Estimate fair value for Roslyn Manufacturing employing each of the three approaches discussed:

$1)$ Liquidation Approach

$2)$ Comparables Approach

$3)$ Discounted Cash Flow Analysis

R O S LY N

Billion$-$dollar apparel companies such as Calvin Klein and Liz Claiborne are

unusual in the garment industry, which consists primarily of dozens of much

smaller apparel makers. One such firm is Roslyn Manufacturing, a producer of

women's apparel, located in Bedford, New York. The firm was started $14$ years

ago by Justin Rose and Brett Lynn$,$ who between them had nearly $25$ years of

experience with a major garment manufacturer. And the partnership initially

blended very well. Rose, reserved and introspective, is extremely creative with

a real flair for merchandising and trend spotting. Mainly as a result of his genius,

the Roslyn label is synonymous with quality and $"$in$"$ fashions. Lynn$,$ outgoing

and forceful, has contributed important merchandising and marketing ideas, but

has mainly assumed the duties of the firm's chief operating officer:

THOUGHTS ON SELLING OUT

Rose, however, is seriously considering the sale of his $50$ percent interest.

Though he still enjoys the creative side of the business, he is tired of the cash

crunches that the firm has faced over the years. Periodically the retailers Roslyn

deals with have encountered financial difficulties and have strung out their

payments. For example, at one point nearly $40$ percent of Roslyn's receivables

were more than $90$ days overdue. And in situations like this, factoring compa$-$

nies $($firms that buy the receivables of apparel companies$)$ would cut back on

the credit they advance on orders to the more unstable retailers. A firm like

Rosyln faced a most unpleasant choice: Either ship to these retailers $($which

often meant a mad scramble for cash$)$ or risk losing sales. Fearful of the second

possibility, at Lynn$\text{'}$s insistence Rosyln would continue to supply all but the

most unteasonable orders. And Lynn is quick to point out that, despite this

decision, the company's average collection period of $62$ days is not terribly

different from the industry median of $50$ days.

Another reason that Rose wants to sell his interest is that he is losing confi$-$

dence in Lynn$\text{'}$s managerial expertise. When the firm was small Rose felt thatLynn did a fine job, but he now wonders whether Lynn is capable of efficiently

running a firm as large as Roslyn. He questions, for example, the firm's inven$-$

tory procedures and Lynn$\text{'}$s decision three years ago to retire all long$-$term debt.

The latter move was predicated by Lynn$\text{'}$s fear that Roslyn's business risk was

increasing. He cited the difficulties of seemingly rock$-$solid retailers like

Bloomingdale's and Campeau to support his claim. Lynn also pointed out that

the company's stock represents an extremely large proportion of the personal

wealth of both him and Rose. "It's true," he told Rose, "that we could borrow

at $9\mathrm{.}5$ percent, which is only two percentage points above the long$-$term govern$-$

ment bond rate. But given our personal investment situation, I hesitate to add

any financial risk to the high business risk we're exposed to$.$"THE CONSULTANT'S RECOMMENDATIONS

Although Rose owns half of the company, Lynn$\text{'}$s personality is such that he has

effectively seized control of the firm, and no major decision that heopposed has

ever been approved. An important recent example of this was Lynn$\text{'}$s reaction

eight months ago to the report of a consulting firm. The consultants recom$-$

mended that Rosyln implement more sophisticated accounting procedures and

make greater use of the computer. They also suggested that Rosyln "very seri$-$

ously" consider building a state$-$of$-$the$-$art distribution center that would allow

the firm to handle big orders from retailers such as K Mart and Wal$-$Mart. Lynn

read the report thoroughly and said he would explore further computerization

and alternative accounting procedures. However, he rejected the distribution

center because he considered the estimated $$5-$million to $$8-$million cost "exces$-$

sive." He felt that "sizeable" capital budgeting projects should be avoided until

he was confident that the firm was on a solid financial base. In fact, Roslyn's

capital budget over the last three years has equalled the money necessary to

maintain the firm's plant and equipment, an average of $$124(000)$ a year. Lynn

admits, though $-$ and Rose agrees $-$ that without large orders from the major

retailers, sales growth should only be in line with inflation, about $4$ percent

per year.

Rose wondered whether Lynn was really concerned that implementation of

these proposals would necessitate bringing in outside capital, given his debt

policy. If so$,$ Lynn would own less than half of Rosyln, a scenario that might

eventually lead to his ouster:

In fairness, however, the relationship between the two partners has been rel$-$

atively smooth over the years. And Rose admits that he may be undul