Quizplus · Accepted Answer

The normal return for the industry was 6%, which means that the expected return for Willie would be $54,000 ($900,000 x 6%). However, the actual expected income for Willie was $60,000, which means that there is excess earnings of $6,000 ($60,000 - $54,000). This excess earnings were capitalized at 10%, which means that Billy paid a premium of $60,000 ($6,000 ÷ 0.10) in addition to the fair value of Willie's net assets ($900,000). Therefore, the total premium paid by Billy is $960,000 ($900,000 + $60,000). The answer is C.

At the Beginning of 2010, Billy Co