Question 2 ( 25 marks: 56 minutes) You, Valuations Manager at Dabest CPA and Assoiciates, are just getting ready to depart from the office for the day when Vince Gem, a senior partner at the firm stops by your office. "I just came out of meeting with Anna Delvey; the owner of Blooms Inc. Anna is starting to think about retirement and is wondering what her business might be worth. Let's meet tomorrow to discuss." The next morning on October 1, 2020, you meet with Vince and he provides the following background on Blooms Inc.: Ms Delvey is the founder of Bloom Inc., a successful flower shop located in the downtown core of Toronto. Established in 2001, Bloom Inc. has been a mainstay, mixing a traditional florist delivery model while adapting to current trends, including the recent addition of a mobile app to allow on-line ordering. The company's customers consist of a mix between corporate/commercial recurring clients and individuals shopping for baby showers, weddings, funerals and other occasions. In addition, holidays (particularly Valentine's Day) drive a large part of her annual sales. Competition is quite fierce with cheaper products offered by big box grocery stores and roadside vendors. Ms Delvey and her sales staff continue to innovate and work towards developing their brand of high-quality product at reasonable prices. Bloom Inc.'s general manager, Lynn, is a long-time employee of over 10 years and is interested in taking over the company. Vinve provides you with a summary of the historical financial statements, which can be found in Appendix 1. After your meeting with Vince, you have a conversation with Ms Delvey, where she provides the following information: A real estate agent has indicated that the store is worth approximate $1,000,000. Ms Delvey indicates that upon any sale, she would intend to keep the building and enter into a long-term lease with the new owner. She indicates that market rent would be $22 per sq. foot (rent includes property taxes, repairs and maintenance costs); the space is approximately 2,200 square feet. The net book value of the real estate as at the valuation date is $266,764, consisting of the original cost allocated to land, as the building has been fully depreciated. As at August 31, 2020 the market value of the investments is $300,000. Ms Delvey's salary is considered comparable to similar positions in the industry. Her 20 years old son, Jack, has drawn a salary of $5,000 per annum to assist with his college education over the last 3 years; he does not work in the business. During fiscal 2020 the company experienced a theft and damage to product that resulted in a loss of $140,000. Amortization approximates annual sustaining capital reinvestment requirements. Your additional research indicates the following: Risk free rate as at the valuation date is 2% Equity risk premium is 12% Industry risk premium is 2% Size premium applicable to Bloom Inc. is 4% The long-term industry growth rate, given that it's a mature industry, is 1% The industry debt to equity structure is 25% debt to 75% equity Required: Calculate the Enterprise Value and the FMV of Equity of Bloom Inc. as at August 31, 2020 (show your calculations). (C) B. Pasquali FCPA, FCA and CBV 2022. Appendix 1 Bloom Inc. Balance Sheet As at August 31 Fiscal Year ACTUAL \begin{tabular}{|c|c|c|c|c|c|c|} \hline & \multirow{2}{*}{\multicolumn{3}{|c|}{2020}} & \multirow[b]{2}{*}{2019} & \multirow{2}{*}{\multicolumn{2}{|c|}{2018}} \\ \hline & & & & & & \\ \hline \multicolumn{7}{|l|}{ ASSETS } \\ \hline Cash & $ & 7,750 & $ & 30,782 & $ & 25,627 \\ \hline Accounts Receivable & & 48,473 & & 45,729 & & 43,970 \\ \hline Inventories & & 213,281 & & 194,121 & & 186,215 \\ \hline Prepaid Expenses & & 1,532 & & 1,498 & & 1,534 \\ \hline Total Current Assets & & 271,036 & & 272,130 & & 257,346 \\ \hline Capital Assets (net of accumulated depreciation) & & 406,795 & & 418,999 & & 431,569 \\ \hline Long Term Investments & & 169,231 & & 241,080 & & 189,723 \\ \hline Total Assets & & 847,062 & & 932,209 & & 878,638 \\ \hline \multicolumn{7}{|l|}{ LIABILITIES } \\ \hline Accounts Payable and Accrued Liabilities & $ & 159,346 & $ & 147,896 & $ & 141,572 \\ \hline Due to Shareholder (interest rate 4\%) & & 9,000 & & 9,500 & & 7,500 \\ \hline Current Portion of Term Debt & & 3,672 & & 3,459 & & 3,258 \\ \hline Total Current Liabilities & & 172,018 & & 160,855 & & 152,330 \\ \hline Term Debt (interest rate 4\%) & & 136,792 & & 140,464 & & 143,922 \\ \hline Total Liabilities & & 308,810 & & 301,319 & & 296,252 \\ \hline \end{tabular} SHAREHOLDERS' EQUITY \begin{tabular}{lrrr} Common Shares & 100 & 100 & 100 \\ Retained Earnings & 538,152 & 630,790 & 582,286 \\ \hline & 538,252 & 630,890 & 582,386 \\ \hline Total Liabilities and Shareholders' Equity & 847,062 & 932,209 & 878,638 \\ \hline \end{tabular} Bloom Inc. Statement of Operations and Retained Earnings For the Vears Fnded