Fair value determination of goodwill and calculating the premium paid over market value in a merger:

Using fair value accounting for goodwill, under FAS 141R, determine the amount of Goodwill that "the acquiring company" enters on its balance sheet in the following situation: Oxford Corporation is acquiring the target Bickley, Inc. in a merger. Both companies are publicly listed. Bickley's market valuation in the merger is $9.0 billion, and its equity value on its balance sheet before any adjustments is $5.5 billion. During the merger process, Bickley's inventories will be written down by $500 million, and its receivables will be written down by $400 million. On the other hand, under fair value accounting, its plant and equipment will increase in value by $1.0 billion. Its patents and trademarks, however, will decrease in value by $500 million.

A) What is the new equity value of Bickley on its balance sheet?
B) How much goodwill will Oxford enter on its balance sheet as a result of this merger?
C) If the prevailing market value of Bickley was $7.0 billion on the NASDAQ before the merger announcement, what is the premium over market value that Oxford paid for Bickley in dollars and percent?

• Explain what type of merger this is. JIM distributes its stock and cash to Mason in exchange for all of its assets.

To determine the fair value of goodwill and calculate the premium paid over market value in this merger, we need to follow these steps:

Step 1: Calculate the new equity value of Bickley on its balance sheet.
The new equity value is calculated by adjusting the original equity value based on the adjustments made in the merger process.

Original Equity Value: $5.5 billion

Adjustments:
- Inventories written down: $500 million
- Receivables written down: $400 million
- Plant and equipment increased: $1.0 billion
- Patents and trademarks decreased: $500 million

New Equity Value = Original Equity Value - Inventories written down - Receivables written down + Plant and equipment increased - Patents and trademarks decreased

New Equity Value = $5.5 billion - $500 million - $400 million + $1.0 billion - $500 million

Calculate the result to determine the new equity value of Bickley on its balance sheet.

Step 2: Calculate the goodwill that Oxford enters on its balance sheet.
Goodwill represents the difference between the total consideration paid in a business combination and the fair value of net assets acquired.

Goodwill = Total consideration paid - Fair value of net assets acquired

In this scenario, we don't have information about the total consideration paid. Therefore, we cannot determine the exact amount of goodwill that will be entered on Oxford's balance sheet.

Step 3: Calculate the premium over market value.

Premium over market value = Total consideration paid - Market value of the target company

In this case, the market value of Bickley before the merger announcement is $7.0 billion, and we don't have information about the total consideration paid. Therefore, we cannot determine the exact premium over market value that Oxford paid for Bickley.

Unfortunately, without the information about the total consideration paid, we cannot provide the exact values for B) and C) as requested.