Give your valuation of the company using the three valuation approaches:
(1) restated book value
(2) current market value using earnings multiples
(3) discounted future cash flow analysis
Valuation Certain nancial considerations were pointed out to Jorge. The brothers were cunently taking out seasons per year in salaries but were spending for less that half of their time at the business. The major operating improvements had been made and there was no good reason for the brothers to spend full time with the business now. Ban believed that the company could be run with onty general management one person at a salary of Sttiiib to replace the three brothers at a cost savings of 5209.01110 per year. Ben stated that there was a strong management learn of three managers immediately below the brothers in the organization structure. This middle management group had been with the company for many years and in Ben's opinion could \"run the place\" in the absence of the three brothers. Ben also pointed out that the equipment had been well maintained and that little new equipment had been required since the technology in the industry had been unchanged for several years. The books showed net plant and equipment at a value of 5421.iil.'i but Ben believed that the not fixed assets had a cunent market value of $6?ii.li{i. AF had followed the price ratios for small and medium sized business sale transactions for several years. The price ratios would change somewhat from year to year as emnomic conditions and interest rates changed. However. at present. businesses of the size and with the growth rate of Phil: had been selling at 3.5 to 4.0 times current annual adjusted EBITDA {Eamings Before interest Taxes Depreciation 8i Amortization}. These ratios were typical of companies with flat growth curves or those growing no faster than their industry growth rate. For rapidly growing companies. the priceiEBlTDA ratio oouid be higher (even up to 5 times EBlTDA}. Ben and Jorge agreed that sales of products in the plastic molded products industry were growing at a rate of 5% per year. Valuation experts use three methods of valuation: it} Restated Book 'v'alue [total current stockholders' equity adfusted for over or under valued items on the balance sheet - in this case: undervalued net plant and equipment]; {2) Current Market tv'aiure [application of ratios such as the PncefEBlTDA ratio]; [3) Discounted Future Cash Flow Valuation. Once the values have been determined using the three methods listed. the valuation expert applies judgment as to the weight to be given to each valuation method. in the case of a reasonably protable company with good future prospects. the Discount Future Cash Flow tvaluation method is often given the greatest weighting. The discount rate will vary with the levels of interest rates. the risk involved with the business being evaluated and qualitative factors. in 2005 with the level of prime interest rates at around Bit: and the risk inherent with PMC. a valuation expert would probably assign a discount rate of from 14% to 16% for valuation of this company. A trey tactor would be what growth in cash flow {if any} should be assumed In projecting future cash flows for PMC. Another valuation consideration when proiecling cash ttow would be how much of the growth expected would be a result of the buyer's efforts and how much would be due to the cument owner's ability. A buyer usually would not pay the seller for the additional growth that might be realized from the efforts of the acquiring new owner
