SCENARIO FOR VALUATION QUESTIONS: You are interested in purchasing a widget business. The business is 5 years old and has seen steady growth in revenues and profits each year since its founding. Assume that net income has been the following: 2020 - $6,000 2019 - $4,000 2018 - $3,500 2017 - $1,000 2016 - S600 The owner has given you the following balance sheet for your review. $2000 5500 $400 $2900 S1800 S4700 ASSETS Current Assets Cash Accounts Receivable Inventory Total Current Assets: $2900 Fixed Assets Equipment Less accumulated depreciation ($1100) Total Fixed Assets: TOTAL ASSETS LIABILITIES Current Liabilities Accounts Payable S300 Other Liabilities Accrued Taxes Total Current Liabilities: $700 Long-term Liabilities Long-term Debt S2000 Total Long-term Liabilities: $2000 $300 S100 TOTAL LIABILITIES $2700 It is now your task to establish a valuation for the business using the following: 1. BASIC BALANCE SHEET METHOD (2 points) 2. ADJUSTED BALANCE SHEET TECHNIQUE (4 points) 3. EXCESS EARNINGS METHOD (10 points) 4. MARKET APPROACH (6 points) Use the following assumptions (may not need all of them) 1. 20 percent of the accounts receivable are over 180 days old. 2. 20 percent of the inventory is outdated and essentially useless. 3. The owner did not include a bill that is owed (i.e., accounts payable) in the amount of $200. 4. Assume a 25 percent rate of return. 5. Assume an additional opportunity cost of $700 for salary forgone if you purchase the business. 6. Assume a years-of-profit figure of 4 for this business. 7. Assume a "most likely" growth rate of 20 percent per year for the business over the next 5 years. 8. Assume that four publicly traded firms that sell widgets similar to this widget company trade at a P/E ratios of 6, 8, 10, and 15 respectively. MAKE SURE YOU SHOW YOUR WORK/CALCULATIONS (clearly highlight or circle your final answers for each valuation method). BASIC BALANCE SHEET METHOD ADJUSTED BALANCE SHEET TECHNIQUE EXCESS EARNINGS METHOD MARKET APPROACH 3. The owner did not include a bill that is owed (1.c., accounts payable) in the amount of $200. 4. Assume a 25 percent rate of return. 5. Assume an additional opportunity cost of $700 for salary forgone if you purchase the business. 6. Assume a years-of-profit figure of 4 for this business. 7. Assume a "most likely" growth rate of 20 percent per year for the business over the next 5 years. 8. Assume that four publicly traded firms that sell widgets similar to this widget company trade at a P.E ratios of 6, 8, 10, and 15 respectively. MAKE SURE YOU SHOW YOUR WORK/CALCULATIONS (clearly highlight or circle your final answers for each valuation method). BASIC BALANCE SHEET METHOD ADJUSTED BALANCE SHEET TECHNIQUE EXCESS EARNINGS METHOD MARKET APPROACH FINAL QUESTION. What do you feel is a fair price for the business (fair for both the buyer and the seller). Give a single number or a range of values (cannot be too broad a range). Briefly explain why. (6 points) 3
