Frosty Footwear Question: Recommend a business value under the market approach to business value, using IBG's primary private company approach of multiple times historical EBITDA and also using the private company transactions method. Complete the spreadsheet.

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Frosty Footwear, Inc. Business Valuations Using Multiples and Benchmarking Panel A: EBITDA Business Valuation Original Recast 0 EBITDA Normal Multiple 0 55 Total Business Value 0 0 Less Debt -1,062,193 -1,062,193 Equity Value -1,062,193 -1,062,193 Panel B: Business Valuations Using Multiples From Mid-Market Comps Key Valuation Metric: Original Recast Frosty Footwear Values: Increased Valuation Original Recast From Recasting P/E P/R P/SE P/A P/CF P/EBITDA Median Multiple 14.55 0.86 12.04 1.79 6.86 12.31 Note: Cash Flow = Net Income + Depreciation + Amortization Panel C: Total Business Valuation Summary With Recasted Numbers Range 0 to Mean #DIV/0! Median #NUM! * Cash flow = Net Income + Depreciation + Amortization All of the business valuations using multiples represent enterprise values, except the P/E approach which represents equity value. The long-term bebt of $425,000 can be added back to convert this equity value to an enterprise value. Panel D: Benchmarking (millions) Variable Median Revenues Net Income Assets St. Equity Cash Flow EBITDA 11.04 0.07 4.5 0.32 1.66 2.60 Frosty Performing Gap 2.25 -8.79 0.11 0.04 2.17 -2.33 1.39 1.07 0.13 -1.53 0.30 -2.30 Exhibit 2: Frosty Footwear Inc. Balance Sheets for Years 2006-2007 12/31/2007 12/31/2006 $ Current Assets Cash Accounts Receivable (net 5,000) Inventory Prepaid Expenses $ 503,443 613,485 852,343 391,347 610,525 654,684 33,035 Total Current Assets $1,969,271 $ 1,689,591 Property, Plant & Equipment Leasehold Improvements Furniture & Fixtures Machinery & Equipment Vehicles 5,120 33,075 263,045 24,109 5,120 73,138 254,681 24,109 Total PPE Accumulated Depreciation 325,349 -305,296 357,048 -323,812 Net PPE 20,053 33,236 Other Assets Patent & Trademark Costs Non-Compete Agreement Loan Fees Accumulated Amortization 15,262 189,000 15,262 189,000 4,375 -80,850 -68,250 Total Other Assets 127,787 136,012 Total Assets $2,117,111 $ 1.858.839 $ Current Liabilities Accounts Payable Sales Tax Payable Accrued Commissions Accrued Interest Line of Credit Payable 80,937 17,972 21,639 90, 156 200,000 71.367 10,639 18,404 163,310 21,500 Total Current Liabilities 410,704 285,220 Long-Term Liabilities Note Payable-Bank Shareholder Loans 425.000 637,193 129,685 837,478 Total Long-Term Liabilities 1,062,193 967,163 Total Stockholders Equity 644,214 606,456 Total Liabilities & Equity $2,117,111 $ 1,858,839 Exhibit 1: Frosty Footwear Inc. Income Statements for Years 2005-2007 2007 2006 2005 $ Sales Units Sold $ 2,248,511 41,300 1,789,429 30,172 $ 2,050,742 31,800 Cost of Goods Sold Material Direct Labor Rent Allocation Depreciation Allocation Other 771,007 251,120 25,719 11,131 77,157 596.194 185,736 26,921 12,434 62,723 693,945 207,823 18,374 19, 110 95,798 Total Cost of Goods Sold 1, 136, 134 884,008 1.035,050 Gross Profit $ 1,112,377 $ 905,421 $ 1,015,692 Operating Expenses Owners/Mgt Compensation CEO Bonus Compensation Salaries & Wages Professional Fees Rent Allocation Commissions Bad Debts Advertising & Promotion Trade Shows Research Depreciation Allocation Amortization--Purchase Debt Interest Other Expense 138,238 23,900 22,331 47,422 23,912 122,089 32,551 104.310 25,162 151,000 4,270 29,395 99.177 24,447 154,430 133,000 20,327 139,523 45,131 20,793 71,815 14,000 94,304 29,021 14,224 3,901 12,600 42,310 210,169 4,008 1,995 12,600 107,534 367,186 74,302 25,184 24,582 2,814 12,600 19,517 264,125 Total Operating Expenses 1,033,238 885,843 851.118 Operating Profit $ 79,139 $ 19,578 $ 164,574 Exhibit 5: Projected Income Statements for Years 2008-20010 2008 2009 2010 Sales $2,600,000 $3,000,000 $3,500,000 Cost of Goods Sold Material Direct Labor Rent Allocation Depreciation Allocation Other 910,000 296,000 26,000 17,770 100.230 1,030,000 335,000 26,000 17,950 123,050 1,195,000 390,000 26,000 19,800 146,200 Total Cost of Goods (51%) 1.350,000 1,532,000 1,777,000 Gross Profit $1,250,000 $1,468,000 $1,723,000 Operating Expenses Owners/Mgt Compensation CEO Bonus Compensation Salaries & Wages Professional Fees Rent Allocation Commissions Bad Debts Advertising & Promotion Trade Shows Research Depreciation Allocation Amortization--Purchase Debt Interest Other Expense 150,000 32,500 24,500 10,000 24,000 143,770 26,140 120,000 26,000 15,000 3.230 12,600 117,630 219,630 180,000 37,500 27,000 10,000 24,000 165,000 30.000 138,000 28,000 15,000 4,050 12,600 134,955 286,895 220,000 45,000 29,700 10,000 24,000 191,345 34,790 160,000 30,000 15,000 4,200 12,600 156,548 339,817 Total Operating Expenses (36%) 925,000 1,093,000 1,273,000 Operating Profit $325,000 $375.000 $450,000 Note: For years 2011 and 2012, sales were projected to grow by 10% per year and the cost percentages were projected to stay the same. Frosty Footwear, Inc. Business Valuations Using Multiples and Benchmarking Panel A: EBITDA Business Valuation Original Recast 0 EBITDA Normal Multiple 0 55 Total Business Value 0 0 Less Debt -1,062,193 -1,062,193 Equity Value -1,062,193 -1,062,193 Panel B: Business Valuations Using Multiples From Mid-Market Comps Key Valuation Metric: Original Recast Frosty Footwear Values: Increased Valuation Original Recast From Recasting P/E P/R P/SE P/A P/CF P/EBITDA Median Multiple 14.55 0.86 12.04 1.79 6.86 12.31 Note: Cash Flow = Net Income + Depreciation + Amortization Panel C: Total Business Valuation Summary With Recasted Numbers Range 0 to Mean #DIV/0! Median #NUM! * Cash flow = Net Income + Depreciation + Amortization All of the business valuations using multiples represent enterprise values, except the P/E approach which represents equity value. The long-term bebt of $425,000 can be added back to convert this equity value to an enterprise value. Panel D: Benchmarking (millions) Variable Median Revenues Net Income Assets St. Equity Cash Flow EBITDA 11.04 0.07 4.5 0.32 1.66 2.60 Frosty Performing Gap 2.25 -8.79 0.11 0.04 2.17 -2.33 1.39 1.07 0.13 -1.53 0.30 -2.30 Exhibit 2: Frosty Footwear Inc. Balance Sheets for Years 2006-2007 12/31/2007 12/31/2006 $ Current Assets Cash Accounts Receivable (net 5,000) Inventory Prepaid Expenses $ 503,443 613,485 852,343 391,347 610,525 654,684 33,035 Total Current Assets $1,969,271 $ 1,689,591 Property, Plant & Equipment Leasehold Improvements Furniture & Fixtures Machinery & Equipment Vehicles 5,120 33,075 263,045 24,109 5,120 73,138 254,681 24,109 Total PPE Accumulated Depreciation 325,349 -305,296 357,048 -323,812 Net PPE 20,053 33,236 Other Assets Patent & Trademark Costs Non-Compete Agreement Loan Fees Accumulated Amortization 15,262 189,000 15,262 189,000 4,375 -80,850 -68,250 Total Other Assets 127,787 136,012 Total Assets $2,117,111 $ 1.858.839 $ Current Liabilities Accounts Payable Sales Tax Payable Accrued Commissions Accrued Interest Line of Credit Payable 80,937 17,972 21,639 90, 156 200,000 71.367 10,639 18,404 163,310 21,500 Total Current Liabilities 410,704 285,220 Long-Term Liabilities Note Payable-Bank Shareholder Loans 425.000 637,193 129,685 837,478 Total Long-Term Liabilities 1,062,193 967,163 Total Stockholders Equity 644,214 606,456 Total Liabilities & Equity $2,117,111 $ 1,858,839 Exhibit 1: Frosty Footwear Inc. Income Statements for Years 2005-2007 2007 2006 2005 $ Sales Units Sold $ 2,248,511 41,300 1,789,429 30,172 $ 2,050,742 31,800 Cost of Goods Sold Material Direct Labor Rent Allocation Depreciation Allocation Other 771,007 251,120 25,719 11,131 77,157 596.194 185,736 26,921 12,434 62,723 693,945 207,823 18,374 19, 110 95,798 Total Cost of Goods Sold 1, 136, 134 884,008 1.035,050 Gross Profit $ 1,112,377 $ 905,421 $ 1,015,692 Operating Expenses Owners/Mgt Compensation CEO Bonus Compensation Salaries & Wages Professional Fees Rent Allocation Commissions Bad Debts Advertising & Promotion Trade Shows Research Depreciation Allocation Amortization--Purchase Debt Interest Other Expense 138,238 23,900 22,331 47,422 23,912 122,089 32,551 104.310 25,162 151,000 4,270 29,395 99.177 24,447 154,430 133,000 20,327 139,523 45,131 20,793 71,815 14,000 94,304 29,021 14,224 3,901 12,600 42,310 210,169 4,008 1,995 12,600 107,534 367,186 74,302 25,184 24,582 2,814 12,600 19,517 264,125 Total Operating Expenses 1,033,238 885,843 851.118 Operating Profit $ 79,139 $ 19,578 $ 164,574 Exhibit 5: Projected Income Statements for Years 2008-20010 2008 2009 2010 Sales $2,600,000 $3,000,000 $3,500,000 Cost of Goods Sold Material Direct Labor Rent Allocation Depreciation Allocation Other 910,000 296,000 26,000 17,770 100.230 1,030,000 335,000 26,000 17,950 123,050 1,195,000 390,000 26,000 19,800 146,200 Total Cost of Goods (51%) 1.350,000 1,532,000 1,777,000 Gross Profit $1,250,000 $1,468,000 $1,723,000 Operating Expenses Owners/Mgt Compensation CEO Bonus Compensation Salaries & Wages Professional Fees Rent Allocation Commissions Bad Debts Advertising & Promotion Trade Shows Research Depreciation Allocation Amortization--Purchase Debt Interest Other Expense 150,000 32,500 24,500 10,000 24,000 143,770 26,140 120,000 26,000 15,000 3.230 12,600 117,630 219,630 180,000 37,500 27,000 10,000 24,000 165,000 30.000 138,000 28,000 15,000 4,050 12,600 134,955 286,895 220,000 45,000 29,700 10,000 24,000 191,345 34,790 160,000 30,000 15,000 4,200 12,600 156,548 339,817 Total Operating Expenses (36%) 925,000 1,093,000 1,273,000 Operating Profit $325,000 $375.000 $450,000 Note: For years 2011 and 2012, sales were projected to grow by 10% per year and the cost percentages were projected to stay the same