Valuing goodwill: the various approaches

In order to be awarded CPD units you must answer the following five random questions correctly. If you fail the test, please re-read the article before attempting the questions again.

  1. Which of the following phrases would NOT be a suitable way to describe goodwill?

  2. Which of the following is NOT a recognised method of valuing goodwill?

  3. The Turnover approach would be best suited to which of the following types of business?

  4. A company may claim a deduction for corporation tax purposes for the amortisation of goodwill under which authority?

  5. George and Mildred Ltd runs a business manufacturing motorcycle sidecars. Details are as follows: (i) Turnover of GBP400,000; (ii) Pre-tax profits of GBP180,000 and a liability to corporation tax of GBP20,000; (iii) Net assets - Net Book Value of GBP100,000 and a current market value of GBP250,000; (iv) Research shows a P/E ratio of 3. Using the whole company valuation approach, what would be the value of the company's goodwill?

  6. Thorpe and Simmonds LLP is a successful firm of solicitors with two members and trading from rented premises. Further details are as follows: (i) Turnover of GBP2,500,000; Recurring turnover of GBP2,000,000; (ii) Pre-tax profits of GBP800,000 and a liability to corporation tax of GBP200,000; (iii) Net assets - Net Book Value (and market value) of GBP100,000; (iv) Income multiple 1. Using the most suitable valuation method for a professional partnership, what would be the value the goodwill of business?

  7. Weikop and Wood Ltd is a home-based husband and wife owned internet trading company with the following details: (i) Turnover GBP1,000,000 and pre tax profits (after directors' fees of GBP50,000) of GBP25,000 (ii) Net assets are small; (iii) Business operated from home and computer equipment is the principal asset in net assets of GBP5,000. What would the value of the company's goodwill under the simple multiple approach, using a multiple of 1?

  8. Which of the following should NOT be deducted from a whole company valuation in arriving at the value of goodwill?

  9. Jack Ltd is a successful company that manufactures footballs. Details are as follows: (i) Turnover of GBP1,000,000; (ii) Pre-tax profits of GBP300,000 and a liability to corporation tax of GBP60,000; (iii) Fixed Assets GBP400,000; Market value GBP400,000; (iv) Patent - NBV GBP20,000; Market value GBP100,000; (v) Research shows a P/E ratio of 3.5. Using the whole company valuation approach, what would be the value of the company's goodwill?

  10. Which of the following statements is not true?