PLEASE ONLY DO THE FOLLOWING:

11-97. Hellemn Candy is a small candy manufacturer low buyer power and cannot achieve significant economies located in Defiance, Ohio. Founded in 1912, the of scale. company offers a full line of candy products to the Major customers include all the major retail chains. While marketplace, including its popular HoHo lollipops, these are important customers, Hellemn's sales are not Christmas candy canes, and various chocolate treats. concentrated with any one retailer. Indeed, the company Company Background works hard to maintain excellent working relationships with Operating from state-of-the-art manufacturing facilities, each of its suppliers and customers. Sales are seasonal, with Hellemn employs 275 full-time associates. The company and Easter. Throughout the remainder of the year, sales are pays competitive wages and is noted for its employee-focused fairly consistent from month to month. Hellemn is able to approach to daily operations. Its motto is, "If our employees adjust its payroll according to operational needs. Manufacare happy, our customers will be happy." Because of this, the turing lead time is four months, and most of the company's company has never experienced an effort to unionize. products have an average shelf life of about six months. Competitive advantages for Hellemn include its brand name Hellemn Candy is a family business. President Dale Hellemn products, state-of-the-art manufacturing facilities, highly liq- is a fourth-generation descandant of the founder, and the uid balance sheet, a proven management team, an abundant chief financial officer, Vicki Hiler, is a third-generation dessupply of nonunion labor, and its loyal customer base. Dis- candant. Dale Hellemn owns 52% of the company's common advantages are its size (Hellemn's total assets are about 8% stock, and six other family members each own 8% as shown of Tootsie Roll's and 2% of Hershey's), its limited presence in the following table. in certain candy product lines, and fewer available dollars Compensation for key employees (as shown in the previous to devote to research and development. Due to its relatively table) was determined by competitive market surveys. small size compared to competitors, the company also has Financial Data Financial information for Hellemn Candy is set forth in the following tables. \begin{tabular}{|l|c|c|c|} \hline \multirow{2}{*}{ Balance Sheets } & \multicolumn{3}{|c|}{ As of December 31 (\$000 omitted) } \\ \hline Hellemn Candy & 2012 & 2011 & 2010 \\ \hline Stockholders' Equity & 29,430 & 32,750 & 32,200 \\ \hline Total Liabilities and Equity & $43,800 & $46,800 & $45,800 \\ \hline Additional Information: & & & \\ \hline Dividends Paid & $1,850 & $1,810 & $1,800 \\ \hline Shares Outstanding & 6,000 & 6,000 & 6,000 \\ \hline Depreciation and Amortization & $2,050 & $1,910 & $1,800 \\ \hline \end{tabular} The Industry The Economy The industry is dominated by several large manufacturers, The economy is growing slowly. Gross domestic product such as Barry Callebaut and Nestl in Europe; Hershey, _ (GDP) in 2012 grew at an annualized rate of 2\%. This growth Mars, and Tootsie Roll in the United States; and Ferrero in is slightly higher than the average growth over the previous Italy. These companies, as well as their smaller counterparts, two years (1.7\%). Interest rates remain at historically low operate in three segments: (1) those that manufacture choco- levels. The December 2012 three-month T-bill rate was .09%, late from beans, (2) those that use manufactured chocolate while the 30 -year T-bond rate was 3.00%. The inflation rate to make candy, and (3) those that manufacture nonchocolate was 1.75% in 2012 and is expected to reach 2.3% in 2013 . candy. The specific risk premium is 1.00%. Demand for candy products is primarily driven by consumer The Assignment tastes and preferences and population growth. Candy manufacturers reinvest about 5% of sales in research and develop- Hellemn Candy is considering a sale to a major candy manument in an effort to meet both changing customer preferences facturer. In order to negotiate a sales price, Hellemn Candy and to provide healthier products to customers. Similar to wants to estimate its fair market value. As a forensic acmany industries, profitability is driven by manufacturing ca- countant, you have been retained to perform a valuation of pability, the ability to maintain supply chain efficiency, and Hellemn Candy as of December 31, 2012. branding and other marketing considerations. The industry is Your engagement is defined as follows: concentrated, and economies of scale exist for large companies. Smaller firms compete by offering specialized products in niche markets. Analysts estimate that U.S. consumers eat about 25 pounds of candy per capita per year. Annual global industry sales exceed $150 billion, with U.S. sales comprising about $9 billion of that amount. Since this is a mature industry, sales are expected to grow at about 3\% per year into the foreseeable future. Revenue components include the following: 50% from purchased chocolate, 30% from nonchocolate candy, and 20% from chocolate candy. The nonchocolate candy segment includes products such as hard candies, marshmallow products, and gum, to To assist you with this effort, the following earnings data are name a few. provided: \begin{tabular}{|l|c|c|c|c|c|} \hline \multicolumn{7}{|c|}{ Hellemn Candy Earnings Analysis (2008-2012), \$000 omitted } \\ \hline Year & 2012 & 2011 & 2010 & 2009 & 2008 \\ \hline Income from Operations & $5,785 & $6,450 & $7,250 & $6,250 & $5,975 \\ \hline Net Income & $4,385 & $5,300 & $5,325 & $4,737 & $4,529 \\ \hline Net Cash Fow from Operations & $5,050 & $8,300 & $7,700 & $7,530 & $5,700 \\ \hline \end{tabular} Assignment 7 Chapter 11 Valuation Suggested approach Determination: Fair Market Value for ...... (State your company name). Note that the class presentation and the book provide guidance on the Phases and the details, except for a few instances where we need to think a little more. The challenge is in recognizing issues discussed in the book when reading the case. With the sketch below, things should hopefully be clearer. Phase I - Financial Statement Analysis i) Ignore the Preparation of Common Size Financial Statements. Compute basic ratios for analysis and for each year in a comparative format as follows:/ ii) Discuss and Comment briefly on each set of ratios, their implications for the performance of the business, it prospects, etc, as follows: Comments/Discussion of Ratios: i) First compute the ROR. Use the buildup method (see the power-point presentation and the text book, and keep to the guidance there). Justify whatever you include. Do not use any rate stated in the problem just because it has been stated, unless it is a component in the buildup as specified in the class presentation or the textbook, or the case specifically states that you must adjust for it. The ROR will be the total of the components. Hint: Begin with the risk-free rate which is the US Treasury bond Rate Stated in the case. Following the book, you may Structure your answer as follows: Company Name: ROR Comnutation ii) Second compute the Capitalization Rate (Note that the company management says that they will meet the industry growth rate at the minimum so use just that information). Capitalization Rate: Phase III - Proxy Benefit Determination i) Do a columnar earnings analysis for the years 2008 through 2012 and compute the average in the last column following the format below: Company Name: Earnings Analysis (2008-2012) ii) Refer to the class presentation or textbook for information on which Proxy benefit is consistent with using future benefits. State and use the average of that Proxy Benefit as follows: Proxy Benefit to Use: Phase IV - Calculation of Indicated Value Compute and Report your Indicated or Fair Market Value. Note that if you abbreviated figures to 1000 s, then you should state full amounts. See the class presentation or the textbook, and report you calculation as follows (show workings or how and what you use for the calculation): i) Fair Market Value: Comment on the role of information about the appraised market value of the company's tangible net assets (For example, assuming the company's tangible net assets is $40,000,000 as of 2012). Respond as below: ii) Role of appraised market value of the company's tangible net assets in Fair Market Value determination