P4 June 2013 Question 2 (b)

In the above mentioned question, we are told :

“Strand Co is of the opinion that most of its value is in its intangible assets, comprising intellectual capital. 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”

Now I don’t understand this statement the examiner gives here, in other words, I don’t understand what he is trying to say here. What is the meaning of this formula, and particularly, ” over the average return on capital employed of the biotechnological industry”

I reviewed the examiner’s answer and I’m happy with all the numbers to this question but he says that once we get the PV to infinity of the after tax excess earnings then we need to divide that by the average return on capital employed of the biotechnological industry. I don’t see him dividing the answer, PV of annual premium (assume perpetuity) = $159·3m/0·07 = $2,275·7m by the 20% average return on capital employed. Why?

This means the question was misdirecting us by stating “over the average return on capital employed of the biotechnological industry”

Thanks,

Gabriel.