1 Josephine Brain is going to open her fashion store. Comparing the pros and cons of setting up her own store from ground and acquiring an existing business, Josephine determines to purchase the existing business. Last month, Josephine discovered that a well-established ladies' clothing shop was up for sale. Although it is a private company, the shop was well known and quite successful in the local market. The present owner, Mrs Kathleen Todd, was quitting to retire very soon. Josephine contacted Mrs Todd to discuss the sale of the business. Mrs Todd hired a company to conduct an independent appraisal of the business, which concluded that tangible assets were $230,000 and assumable liabilities were $18,000. The appraisal estimated net profit for the next year to be $73,800 before deducting any managerial salaries. Josephine expects to draw $20,000 in salary since she believes this is the salary she could expect when working for someone else. Josephine estimates that a reasonable rate of return on an investment of similar risk is 25 percent and years-ofprofit figure is 3. Ms. Todd has set a value of $85,000 for intangibles such as goodwill, and is asking $297,000 for this private company. Using the capitalized earnings method, calculate the value of the business. 30 points QUESTION 2 Josephine Brain is going to open her fashion store. Comparing the pros and cons of setting up her own store from ground and acquiring an existing business, Josephine determines to purchase the existing business. Last month, Josephine discovered that a well-established ladies' clothing shop was up for sale. Although it is a private company, the shop was well known and quite successful in the local market. The present owner, Mrs Kathleen Todd, was quitting to retire very soon, Josephine contacted Mrs Todd to discuss the sale of the business. Mrs Todd hired a company to conduct an independent appraisal of the business, which concluded that tangible assets were $230,000 and assumable liabilities were $18,000. The appraisal estimated net profit for the next year to be $73,800 before deducting any managerial salaries. Josephine expects to draw $20,000 in salary since she believes this is the salary she could expect when working for someone else. Josephine estimates that a reasonable rate of return on an investment of similar risk is 25 percent and years-ofprofit figure is 3. Ms. Todd has set a value of $85,000 for intangibles such as goodwill, and is asking $297,000 for this private company. Based on the excess earnings approach, calculate the value of the business. 70 points Save