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Hello Sir, in the above stated question, we are asked to calculate the max premium payable using an “excess earning method”. If you could plead explain what this is, it would be very helpful. Thank you
It is not a standard method that you are expected to have learned. It is just following the instructions given in the 5th paragraph of the question.
“Therefore, the premium payable on acquisition should be based on the present value to infinity of the after tax excess earnings the company has generated in the past three years, over the average return on capital employed of the biotechnological industry.”(The examiner’s answer mentions that this is similar to EVA (which it is), but appreciate that EVA was removed from the syllabus for Paper AFM two years ago)
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