ABSTRACT
In Chapter 1, we used a very generic and extremely simplifi ed formulation of the going-concern goodwill (also referred to as internally generated goodwill):
G = [ ke
BkeI )( ×− ] [1.1]
G: goodwill I: perpetual expected earning fl ows ke: cost of equity B: equity book value
)( BkeI ×− : abnormal earnings
Such formulation proved useful to explain, from a theoretical perspective, the economic meaning of goodwill. Incidentally, it should be noted that the rate used in the formula (ke) is the same in both numerator and denominator. Alternative solutions have also been proposed by the specialized literature, which are:
a rate with a higher denominator, since it must discount the high risk • to which profi t is subject; a rate with a risk-free denominator, possibly with a higher value for • the generic risk of the equity investment, in order not to duplicate the weight of the specifi c enterprise risks (in the numerator and denominator) in determining the value.
