Hi,
In the full LBO model, the goodwill amount as part of the balance sheet adjustment part is calculated as a plug. Calculating goodwill using the PPA method gives a different value (805m USD) compared to the plug method (i.e. just taking the total adjustments of liabilities and equity less adjustments excl. goodwill on the asset side). There are no mentionings of any write-downs. Does anyone know why this is?
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I think 805 is the right answer. In the prompt, the advisory fee is 25 however in PF adjustment, the author deducted transaction fee at the amount of 25*(1-tax rate%) from retained earnings, which caused $10 difference. In my opinion, should always calculate goodwill using PPA method and do sanity check.
Please excuse, but what is correct here for the transaction fee; AFTER tax or without tax?
The accountant's answer is after tax - the reason modelling courses tell you to reduce retained earnings by the transaction fee is because they want you to assume its tax deductible and therefore running through your P&L. Anything you run through your P&L gets tax impacted.
The model test answer is don't tax impact it - push the gross amount through retained earnings on your opening balance sheet, and then if you want to be accurate in your tax modeling, push the deduction through wherever you are calculating your taxes.
so to do it correctly in the test, I should subtract the after tax amount from retained earnings in the opening year? Thank you
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