How is goodwill calculated?
In modern valuation methods, goodwill is not directly calculated. It is derived by subtracting the value of the tangible assets, such as plant & equipment and stock from the valuation figure.
Assume in the R.O.I. example in the section on valuation methods, a valuation figure of $1,875,000 is calculated. and that stock is worth $600,000 and plant & equipment $275,000.
Goodwill is derived as follows:
Valuation = $1,875,000
Less stock $600,000
Less plant $275,000
= $1,000,000
= Goodwill