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274 PART 3 • STRATEGY IMPLEMENTATION

dedicated employees, a favorable lease, a bad credit rating, or good patents—that may
not be reflected in a firm’s financial statements. Also, different valuation methods will
yield different totals for a firm’s worth, and no prescribed approach is best for a certain
situation. Evaluating the worth of a business truly requires both qualitative and quantita-
tive skills.
The first approach in evaluating the worth of a business is determining its net worth or
stockholders’ equity. Net worth represents the sum of common stock, additional paid-in
capital, and retained earnings. After calculating net worth, add or subtract an appropriate
amount for goodwill, overvalued or undervalued assets, and intangibles. Whereas intangi-
bles include copyrights, patents, and trademarks, goodwill arises only if a firm acquires
another firm and pays more than the book value for that firm.
It should be noted that Financial Accounting Standards Board (FASB) Rule 142
requires companies to admit once a year if the premiums they paid for acquisitions, called
goodwill, were a waste of money. Goodwill is not a good thing to have on a balance sheet.
Note in Table 8-14 that Mattel’s goodwill of $815 million as a percent of its total assets
($4,675 million) is 17.4 percent, which is extremely high compared to Nordstrom’s good-
will of $53 million as a percentage of its total assets ($5,661 million), 0.94 percent. Pfizer’s
goodwill to total assets percentage also is high at 19.3 percent.
At year-end 2008, Mattel, Nordstrom, and Pfizer had $815 million, $53 million, and
$21,464 billion in goodwill, respectively, on their balance sheets. Most creditors and
investors feel that goodwill indeed should be added to the stockholders’ equity in calcu-
lating worth of a business, but some feel it should be subtracted, and still others feel it
should not be included at all. Perhaps whether you are buying or selling the business
may determine whether you negotiate to add or subtract goodwill in the analysis.
Goodwill is sometimes listed as intangibles on the balance sheet, but technically intangibles
refers to patents, trademarks, and copyrights, rather than the value a firm paid over book
value for an acquisition, which is goodwill. If a firm paid less than book value for an
acquisition, that could be called negative goodwill—which is a line item on Mattel’s bal-
ance sheets.
The second approach to measuring the value of a firm grows out of the belief that the
worth of any business should be based largely on the future benefits its owners may derive
through net profits. A conservative rule of thumb is to establish a business’s worth as five
times the firm’s current annual profit. A five-year average profit level could also be used.

TABLE 8-14 Company Worth Analysis for Mattel, Nordstrom,
and Pfizer (year-end 2008, in $millions, except stock
price and EPS)

Input Data Mattel Nordstrom Pfizer
Shareholders’ Equity $2,117 $1,210 $57,556
Net Income (NI) 379 401 8,104
Stock Price 15 10 15
EPS 1.03 1.83 1.19
# of Shares Outstanding 358 215 6,750
Goodwill + Intangibles 815 53 21,464
Total Assets 235 0 17,721
Company Worth Analyses
1. Shareholders’ Equity + Goodwill + Intangibles $3,167 $1,263 $ 96,741
2. Net Income × 5 1,895 2,005 40,520
3. (Stock Price/EPS) × NI 5,519 2,191 102,151
4. # of Shares Out × Stock Price 5,340 2,150 101,250
5. Four Method Average 3,988 1,902 76,049
$Goodwill/$Total Assets 17.4% 0.94% 19.3%