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-EXHIBIT 8- Fort Meyers Lincoln-Mercury, Inc. Adjusted Earnings and Cash Flow 1986 1987 1988 Profit before taxes $233,423 $190,657 $238,524 Adjustments for Officer compensation 144,923

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-EXHIBIT 8- Fort Meyers Lincoln-Mercury, Inc. Adjusted Earnings and Cash Flow 1986 1987 1988 Profit before taxes $233,423 $190,657 $238,524 Adjustments for Officer compensation" 144,923 160,490 164,529 Adjusted profit before taxes 378,846 351.147 403,054 Adjusted taxest 129,960 19,815 139,176 Adjusted net profit $248,385 $231,332 $269,877 1989 1990 $316,827 5178,590 127,612 444,439 154,613 $289,826 132,106 310,696 104,727 $205,969 43,132 40,504 18.446 48,874 62,389 Plus: depreciation Plus: adjustment for operating cash flow from cash flow statement Plus: adjustment for interest expense tax shelter Adjusted operating cash flow 7.157 8,048 38,898 (12,525) 20,038 19.037 15,092 $319,603 $329,771 $314,891 751 26,064 $365,515 26,387 $301,902 *Officer compensation was reduced to 1.3 percent of revenue. Taxes were computed by $16,818 plus 37.5 percent times the income over $75,000. This includes both federal and state taxes. The 37.5 rate was found by .94 + .05 - (1 - 31) (federal plus state). Interest was multiplied by the new, marginal tax rate for the appropriate year (c.8., 37.3 percent). QUESTIONS 1. Analyze the dealership's financial statements. Use the company calcula- tions and industry data provided in Exhibits 1 through 6. * 2. Comment on the usefulness of the adjusted book value technique of val- uation. Use the data provided in Exhibit 7 as an example. What are the advantages and disadvantages of this technique? Where does "goodwill" enter into this analysis? 3. Comment on the usefulness of the adjusted earnings and cash flow cal- culations. Be prepared to explain how you determined these calculations. *4. Comment on the usefulness of the price earnings multiple technique. What are the advantages and disadvantages of this technique? How are the data determined? * 5. Comment on the usefulness of the discounted cash flow technique. What are the advantages and disadvantages of this technique? How are the data determined? ASSUME ET DEBT 15 NEGU GABLE. 6. How would you reconcile the three different numbers to George Stone?! 7. How might you determine an appropriate discount for "lack of market- ability and minority interest"? 1981 1988 1989 $15,185,710 Gross sales Dividends Interest CODE Gross rent Other income $15.999.550 EXHIBIT 1 Fort Meyers Lincoln-Mercury, Inc. Statement of Income for Year Ended December 31 1983 1984 1985 1986 1987 $5,800,505 $7.525,966 59.695,709 $11.444.244 $12.481,501 9.870 4,558 5 257 5.429 24.895 15,513 11.040 6 ,455 8.395 5.884 02,2930 3.403 34,622 31.974 72,350 150,710 109.760 5.875,574 7,581,011 9.781,397 11,601,666 12.606.488 $3.746,834 14,186 17.725 28.019 35.722 3.842,484 1982 34.835.263 20824 25,934 6.794 36,191 4.925,006 3.000 $11,682,350 217 3.318 800 191.341 11,881.026 Total income 207,990 15,394.634 159.837 11,162.427 3.139,031 131.775 4,075,972 154.877 5 6,723.419 ,201.925 179.143 8,701,051 10.229.103 293.698 11.081.912 322.750 10.471.835 $16,400 13,864,162 325,000 14.680,798 340.100 Cost of goods sold Officer compensation Depreciation Other operating expenses Total operating expenses 58,321 308,584 39,778 412.248 37.712 455,072 48,524 428.110 49,727 550,220 44.717 747,004 12.126 917.930 19,567 764.238 50,629 767,099 827,265 3,637,711 4.682,875 5,853.8527.401,096 9.518.478 11,314,522 12.364.718 11.602,040 15,006,8410 15.919,094 Earnings before interest and taxes 204,773 22,131 21.722 179.915 262.919 287,144 241.770 278,986 387.744 249,335 Interest expense 76,738 73.291 73,142 53,275 78,871 53,721 51.038 40.462 69,878 70.743 Ordinary gains Capital gains 1.875 3.716 1,439 15,314 2.128 18.929 (120) 307 42,575 (8,538) (75) Prolit before taxes 133,626 185,593 147,697 183,928 233.423 190.657 238.524 316,827 17,550 Taxes 2,873 14,628 0 5,013 86,367 57.197 69.172 101,385 57.149 Profit after takes $130,753 $170,965 ($8,588) $147,697 $178,885 $133.460 0.30 $169,352 0.29 $215,442 0.32 $121,441 0.32 $147,056 0.37 ($60,000) $87,057 Dividends Retained earnings ($39,000) $91,753 ($40,000) $130,965 ($40,000) (548,538) ($60,000) $87,097 ($60,000) 3 118,885 $73.460 $109.352 ($75,000) $140.445 ($75.000) 16.442 EXHIBIT 2 Fort Meyers Lincoln-Mercury, Inc. Balance Sheets as of December 31 1983 1984 1985 1986 1981 1982 1987 1988 1989 1990 Aus Accounts receivable Inventory Other current assets Total current assets $145.127 123,304 744.461 20.011 1,632.903 $230,002 122.749 919,365 20,417 1.292,531 $278,047 95,032 941.289 16,781 1.331,149 $265.110 94.757 1,441.645 10.230 1.811.722 $168,721 143,516 1.593,910 9,800 1.915,947 $ 204,043 97.343 1.577,057 4,690 1943,133 $371,052 207,769 1,504,902 3.220 2.086,943 $361.844 181.786 1.718.935 1 $448.21 246,6419 ,976,222 2.374 2,674.626 S47.59 16.470 1.523,845 7.50N 2.662.12 2,265,565 Land Buildings Acumulated depreciati Net buildings 60.438 465,265 (131.145) 60.438 461,867 (159.203) 60,438 471.913 (191.785) 60.458 605,940 (240,109) 60438 604,513 (274.065) 60.458 622.207 _(518,183) 60,438 627,776 (360,309) 60.458 805,775 (409.876) 4.438 745,975 (379,376) 60.458 785.2002 (418,518 394,558 365,042 S40,566 426,269 390,886 Other assets 364,462 327.905 456,397 31,166 427.037 32.378 427.122 66,789 75.613 43,396 41,604 45.377 58,268 142,020 148,615 Other investments Tistal assets 231,599 $1,690.166 167.189 $1.855.140 114,442 $1.852.946 134,893 $2.448.497 3,640 107.428 $2.457.657 81,907 $2.431.106 $2.463.865 7.260 $2.787.430 7.260 $3,250,343 $3,247,465 Liabilities and Owners' Equity Accounts payable Notes payable Other current liabilities Total current liabilities $74.453 992.705 36.462 $64.242 1,02 1,032 58.429 $82.261 1.082,380 39.231 $75,954 1.593,385 $42.000 1,578,051 41.271 $90,892 1.464.192 46,150 $139,460 1.499.778 37,695 $158,535 1.684.775 5.928 $164,368 2.0 ,905 3.199 $136.225 1.999.623 1.103,620 1,143,703 1.203,872 1.715,292 1.661,322 1.601.234 1.676,933 1.849.238 2.174.473 2.131.248 Long-term debt Total liabilities 297,098 1.400,718 290,024 1.433.727 276,199 1.480,071 272,633 1.987,925 216,878 1.878.200 163,359 1.764,593 88,867 46,959 1.723.892 1.938,105 86.102 2.260,575 120,562 2.251.810 Capital stock Pald-in surplus Retained earnings Total equity Total liabilities and equity 112,200 21.502 155,746 289.418 $1.690.166 119,200 21,502 286.711 121.413 94.144 113,200 21.502 238.173 372.875 115.200 21,502 325,870 460,572 $2.448.497 113,200 21,502 444,755 579.457 32.457.657 113,200 21,502 531,812 666,514 119.200 21,502 605,272 739,974 113,200 21,502 714.624 849.326 113.200 21,502 855.067 989,769 01.509 $1.855.140 $1,852.946 $2.431.107 $2.463.866 $2.787.431 $3.250.344 $3.247.463 1990 - EXHIBIT 3 Fort Meyers Lincoln-Mercury, Inc. Percentage Income Statements for Company and Industry, 1986-1990 Company Industry (SIC 5511) 1986 1987 1988 1989 1990 1986 1987 1988 1989 98.6% 99.0% 98.3% 98.6% 99.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.3% 0.9% 1.6% 1.4% 1.09 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 88.9% 87.9% 88.1% 90.1% 90.8% 85.5% 85.5% 85.9% 85.5% 2.5% 2.6% 2.79 2.1% 2.1% 0.44% 0.3% 0.4% 0.3% 0.4% 6.4% 7.3% 6.4% 5.0% 5.1% 12.4% 12.7% 12.6% 13.6% 97.5% 98.1% 97.7% 97.5% 98.5% 97.9% 98.29 98.5% 99.15 2.5% 1.9% 2.3% 2.5% 1.5% 2.1% 1.8% 1.5% 0.9% Gross sales Dividends Interest income Gruss rents Other income Total income Cost of goods sold Officer compensation Depreciation Other operating expenses Total operating expenses Earnings before interest and taxes Interest expense Ordinary gains Capital gains Profit before taxes 100.0% 85.99 13.3% 99.2% 0.8% 0.5% 0.0% 0.0% 2.0% 0.4% 0.0% 0.0% 1.5% 0.3% 0.0% 0.0% 2.0% 0.5% 0.0% 0.0% 2.1% 0.4% 0.0% 0.0% 1.1% 2.1% 1.8% 1.6% 1.28 1.15 - EXHIBIT 4 Fort Meyers Lincoln-Mercury, Inc. Percentage Balance Sheets for Company and Industry. 1986-1990 Company Industry (SIC 5511) 1987 1988 1989 1990 1986 1987 1988 1989 1986 1990 5.4% Cash Accounts receivable Inventories Other current assets Total current assets 10.99 4.0% 64.9% 0.2% 79.9% 15.1% 8.4% 61.1 0.1% 84.7% 13.1% 6.5% 61.7% 0.0% 81.3% 2.2% 28.9% -14.795 Assets 13.8% 15.0% 7.6% .06 5.25 60.8% 61.6% 0.1% 0.2% 82.9% 82.0% 1.9% 1.9% 23.0% 24.2% - 11.7% - 12.9% 6.1% 9.6% 63.3% 3,5% 82.5% 6.4% 6.4% 9.5% 63.3% 3.3% 82.5% 7.3% 9.7% 61.95 2.8% 81.7% 5.7% 8.6% 66.0% 2.8% 85.1% 65.75 2.9% 82 NE Land Buildings Accumulated depreciation Net buildings 2.59 25.6% - 13.196 2.5% 25.5% - 14.6% 15.0% 1.7% 13.176 13.2% 10.09 13.3% 1.8% 16.4% 2.1% 9.8% Other assets 9.7% 7.5% 10.5% 7.5% 4.4% 4.6% 7.2% 10.15 6.6% Other investments Total assets 3.4% 100.0% 0.1% 100.0% 0.5% 100.0% 0.2% 100.096 0.8% 100.0% 1 99.7% 99.7% 99.7% 99.49 99.5% Accounts payable Notes payable Other current liabilities Total current liabilities 3.7% 60.2% 1.9% 5.7% 60.9% 1.5% 5.7% 60.4% 0.2% Liabilities and Owners' Equity 5.1% 61.7% 61.4% 0.1% 0.0% 5.3% 47.1% 9.7% 5.2% 49.7% 8.5% 5.3% 49.5% 9.1% 5.5% 53.3% 7.6% 5.9% 53.5% 6.9% 65.9% 68.1% 66.3% 66.9% 65,6% 62.1% 63.4% 63.9% 66.4% 66.35 9.5% 71.6% 9.4% 72.8% 9.9% 73.8% 9.7% 76.1% 10.0% 76.3% Long-term debt Total liabilities Capital stock Paid-in surplus Retained earnings 6.7% 72.6% 4.7% 0.9% 21.9% 27.4% 100.0% 1.9% 70.0% 4.6% 0.9% 24.6% 30.0% 100.0% 3.2% 69.5% 4.1% 0.8% 25.6% 30.5% 100.0% 2.6% 69.5% 3.5% 0.7% 26.3% 30.5% 100.0% 3.7% 69.3% 2.9% 0.0% 27.8% 30.7% 100.0% 23.7% Total liabilities and equity 28.4% 100.0% 27.2% 100.0% 26.2% 100.0% 23.9% 100.0% 100.0 EXHIBIT 5 Fort Meyers Lincoln-Mercury, Inc. Ratio Analysis Company 1988 1989 1990 Aug. 1986 Industry (SIC 5511) 1986 1987 1987 1988 1989 1990 Avg. Liquidity Current ratio Quick ratio 1.211.24 0.23 0.35 1.23 0.30 1.231.25 0.32 0.31 1.23 0.30 1.3 1.3 0.2 1.2 0.2 1.2 0.2 1.26 0.20 Productivity ratios Sales/total assets Saleset fixed assets Sales/current assets Sales/accounts receivable Average collection period Sales/inventory 4.8 70.3 4.2 68.0 4.3 64.7 71.0 4.8 31.8 6.0 119.2 3.0 7.4 5. 1 38.4 6. 0 60.7 5.9 8.4 4 .3 26.0 5 .2 65.4 5.5 6.9 4.7 36.0 5.8 62.4 5.8 7.8 5.0 37.8 6.1 95.9 3.8 8.1 4.8 34.0 5.8 80.7 4.8 7.7 62.1 61. 3 6 1.2 59.1 60.8 6.7 6.3 6.6 5.5 5.6 6.1 72.6% 63.7% 5.3 70.0% 52.5% 4.7 69.5% 60.8% 6. 9 69.5% 49.3% 5 . 5 69.3% 49.0% 3 .5 70.2% 55.1% 5.2 71.6% 30.0% 72.8% 30.0% 3.0 73.8% 30.0% 2.8 76.1% 30.0% 2.1 76.3% 40.0% 74.1% 32.05 Leverage Debu/total assets Fixed assetset worth EBIT interest Profitability Pretax net profit margin Operating profit margin Gross profit margin Pretax return on assets Pretax return on equity 2.0% 2.5% 11.8% 9.6% 35.0% 1.5% 1.9% 12.1% 7.7% 25.8% 2.0% 2.5% 11.9% 8.6% 28.1% 2.1% 2.5% 9.9% 9.7% 32.0% 1.1% 1.5% 9.2% 5.5% 17.9% 1.7% 2.2% 11.0% 8.2% 27.8% 2.1% 2.1% 14.5% 8.2% 33.4% 1.8% 1.8% 14.5% 6.6% 28.8% 1.6% 1.5% 14.1% 5.7% 25.5% 1.2% 0.9% 14.5% 4.0% 18.75 1.15 0.8% 14.1% 3.8% 19.0% 1.6% 1.4% 14.5% 5.7 25.1% Johnson first estimated a "normalized" cash flow for the company and then used estimates of growth to forecast future cash flows. Three stages of growth were forecasted: strong growth for five years. (67%) -EXHIBIT 6- Fort Meyers Lincoln-Mercury, Inc. Statement of Cash Flow 1986 1987 1988 $168.721 $264.043 $371,052 1990 5364,844 $448.821 Beginning cash balance 147,056 133.460 44,717 42.126 46.173 (110,426) 16,853 72.155 5,110 1.470 48.89248,568 (113,859) 35.586 4,879 (8.455) $199,821 $214.484 Funds from operations Profit after taxes Depreciation Accounts receivable Inventories Our current assets Accounts payable Notes payable Other current liabilities Total funds from operations Funds from investing Land Buildings Other assets Orher investments Total funds from investing 169,352 49.567 25.99 (214,035) 3,220 19.075 184.997 (31.767) $206,894 215,442 50,629 64 823) (257,287) (2,574) 5 . 22,131 (2.729) $266,823 121,441 64,931 78,139 (22.625) (5.154) (28,143) (12,283) (2.799) $193,529 (18.293) 1.792 25,521 $9.020 (5,569) (3.773) 78,267 $68,925 (177,999) (12.891) (5.620) ($194,510) (21,329) (65,016) (85,752) (6,595) 0 (1.654) ($105,081) ($73,265) (53,519) (60,000) (116,400) (60.000) 41.908 (60,000) Funds from financing Long-term debt Dividends Capital stock Total funds from financing Cash flow Ending cash balance (2.765) 34.460 (75,000) (75,000) (40,558) ($77,765) ($81,098) 0 ($113,519) ($176,400) ($18,092) $95,322 $264,043 $107,009 $371,052 ($6,208) $364,844 $83,977 $39,166 $448,821 $487,987 le 52 slower growth for five years, and constant steady growth of 3.5 percent forever. The discount rate of 15.75 percent was used to estimate both the terminal value and the discounted cash flow. Johnson derived this rate by using the 9.0 percent rate for government securities and adding to it a 4.50 percent premium for business risk and a 2.25 percent premium for finan- cial risk; the 6.75 premium for risk seemed consistent with current market conditions. The value of the company's assets was determined by discount ing the forecasted cash flow. Value of the equity was calculated by subtract- ing the long-term liabilities from the value of the assets. At last Johnson was ready to summarize his report of the car dealer ship's value to John Morris, but he wondered how he could justify pre- -EXHIBIT 7- Fort Meyers Lincoln-Mercury, Inc. Adjusted Market Estimate of Book Value Adjusted Book Value Book Value Adjustment Assets Cash Accounts receivable Inventory Other current assets Other investments Land Buildings Other assets Franchise $487,989 168,470 1,998,845 7,508 8,914 60,438 366,684 148,615 10094 100% 100% 100% 100% 500% 200% 100% NA $487,989 168,470 1.998,845 7,508 8,914 302,190 733,368 148,615 500,000 $4,355,899 Total Assets Accounts payable Notes payable Other current liabilities Long-term debt $3,247,463 Liabilities $136,225 1,994,623 400 120,562 $2,251,810 100% 100% 100% 100% 136,225 1,994,623 400 120,562 $2,251,810 senting three separate estimates. Which one was correct? In frustration, he had merely weighted each of the three estimates. He knew that he had not discounted the value of the company for any lack of marketability or mi- nority interest. Once the gifts of stock had been completed, Stone would still own more than 51 percent of the shares. With Stone retaining effective control of the company, the minority shares would be worth less than his own shares. Also, neither George Jr. nor Wanda would be able to sell their shares of stock easily. The IRS would allow a discount for the lack of mar- ketability of the gifted shares. Johnson estimated that a 20 percent discount might be appropriate, but wondered how he might verify this number. -EXHIBIT 8- Fort Meyers Lincoln-Mercury, Inc. Adjusted Earnings and Cash Flow 1986 1987 1988 Profit before taxes $233,423 $190,657 $238,524 Adjustments for Officer compensation" 144,923 160,490 164,529 Adjusted profit before taxes 378,846 351.147 403,054 Adjusted taxest 129,960 19,815 139,176 Adjusted net profit $248,385 $231,332 $269,877 1989 1990 $316,827 5178,590 127,612 444,439 154,613 $289,826 132,106 310,696 104,727 $205,969 43,132 40,504 18.446 48,874 62,389 Plus: depreciation Plus: adjustment for operating cash flow from cash flow statement Plus: adjustment for interest expense tax shelter Adjusted operating cash flow 7.157 8,048 38,898 (12,525) 20,038 19.037 15,092 $319,603 $329,771 $314,891 751 26,064 $365,515 26,387 $301,902 *Officer compensation was reduced to 1.3 percent of revenue. Taxes were computed by $16,818 plus 37.5 percent times the income over $75,000. This includes both federal and state taxes. The 37.5 rate was found by .94 + .05 - (1 - 31) (federal plus state). Interest was multiplied by the new, marginal tax rate for the appropriate year (c.8., 37.3 percent). QUESTIONS 1. Analyze the dealership's financial statements. Use the company calcula- tions and industry data provided in Exhibits 1 through 6. * 2. Comment on the usefulness of the adjusted book value technique of val- uation. Use the data provided in Exhibit 7 as an example. What are the advantages and disadvantages of this technique? Where does "goodwill" enter into this analysis? 3. Comment on the usefulness of the adjusted earnings and cash flow cal- culations. Be prepared to explain how you determined these calculations. *4. Comment on the usefulness of the price earnings multiple technique. What are the advantages and disadvantages of this technique? How are the data determined? * 5. Comment on the usefulness of the discounted cash flow technique. What are the advantages and disadvantages of this technique? How are the data determined? ASSUME ET DEBT 15 NEGU GABLE. 6. How would you reconcile the three different numbers to George Stone?! 7. How might you determine an appropriate discount for "lack of market- ability and minority interest"? 1981 1988 1989 $15,185,710 Gross sales Dividends Interest CODE Gross rent Other income $15.999.550 EXHIBIT 1 Fort Meyers Lincoln-Mercury, Inc. Statement of Income for Year Ended December 31 1983 1984 1985 1986 1987 $5,800,505 $7.525,966 59.695,709 $11.444.244 $12.481,501 9.870 4,558 5 257 5.429 24.895 15,513 11.040 6 ,455 8.395 5.884 02,2930 3.403 34,622 31.974 72,350 150,710 109.760 5.875,574 7,581,011 9.781,397 11,601,666 12.606.488 $3.746,834 14,186 17.725 28.019 35.722 3.842,484 1982 34.835.263 20824 25,934 6.794 36,191 4.925,006 3.000 $11,682,350 217 3.318 800 191.341 11,881.026 Total income 207,990 15,394.634 159.837 11,162.427 3.139,031 131.775 4,075,972 154.877 5 6,723.419 ,201.925 179.143 8,701,051 10.229.103 293.698 11.081.912 322.750 10.471.835 $16,400 13,864,162 325,000 14.680,798 340.100 Cost of goods sold Officer compensation Depreciation Other operating expenses Total operating expenses 58,321 308,584 39,778 412.248 37.712 455,072 48,524 428.110 49,727 550,220 44.717 747,004 12.126 917.930 19,567 764.238 50,629 767,099 827,265 3,637,711 4.682,875 5,853.8527.401,096 9.518.478 11,314,522 12.364.718 11.602,040 15,006,8410 15.919,094 Earnings before interest and taxes 204,773 22,131 21.722 179.915 262.919 287,144 241.770 278,986 387.744 249,335 Interest expense 76,738 73.291 73,142 53,275 78,871 53,721 51.038 40.462 69,878 70.743 Ordinary gains Capital gains 1.875 3.716 1,439 15,314 2.128 18.929 (120) 307 42,575 (8,538) (75) Prolit before taxes 133,626 185,593 147,697 183,928 233.423 190.657 238.524 316,827 17,550 Taxes 2,873 14,628 0 5,013 86,367 57.197 69.172 101,385 57.149 Profit after takes $130,753 $170,965 ($8,588) $147,697 $178,885 $133.460 0.30 $169,352 0.29 $215,442 0.32 $121,441 0.32 $147,056 0.37 ($60,000) $87,057 Dividends Retained earnings ($39,000) $91,753 ($40,000) $130,965 ($40,000) (548,538) ($60,000) $87,097 ($60,000) 3 118,885 $73.460 $109.352 ($75,000) $140.445 ($75.000) 16.442 EXHIBIT 2 Fort Meyers Lincoln-Mercury, Inc. Balance Sheets as of December 31 1983 1984 1985 1986 1981 1982 1987 1988 1989 1990 Aus Accounts receivable Inventory Other current assets Total current assets $145.127 123,304 744.461 20.011 1,632.903 $230,002 122.749 919,365 20,417 1.292,531 $278,047 95,032 941.289 16,781 1.331,149 $265.110 94.757 1,441.645 10.230 1.811.722 $168,721 143,516 1.593,910 9,800 1.915,947 $ 204,043 97.343 1.577,057 4,690 1943,133 $371,052 207,769 1,504,902 3.220 2.086,943 $361.844 181.786 1.718.935 1 $448.21 246,6419 ,976,222 2.374 2,674.626 S47.59 16.470 1.523,845 7.50N 2.662.12 2,265,565 Land Buildings Acumulated depreciati Net buildings 60.438 465,265 (131.145) 60.438 461,867 (159.203) 60,438 471.913 (191.785) 60.458 605,940 (240,109) 60438 604,513 (274.065) 60.458 622.207 _(518,183) 60,438 627,776 (360,309) 60.458 805,775 (409.876) 4.438 745,975 (379,376) 60.458 785.2002 (418,518 394,558 365,042 S40,566 426,269 390,886 Other assets 364,462 327.905 456,397 31,166 427.037 32.378 427.122 66,789 75.613 43,396 41,604 45.377 58,268 142,020 148,615 Other investments Tistal assets 231,599 $1,690.166 167.189 $1.855.140 114,442 $1.852.946 134,893 $2.448.497 3,640 107.428 $2.457.657 81,907 $2.431.106 $2.463.865 7.260 $2.787.430 7.260 $3,250,343 $3,247,465 Liabilities and Owners' Equity Accounts payable Notes payable Other current liabilities Total current liabilities $74.453 992.705 36.462 $64.242 1,02 1,032 58.429 $82.261 1.082,380 39.231 $75,954 1.593,385 $42.000 1,578,051 41.271 $90,892 1.464.192 46,150 $139,460 1.499.778 37,695 $158,535 1.684.775 5.928 $164,368 2.0 ,905 3.199 $136.225 1.999.623 1.103,620 1,143,703 1.203,872 1.715,292 1.661,322 1.601.234 1.676,933 1.849.238 2.174.473 2.131.248 Long-term debt Total liabilities 297,098 1.400,718 290,024 1.433.727 276,199 1.480,071 272,633 1.987,925 216,878 1.878.200 163,359 1.764,593 88,867 46,959 1.723.892 1.938,105 86.102 2.260,575 120,562 2.251.810 Capital stock Pald-in surplus Retained earnings Total equity Total liabilities and equity 112,200 21.502 155,746 289.418 $1.690.166 119,200 21,502 286.711 121.413 94.144 113,200 21.502 238.173 372.875 115.200 21,502 325,870 460,572 $2.448.497 113,200 21,502 444,755 579.457 32.457.657 113,200 21,502 531,812 666,514 119.200 21,502 605,272 739,974 113,200 21,502 714.624 849.326 113.200 21,502 855.067 989,769 01.509 $1.855.140 $1,852.946 $2.431.107 $2.463.866 $2.787.431 $3.250.344 $3.247.463 1990 - EXHIBIT 3 Fort Meyers Lincoln-Mercury, Inc. Percentage Income Statements for Company and Industry, 1986-1990 Company Industry (SIC 5511) 1986 1987 1988 1989 1990 1986 1987 1988 1989 98.6% 99.0% 98.3% 98.6% 99.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.3% 0.9% 1.6% 1.4% 1.09 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 88.9% 87.9% 88.1% 90.1% 90.8% 85.5% 85.5% 85.9% 85.5% 2.5% 2.6% 2.79 2.1% 2.1% 0.44% 0.3% 0.4% 0.3% 0.4% 6.4% 7.3% 6.4% 5.0% 5.1% 12.4% 12.7% 12.6% 13.6% 97.5% 98.1% 97.7% 97.5% 98.5% 97.9% 98.29 98.5% 99.15 2.5% 1.9% 2.3% 2.5% 1.5% 2.1% 1.8% 1.5% 0.9% Gross sales Dividends Interest income Gruss rents Other income Total income Cost of goods sold Officer compensation Depreciation Other operating expenses Total operating expenses Earnings before interest and taxes Interest expense Ordinary gains Capital gains Profit before taxes 100.0% 85.99 13.3% 99.2% 0.8% 0.5% 0.0% 0.0% 2.0% 0.4% 0.0% 0.0% 1.5% 0.3% 0.0% 0.0% 2.0% 0.5% 0.0% 0.0% 2.1% 0.4% 0.0% 0.0% 1.1% 2.1% 1.8% 1.6% 1.28 1.15 - EXHIBIT 4 Fort Meyers Lincoln-Mercury, Inc. Percentage Balance Sheets for Company and Industry. 1986-1990 Company Industry (SIC 5511) 1987 1988 1989 1990 1986 1987 1988 1989 1986 1990 5.4% Cash Accounts receivable Inventories Other current assets Total current assets 10.99 4.0% 64.9% 0.2% 79.9% 15.1% 8.4% 61.1 0.1% 84.7% 13.1% 6.5% 61.7% 0.0% 81.3% 2.2% 28.9% -14.795 Assets 13.8% 15.0% 7.6% .06 5.25 60.8% 61.6% 0.1% 0.2% 82.9% 82.0% 1.9% 1.9% 23.0% 24.2% - 11.7% - 12.9% 6.1% 9.6% 63.3% 3,5% 82.5% 6.4% 6.4% 9.5% 63.3% 3.3% 82.5% 7.3% 9.7% 61.95 2.8% 81.7% 5.7% 8.6% 66.0% 2.8% 85.1% 65.75 2.9% 82 NE Land Buildings Accumulated depreciation Net buildings 2.59 25.6% - 13.196 2.5% 25.5% - 14.6% 15.0% 1.7% 13.176 13.2% 10.09 13.3% 1.8% 16.4% 2.1% 9.8% Other assets 9.7% 7.5% 10.5% 7.5% 4.4% 4.6% 7.2% 10.15 6.6% Other investments Total assets 3.4% 100.0% 0.1% 100.0% 0.5% 100.0% 0.2% 100.096 0.8% 100.0% 1 99.7% 99.7% 99.7% 99.49 99.5% Accounts payable Notes payable Other current liabilities Total current liabilities 3.7% 60.2% 1.9% 5.7% 60.9% 1.5% 5.7% 60.4% 0.2% Liabilities and Owners' Equity 5.1% 61.7% 61.4% 0.1% 0.0% 5.3% 47.1% 9.7% 5.2% 49.7% 8.5% 5.3% 49.5% 9.1% 5.5% 53.3% 7.6% 5.9% 53.5% 6.9% 65.9% 68.1% 66.3% 66.9% 65,6% 62.1% 63.4% 63.9% 66.4% 66.35 9.5% 71.6% 9.4% 72.8% 9.9% 73.8% 9.7% 76.1% 10.0% 76.3% Long-term debt Total liabilities Capital stock Paid-in surplus Retained earnings 6.7% 72.6% 4.7% 0.9% 21.9% 27.4% 100.0% 1.9% 70.0% 4.6% 0.9% 24.6% 30.0% 100.0% 3.2% 69.5% 4.1% 0.8% 25.6% 30.5% 100.0% 2.6% 69.5% 3.5% 0.7% 26.3% 30.5% 100.0% 3.7% 69.3% 2.9% 0.0% 27.8% 30.7% 100.0% 23.7% Total liabilities and equity 28.4% 100.0% 27.2% 100.0% 26.2% 100.0% 23.9% 100.0% 100.0 EXHIBIT 5 Fort Meyers Lincoln-Mercury, Inc. Ratio Analysis Company 1988 1989 1990 Aug. 1986 Industry (SIC 5511) 1986 1987 1987 1988 1989 1990 Avg. Liquidity Current ratio Quick ratio 1.211.24 0.23 0.35 1.23 0.30 1.231.25 0.32 0.31 1.23 0.30 1.3 1.3 0.2 1.2 0.2 1.2 0.2 1.26 0.20 Productivity ratios Sales/total assets Saleset fixed assets Sales/current assets Sales/accounts receivable Average collection period Sales/inventory 4.8 70.3 4.2 68.0 4.3 64.7 71.0 4.8 31.8 6.0 119.2 3.0 7.4 5. 1 38.4 6. 0 60.7 5.9 8.4 4 .3 26.0 5 .2 65.4 5.5 6.9 4.7 36.0 5.8 62.4 5.8 7.8 5.0 37.8 6.1 95.9 3.8 8.1 4.8 34.0 5.8 80.7 4.8 7.7 62.1 61. 3 6 1.2 59.1 60.8 6.7 6.3 6.6 5.5 5.6 6.1 72.6% 63.7% 5.3 70.0% 52.5% 4.7 69.5% 60.8% 6. 9 69.5% 49.3% 5 . 5 69.3% 49.0% 3 .5 70.2% 55.1% 5.2 71.6% 30.0% 72.8% 30.0% 3.0 73.8% 30.0% 2.8 76.1% 30.0% 2.1 76.3% 40.0% 74.1% 32.05 Leverage Debu/total assets Fixed assetset worth EBIT interest Profitability Pretax net profit margin Operating profit margin Gross profit margin Pretax return on assets Pretax return on equity 2.0% 2.5% 11.8% 9.6% 35.0% 1.5% 1.9% 12.1% 7.7% 25.8% 2.0% 2.5% 11.9% 8.6% 28.1% 2.1% 2.5% 9.9% 9.7% 32.0% 1.1% 1.5% 9.2% 5.5% 17.9% 1.7% 2.2% 11.0% 8.2% 27.8% 2.1% 2.1% 14.5% 8.2% 33.4% 1.8% 1.8% 14.5% 6.6% 28.8% 1.6% 1.5% 14.1% 5.7% 25.5% 1.2% 0.9% 14.5% 4.0% 18.75 1.15 0.8% 14.1% 3.8% 19.0% 1.6% 1.4% 14.5% 5.7 25.1% Johnson first estimated a "normalized" cash flow for the company and then used estimates of growth to forecast future cash flows. Three stages of growth were forecasted: strong growth for five years. (67%) -EXHIBIT 6- Fort Meyers Lincoln-Mercury, Inc. Statement of Cash Flow 1986 1987 1988 $168.721 $264.043 $371,052 1990 5364,844 $448.821 Beginning cash balance 147,056 133.460 44,717 42.126 46.173 (110,426) 16,853 72.155 5,110 1.470 48.89248,568 (113,859) 35.586 4,879 (8.455) $199,821 $214.484 Funds from operations Profit after taxes Depreciation Accounts receivable Inventories Our current assets Accounts payable Notes payable Other current liabilities Total funds from operations Funds from investing Land Buildings Other assets Orher investments Total funds from investing 169,352 49.567 25.99 (214,035) 3,220 19.075 184.997 (31.767) $206,894 215,442 50,629 64 823) (257,287) (2,574) 5 . 22,131 (2.729) $266,823 121,441 64,931 78,139 (22.625) (5.154) (28,143) (12,283) (2.799) $193,529 (18.293) 1.792 25,521 $9.020 (5,569) (3.773) 78,267 $68,925 (177,999) (12.891) (5.620) ($194,510) (21,329) (65,016) (85,752) (6,595) 0 (1.654) ($105,081) ($73,265) (53,519) (60,000) (116,400) (60.000) 41.908 (60,000) Funds from financing Long-term debt Dividends Capital stock Total funds from financing Cash flow Ending cash balance (2.765) 34.460 (75,000) (75,000) (40,558) ($77,765) ($81,098) 0 ($113,519) ($176,400) ($18,092) $95,322 $264,043 $107,009 $371,052 ($6,208) $364,844 $83,977 $39,166 $448,821 $487,987 le 52 slower growth for five years, and constant steady growth of 3.5 percent forever. The discount rate of 15.75 percent was used to estimate both the terminal value and the discounted cash flow. Johnson derived this rate by using the 9.0 percent rate for government securities and adding to it a 4.50 percent premium for business risk and a 2.25 percent premium for finan- cial risk; the 6.75 premium for risk seemed consistent with current market conditions. The value of the company's assets was determined by discount ing the forecasted cash flow. Value of the equity was calculated by subtract- ing the long-term liabilities from the value of the assets. At last Johnson was ready to summarize his report of the car dealer ship's value to John Morris, but he wondered how he could justify pre- -EXHIBIT 7- Fort Meyers Lincoln-Mercury, Inc. Adjusted Market Estimate of Book Value Adjusted Book Value Book Value Adjustment Assets Cash Accounts receivable Inventory Other current assets Other investments Land Buildings Other assets Franchise $487,989 168,470 1,998,845 7,508 8,914 60,438 366,684 148,615 10094 100% 100% 100% 100% 500% 200% 100% NA $487,989 168,470 1.998,845 7,508 8,914 302,190 733,368 148,615 500,000 $4,355,899 Total Assets Accounts payable Notes payable Other current liabilities Long-term debt $3,247,463 Liabilities $136,225 1,994,623 400 120,562 $2,251,810 100% 100% 100% 100% 136,225 1,994,623 400 120,562 $2,251,810 senting three separate estimates. Which one was correct? In frustration, he had merely weighted each of the three estimates. He knew that he had not discounted the value of the company for any lack of marketability or mi- nority interest. Once the gifts of stock had been completed, Stone would still own more than 51 percent of the shares. With Stone retaining effective control of the company, the minority shares would be worth less than his own shares. Also, neither George Jr. nor Wanda would be able to sell their shares of stock easily. The IRS would allow a discount for the lack of mar- ketability of the gifted shares. Johnson estimated that a 20 percent discount might be appropriate, but wondered how he might verify this number

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