To: cfimx who wrote (1573 ) 6/9/1999 9:56:00 AM From: cfimx Read Replies (2) | Respond to
Let's say a private investor went out and bought 100 shares of Apple at $40 and it had $20 of tangible book. It earns $4 and should continue to earn that going forward. The "cash" earnings are distributed annually. So he bought the thing at two times book. But lets also say the rules of the game suddenly changed, and that individual investors now had to play by the same silly rules as corporations do when they buy a company in its entirety. That is, individual investors now must record the excess of purchase price over tangible book as goodwill on their own "personal" balance sheet. So on this guy's personal balance sheet, he has to record $2000 of "goodwill." And, he will need to amortize this goodwill over 20 years. So each year, he must reduce his $400 of annual earnings by $100. So, lo and behold, instead of $400 of earnings he thought he was getting, the "books" say he is only getting $300 ( $400 annual earnings less $100 annual amortization). The investor is reminded, however, that there is absolutely ZERO economic cost to this charge and his true "cash earnings" will go on being $400 per year. He deposits $400 in the bank. But it doesn't sink in.
