Valuation is an important topic area for both accountants and financial specialists to understand. As you will see, corporate valuation is part science and part educated guess-work.Since nobody knows what the future will bring, it is impossible to value cash flows that stretch out to infinity with a high degree of precision.Regardless, the attempt to understand the drivers of value is of great importance.

To make this a more meaningful assignment, the scenario presented is based on current realworld events.

The agriculture industry in Canada has been impacted by the COVID19 pandemic. Due to the health guidelines issued by the Government of Canada, more people are choosing to stay at home.As a result, many people have turned to backyard birdfeeders for enjoyment which has unexpectedly increased demand for sunflower seeds 10-15% this year. Canadian farmers have needed to adapt to this change in consumer demand.Crops have grown and prices have increased. Sunflower seeds have increased in price from $0.25/lb to as much as $0.40/lb (range:

$0.10/lb-$0.15/lb increase).

https://www.citynews1130.com/2020/08/29/increase-in-backyard-birdfeeders-driving-demandfor-sunflower-seeds/

https://www.agr.gc.ca/eng/covid-19-financial-support-for-farmers-and-foodprocessors/?id=1594301472449

Canada is poised in 2020 to see its largest sunflower crop in years if environmental conditions

cooperate.

Sunflower crops have increased to 365 km² in 2020 from 200-245 km².Farmers are

being asked to increase sunflower yields 10% (or slightly more) in the coming year (2021) to meet the increase in demand.According to Statistics Canada, Canadian farmers intend to seed 104,400 acres of sunflowers in Spring 2021, which would be up 36% over 2020 and represent the largest acreage base for the crop in a decade.

https://www.agcanada.com/daily/bigger-sunflower-crop-expected-for-2020 https://www.realagriculture.com/tag/national-sunflower-association-of-canada/

The Manitoba Crop Alliance, an amalgamation of 5 provincial commodity associations, became operational August 1, 2020.Mandatory check-off amounts from the sales of sunflowers, wheat, barley, corn, and flax remained the same post-merger.

https://www.realagriculture.com/2020/07/manitoba-crop-alliance-receives-checkoff-approvaland-announces-management-team/

The majority of Canadian sunflower crops are found in Manitoba.Farmers produce sunflowers primarily for domestic end-users.Historically, sunflowers have been produced for confectionary (80% roasted snack seeds, 1% baking with shell, 4% baking without shell), birdfeed (5%; a smaller variety of seed), and vegetable oils (10%).Canadians produced 63Kt of sunflower seeds for the 2019-2020 growing season.

https://en.wikipedia.org/wiki/Agriculture_in_Canada https://www150.statcan.gc.ca/n1/en/type/data?text=10010&sourcecode=3438 https://www.agr.gc.ca/eng/crops/reports-and-statistics-data-for-canadian-principal-fieldcrops/canada-outlook-for-principal-field-crops-2019-12-19/?id=1577189965774

For this assignment, you will be taking the role of a professional advisor, assisting your client in making a strategic business decision based on the results of your valuation.

Your client is a grain supplier from Manitoba who owns 100% (100 Class A voting common shares,

100 Class B non-voting common shares, 1,000,000 Redeemable preferred shares) of an incorporated private farm (Country Farm Ltd.) that grows sunflowers, wheat, barley and flax on 2,000 acres of farmland.Adjacent to the farmer's farmland is a production facility that sits on 10 acres of land.All land and buildings are fully-owned through inheritance of the farm through generations of the family.The production facility is running at 75% capacity.The production facility is able to convert harvested grain to a sellable product within a day.

In 2020, the farmland was allocated at 25% per each of 4 crops: sunflowers, wheat, barley, and flax. Current rate of return is 15%.The farmer has $150,000 cash in the bank.The client's succession plan is to hand-over the company to his/her daughter in 5 years, while maintaining a percent ownership in the farm to fund his/her retirement annually with $35,000 pre-tax.The farmer's daughter is actively involved in the farming operations and is a reasonable choice to run operations after her parent's retirement.

The neighbour is selling 350 acres of adjacent farmland for $3,000/acre (firm) cash on the transaction date.The neighbouring farm's soil is ready for crops and the soil nutrients are suitable to grow wheat or flax.Your client is considering purchasing the land to increase production of sunflowers for birdseed.

Your client has been approached by a fellow farmer in the local community who is interested in sharing the production facility for his own harvest, starting next year.If new systems are installed to the production facility to allow for more efficient production, it will cost $150,000 in upgrades.The more efficient systems will result in 12% pre-tax cost savings of grain processed for each year thereafter.

The farmer has legal contractual agreements for the next 3 years with grain distributors to supply the following percentage of annual production: 80% sunflower seeds (at standard mix), 70% wheat, 65% barley, and 45% flax.The remaining crop is sold through the Manitoba Crop Alliance at fair value.Corporate tax is 26%.

More information supplied early in the semester.

See Crop Production Costs:

https://www.gov.mb.ca/agriculture/farm-management/production-economics/cost-ofproduction.html

https://www.gov.mb.ca/agriculture/farm-management/production-economics/pubs/cop-cropproduction.pdf

As the professional advisor, you are required to draft a comprehensive memo, addressed to: The Owner, Heritage Farm Ltd. and answer the following questions:

1. CROP ALLOCATION AND PROFIT

a.Based on the information currently available to us, would it be financially beneficial for a farmer to redistribute his crops to include a yield of 10% more sunflowers? What would be the percentage distribution of the crop mix to maximize profits?What would be the financial benefit, if any?

b.What are risks of the crop mix distribution that maximizes profits? How does the farmer mitigate the risks?

c.What is the break-even price of each crop currently?What is the break-even price of the recommended crop mix?

2. NEIGHBOUR'S LAND

a.Should the farmer buy his neighbour's adjacent land to grow crops?If so, what crop should the farmer grow on the land?Why?

b.Assume the farmer decided to buy the neighbour's land.How should he fund the purchase of his neighbour's land?What are his options? Be specific.

c.When will the farmer break-even if he buys the neighbour's land?