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Case Retail Clothing Store (RCS) is a family-owned chain of clothing stores in California. The company specializes in children's clothing from infant to 14 years of age. It currently has 15 stores in major shopping malls in the state. The company is owned by the Kess family and was started by Mrs. Jane Kess and her husband 30 years ago. The company is currently run by the three children of Mr. and Mrs. Kess and some of their spouses. Mr. Kess passed away a number of years ago and Mrs. Jane Kess, passed away on 12/31/09. At the time of her passing, she owned 10% of the outstanding common stock of the company. You have been engaged by RCS to determine the fair market value of the shares owned by Mrs. Kess as of 12/31/09 for estate tax purposes. The attached spreadsheet contains projections prepared by RCS' management. Management expects the company to reach a steady state after fiscal year ended January 2013. Mrs. Kess's children, John, Paul, and Jane are officers of RCS. Each of the three officers is expected to draw an annual salary of $275,000 in fiscal year ending January, 2010. John is the CEO, Paul is the COO, and Jane is the CFO. An employment consultant who works with RCS has informed you that the market salary for the COO's position is expected to be $225,000 per year and the market salary for the CFO's position is expected to be $175,000 per year. In addition, officers' salaries are expected to increase at a rate of 5% per year from 2009 to 2013. Based on your research, if applicable, the control premium would be 35% and the marketability discount would be 40%. Using the discounted cash flow method and the discount rate that you developed last week, determine the fair market value of Mrs. Kess's interest as of 12/31/09. Retail Clothing Store Projections (in '000) Fiscal Year Ended 1/2011 1/2012 1/2010 Net sales 1/2013 $14,962 $15,710 $16,652 $17,485 Cost of goods sold and occupancy expenses 9,426 9,897 10,491 11,016 Gross profit Operating expenses 5,536 4,040 5,813 4,242 6,161 4,579 6,469 4,808 Operating income Interest expense 1,496 1 1,571 2 1,582 2 1,661 3 Earnings from operations before income taxes 1,495 1,569 1,580 1,658 Income taxes 598 628 632 663 Net earnings $897 $941 $948 $995 Depreciation 1,000 1,000 1,000 1,000 Increase in working capital 200 220 240 260 Capital Expenditures 175 175 175 175 Officers' Salaries 825 825 900 900 Risk-free rate = 3.00% In this case, the given company does not fall under the category of large corporation therefore, we are not taking i account the equity premium based on large corporation and long-term government bonds. In this case the suitable risk premium will be the historical equity premium minus the 3 year average of P/E ratio Equity premium = 5.70% There is no information about the market cap of the company but from balanace sheet it is clear that they will be categorized as micro capital as it falls lesser than $453.254 million. Micro-capital premi 3.74% RCS deals with the infant to children clothing and has more stores selling exclusively those products. In the given there are no such specifications about the children clothing stores, therefore we are using Retail store, Not Elsewh Classified premium as an appropriate premium. Retail store, Not Elsewhere Classified = Discount Rate = 14.49% 2.05% fore, we are not taking into ar average of P/E ratio clear that they will be e products. In the given list Retail store, Not Elsewhere