Assume the following information for a company that you are going to value using the Excess Earnings approach to valuation: Tangible assets = $2,468,000 Goodwill = $1,532,000 Tangible Assets should generate a return of 12% The company reported $500,000 of Net Income Compute the excess earnings generated by the company (presumably from goodwill and intangibles)

Under the excess earning approach to valuation, the normal profits are determined by multiplying the rate of return with the tangible assets of the firm. These are then subtracted from the actual profits earned by the company. The excess of this profit, is then capitalized by multiplying with a suitable number to get the value of the intangible assets. This is because, it is assumed that the company is able to earn excess profits because of the goodwill and the other intangible assets.

Therefore normal earnings = Rate of return tangible assets should generate * value of tangible assets

= 12% * 2,468,000

= $296,160

Net income reported by company = $500,000

Excess income = Net income reported by company - Normal earnings

= 500,000 - 296,160

= 203,840

Therefore the amount of excess earning earned by the company is $203,840 because of the goodwill and the other intangible assets.