Microsoft Word peachtree case study

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2004, an equity risk premium of approximately 7.10% has been derived for use in the buildup method. This is the long horizon equity risk premium as quoted in the
Stocks, bonds, bills, and inflation 2006 valuation edition released by Ibbotson
& Associates.
Note 3 ‐ The Size Risk Premium (“SRP”) represents the risk premium or incremental return over the large company common stock returns that is required by an investor to compensate for the added risk of investing in a small company. Based upon the difference between the long‐term returns achieved on large company stock returns less the long‐term returns achieved on small company common stock returns from 1926‐2004, a size risk premium of approximately
6.36% has been derived for use in the buildup method.
Note 4 ‐ The Company Specific Risk Premium (“CSRP”), specific to an equity investment in the subject business enterprise, includes industry related‐risk as well as other business specific attributes. The CSRP is the most subjective number utilized in the Buildup method and can have a significant impact on the discount rate and, subsequently, on the value of a closely held company. It is important that the valuator understands all of the issues that must be addressed when analyzing this figure. The following factors must be considered
• Size of the Company relative to competition
• Pending environmental regulatory changes
• Relative volatility of the economic income flow used in the forecast
• Customer diversity
• Service/product offering diversity
19
Stocks, bonds, bills, and inflation 2006 valuation edition. 2005. Chicago Ibbotson Associates. Appendix C, Table C Long‐horizon expected equity risk premium.
20
Stocks, bonds, bills, and inflation 2006 valuation edition. 2005. Chicago Ibbotson Associates. Appendix C, Table C size premium for micro‐cap stocks in the 9th and 10th deciles as defined by Ibbotson Associates.

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• Existing and pending competition
• Financial position of the Company
• Safety record
• Labor market
• Limits on financing needed
• Expected growth of the business
• Key person dependence Overall, the appraiser believes that the Company’s above‐average financial performance (discussed in detail in Section 4.7 Company Financial Review, longevity of the business (over 17 years) and its general renown in the marketplace mitigates most of the risks that a company of this size in this type business would be subject to. Given the strength of the balance sheet (which includes the company’s enormous cash position, and the Company’s profitable operation on a normalized basis, there should be no barrier to raising funds if needed. The returns have been above average over the last five years and there is no reason to expect a largely different result over the long term as long as the Company continues to be managed and operated in the same way. The company’s financial ratios (liquidity, leverage, and profitability) were superior to their peers and the valuator chose to subtract 3.0% (1.0% for each of the above ratios. Moreover, the Company also has an excellent safety record and has maintained clean environmental inspection reports. However, there are still risks specific to the company that a hypothetical buyer would consider. The labor market in Atlanta is tight and the company is a union shop. Finding skilled labor will be a challenge to grow the business and, at union labor rates, will be costlier than for nonunion competitors.

Page 103 of 141 Secondly, the company has no true heir apparent ready to takeover for Mike Jones where he no longer to be the face of the company. Inconsideration of the above highlights of the analyses conducted throughout this report, and the estimated uncertainty and speculation involved with the operating forecast and other risk factors inherent in an equity investment in the subject Company including, but not limited to, changes in industry estimates, economic forecast realization, inflation, general business conditions, reasonable financial market variability, implementation of changes in the business operation, competitive response and other due diligence findings reported herein, the valuator believes that a Company‐specific risk premium of 4.00% is reasonable. Using the variables discussed above, the following discount rate relative to an equity investment in the subject business enterprise is so calculated Re = 4.60% + 7.10% + 6.36% + 4.00% = 22.06% A 22.06% discount rate reflects the appraiser’s judgment as to the equity return that a prudent investor would require as adequate compensation for alternative investment opportunities and for the particular business and financial risks assumed through an investment in a business of this nature. The valuator then deducts the long term sustainable growth rate from this figure to arrive at
Note 5 ‐ Among the more important factors to betaken into consideration in deciding upon a capitalization rate in a particular case are (1) the nature of the business, (2) perceived risks, and (3) the stability or irregularity of earnings. As the capitalization rate declines, the value increases. Higher capitalization and discount rates generally result from increased risks perceived by the appraiser in a particular situation. The capitalization rate is generally derived from a discount rate. The long‐term sustainable growth rate for the subject Company is deducted from the calculated discount rate to arrive at a nominal rate of return in perpetuity and is used to calculate the business value for the Single Period Capitalization Method. In this case, the long‐term sustainable growth rate has been estimated to be 3.0% (as discussed in Section 3.3 Impact on Appraisal Subject. The risk of achieving this

Page 104 of 141 growth rate has been included in our estimation of the CSRP as included in the calculation of the discount rate as discussed above. The progression through the Buildup Method arrived at a discount rate of
22.77% for next year. Subtracting the sustainable long term growth rate of 3.0%

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