Mongolia Corp. is considering acquiring Tibet Corp. The following information relates to Tibet Corp:
Net tangible assets at cost $5,000,000
Net tangible assets at fair value $5,500,000
Average net income for the past four years $475,000
Normal rate of return for the industry 8%
a.) What is the amount of goodwill if average excess earnings for the past four years are to be capitalized at the normal rate of return for the industry?
b.) What is the total amount that Mongolia should be willing to pay for Tibet if average excess earnings for the past four years are to be capitalized at 14%