This example says that if goodwill is greater than the market value of a company, then this implies that the value implicitly given to its assets is negative and a future goodwill write-off is likely. I think the conclusion is correct (goodwill likely to be written down), but as market value represents the market’s valuation of the net assets of a company, surely if goodwill is greater than the market value, this implies the value implicitly given to net assets (rather than assets ) is negative. Can anyone help with this?
pemb inc is a study guide shop. it owns one set of L2 2015 CFAI textbooks. the market values this firm at $100.
onlysimon inc has a set of L2 2014 books, pemb decides to buy this firm for $120.
after the transaction, pemb realises these books are worthless so records goodwill of $120.
the market still thinks pemb inc is still worth $100.
the next year pemb writes down the goodwill to zero.
There are no liabilities in your example, so it doesn’t answer my question…
Market value of company = market value of operating assets + market value of non operating assets = market value of debt + market value of equity
Market value of equity = Market value of operating assets + non-operating assets ( cash, good will etc) - market value of debt
If market value of equity is 100 M
market value of good will only is 120 M
then in order to balance, the net assets which is (market value of operating assets + other non-opertaing assets - market value of debt) has to be negative in or der to match.