Level 5: Analysis · Exercise 72 of 74

Purchase price allocation and goodwill

A financial modeling exercise from Modeldrill. Solve it with a live spreadsheet grid in your browser, with Fill right and Fill down, and it is checked the moment you submit.

The task

An acquirer pays the price in B2 for a company. Fill the deferred tax liability on the write-ups (B10: the fixed asset step-up plus the identified intangibles, times the tax rate), the fair value of net assets (B11: book value plus both write-ups, less the deferred tax liability), goodwill (B12: the price less that fair value), the extra yearly depreciation and amortization from the write-ups over the life in B7 (B13) and its after-tax cost to net income (B14).

What this exercise teaches

Goodwill is the part of the price that cannot be assigned to anything identifiable. Writing assets up reduces goodwill but adds depreciation and amortization that lower reported earnings, which is why the allocation matters for accretion and dilution.

A hint if you get stuck

Work down the list: the write-ups create a tax liability, the fair value of net assets is book value plus write-ups less that liability, and goodwill is whatever the price exceeds it by.