Valuation of the Common Stock of: «Cell│[1]ReportWriter!B3│0││Peachtree Plumbing, Inc»
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- Determination of Fair Market Value
- Adjusted Book Value Method – Going Concern
- Application of Built In Gains Adjustment
- Indicated Value Calculation
- Capitalization of «Cell│[1]ReportWriter!H24│0││Cash Flow» Method
- Estimate of Ongoing Benefit Stream
- Capitalization «Cell│[1]ReportWriter!h27│0││Rate»
- Specific Company Risk Premium
- Expected Sustainable Growth Rate
- Rate to Factor Conversion
- Calculation of the «Cell│[1]ReportWriter!H27│0││Rate»
- Application of Minority Interest Discount
- Application of Marketability Discount
- Application of Excess or Non-Operating Assets
Income Statement AdjustmentsI felt it was important to represent a 5 year history to show patterns and trends, however most of the adjustments and attention was given to last year’s income statement. The company’s reported profit and loss statement was adjusted for one time charges and abnormalities as listed below:
« Range│[1]AdjustedIS_Summary!L11:AG25│0│0│ Estimate of ValueDetermination of Fair Market ValueBecause this is a case study valuation I have decided to all three methods of estimating Fair Market Value (Asset, Income, and Market) of Mrs. Jones going concern interest. I have chosen to use the adjusted book value method-going concern under the Asset Valuation method, the capitalization of earnings under the Income method, and under the Market approach I have chosen to use guideline companies from the Bizcomps report.Adjusted Book Value Method – Going ConcernThe adjusted value of «Cell│[1]ReportWriter!b3│0││Peachtree Plumbing, Inc» as of «Cell│[1]ReportWriter!b5│0│mmmm d, YYYY│June 30, 2006» was $«Cell│[1]ReportWriter!e11│0││4,891,000». The adjusted book value - going concern method develops a valuation indication by adjusting the reported book values of a subject company’s assets to their actual or estimated «Cell│[1]ReportWriter!b41│0││fair market value» and subtracting its liabilities (adjusted to «Cell│[1]ReportWriter!b41│0││fair market value», if appropriate). The specific adjustments were described in the analysis of the balance sheet. The indicated value should not be interpreted as an estimate of liquidation value. Neither an orderly nor a forced liquidation is contemplated. See “balance sheet adjustments” under the Normalization Adjustments paragraph (page 55) above for a detailed report of what line items were adjusted and why. There was no evidence of any off balance sheet items not recorded on the balance sheet and there were no recorded intangible assets.
Appendix E contains further information on the lack of a marketability discount. Indicated Value CalculationAs determined below, the «Cell│[1]ReportWriter!b41│0││fair market value» indicated by using the Adjusted Book Value as a Going Concern method was $«Cell│[1]ReportWriter!E30│0││4,891,250» and was rounded to $«Cell│[1]ReportWriter!E31│0││4,891,000». «Range│[1]AssetMarketConclusion!A12:Q24│0│0│ Capitalization of «Cell│[1]ReportWriter!H24│0││Cash Flow» MethodCapitalization of «Cell│[1]ReportWriter!h25│0││cash flow» requires an estimate of an ongoing benefit stream and a capitalization «Cell│[1]ReportWriter!h26│0││multiple». The capitalization «Cell│[1]ReportWriter!h26│0││multiple» represents the required rate of return minus the sustainable growth rate. Capitalization of «Cell│[1]ReportWriter!h25│0││cash flow» effectively determines the present value of the Company’s ongoing economic benefit stream growing perpetually at a fixed rate and discounted at the required rate of return. The present value is representative of the amount a willing buyer and a willing seller would exchange for the business. Estimate of Ongoing Benefit StreamThe analysis presented below represents the calculation of the ongoing economic benefit stream. It depicts the calculation of the «Cell│[1]ReportWriter!h28│0││after tax cash flow» benefit stream. In talking with management they felt that since there expansion into the residential market they are almost at full capacity and see their growth slowing down, however they see a 2% stable long term growth for the future. So our projections for ongoing benefit stream is a weighted average cash flow of 2006 with a 2% growth in perpetuity from there on out. I have chosen to weight only the last 3 years because those reflect more closely what the cash flows will look like. There are no plans in the future for large capital expenditures to enter into new markets or create new services. Calculation of the Ongoing Economic Benefit Stream «Range│[1]CoeBenefitStream!L12:AK56│1│0│ The weighting above was chosen because years 2003 and 2002 do not reflect the operations which currently exist or which will exist into the future. In 2003 the company expanded into the residential sector and almost doubled their net income and because of that I felt that years 2003 and 2002 shouldn’t have any weight or even be consideredthe author needs to list the reasons for the weighting here. Although pre-tax net income have been increasing around 12-13% (nominal) since 2003 management forecasts future sustainable growth to be around 2%(nominal). Income taxes are in Georgia and Florida. Georgia income tax is 6% and Florida has no income tax, so I weighted the tax rates to the revenues on a pro-rata basis per state.
TaxesTaxes were calculated as $«Cell│[1]ReportWriter!h29│0││61,232» for the state and $«Cell│[1]ReportWriter!h30│0││499,653» for federal. The ongoing benefit stream was reduced by these outflows. Cash FlowA cash flow stream needs to define the changes in working capital, capital expenditures and long term debt. Management sees no ongoing increase/decrease in working capital so there are not adjustments to capital expenditures and debt amounts. Capitalization «Cell│[1]ReportWriter!h27│0││Rate»Capitalization RatesThe discount rate represents the risk an investor is willing to accept for the potential reward an investment in the subject company will return. Different rates apply to types of businesses. It can also be considered the rate of return that an investor requires on an ongoing basis. This risk is not calculated in a vacuum or a sterile environment but rather it is calculated based on the factors that can be contrasted against the investment in other vehicles that are available and in the specific environment as of the valuation date. The buildup method layers different risk estimates to build up a discount rate. The appropriate discount rate components for the Company are the risk free rate, equity risk premium, size premium and company specific premium. Subtracting sustainable growth from the discount rate develops the capitalization rate. Risk Free RateThe risk free rate measures the rate of return an investor can earn without taking any additional risk. Examples of risk free returns are United States Treasury bonds. As of the valuation date «Cell│[1]ReportWriter!b5│0│mmmm d, YYYY│June 30, 2006», this yield was «Cell│[1]ReportWriter!h34│0││4.80%». The rate applied to the buildup was «Cell│[1]ReportWriter!h34│0││4.80%». Equity Risk PremiumThe equity risk premium represents the risk an investor accepts for investing in large public companies. This risk is measured by taking the returns of public companies over the last 80 years and subtracting the risk free return over the last 80 years (average annual returns for large capitalization stocks minus average annual returns for long term government bonds). This information is published by Morningstar. As of «Cell│[1]ReportWriter!b5│0│mmmm d, YYYY│June 30, 2006», the equity risk premium was «Cell│[1]ReportWriter!h35│0││6.10%». The rate applied to «Cell│[1]ReportWriter!b3│0││Peachtree Plumbing, Inc» was «Cell│[1]ReportWriter!h35│0││6.10%». Size Risk PremiumEmpirical evidence shows that the risk reward principle (the greater the risk the greater the reward) holds true in the size or capitalization of the company. The size premium represents average annual returns for small capitalization stocks minus average annual returns for large capitalization stocks. Based on Stocks, Bonds, Bills, and Inflation Yearbook, a publication of Morningstar, the small stock risk premium averaged «Cell│[1]ReportWriter!h38│0││9.90%» from 1926 to 2006. The rate applied to «Cell│[1]ReportWriter!b3│0││Peachtree Plumbing, Inc» was «Cell│[1]ReportWriter!h38│0││9.90%». Industry Risk PremiumBased upon the industry of the subject company as reported in Stocks, Bonds, Bills, and Inflation Yearbook, a publication of Morningstar, the industry risk premium was calculated as «Cell│[1]ReportWriter!h39│0││0.63%». The rate applied to «Cell│[1]ReportWriter!b3│0││Peachtree Plumbing, Inc» was «Cell│[1]ReportWriter!h39│0││0.63%». Specific Company Risk PremiumBased upon Company specific factors - cyclical risk, risks of competitive encroachment, size and various operating concentrations (key executive dependency, customer concentration, for example) - the summation requires an additional risk premium of «Cell│[1]ReportWriter!h40│0││3.68%». The main item I looked for in company specific risk was the company’s financial risk, diversification of company’s operations, and other operating characteristics. The biggest risk I say was the key personal risk with Mike Jones. He plays a big part in the relationships with clients and reputation. The other factors such as stability of industry and diversification of product line were given some consideration of risk but not much. Expected Sustainable Growth RateWe estimate «Cell│[1]ReportWriter!h51│0││2.00%» long term compound annual growth. This «Cell│[1]ReportWriter!h25│0││cash flow» growth estimate is based upon «Cell│[1]ReportWriter!b19│0││my» assessment of the Company’s prospects for sustained growth in relationship to the estimate of ongoing «Cell│[1]ReportWriter!h25│0││cash flow» power developed above. Rate to Factor ConversionThe capitalization rate developed using the buildup method is «Cell│[1]ReportWriter!h57│0││23.11%». The reciprocal of this measure (1/«Cell│[1]ReportWriter!h57│0││23.11%») provides a capitalization multiple of «Cell│[1]ReportWriter!h55│0││4.413674». Calculation of the «Cell│[1]ReportWriter!H27│0││Rate»The schedule below shows how the «Cell│[1]ReportWriter!h26│0││multiple» was calculated «Range│[1]CoeCapRateBuildup!K12:U63│1│0│ Indicated ValueTo calculate an indicated value for «Cell│[1]ReportWriter!b3│0││Peachtree Plumbing, Inc», the first step is to use the «Cell│[1]ReportWriter!h28│0││after tax cash flow» benefit steam and «Cell│[1]ReportWriter!h56│0││multiply» it by the «Cell│[1]ReportWriter!h26│0││multiple». «Cell│[1]ReportWriter!h53│0││In order to match the appropriate period to the rate, the rate is divided by one plus the growth rate.» The next step is to apply adjustments to value for «Cell│[1]ReportWriter!b3│0││Peachtree Plumbing, Inc». Application of Minority Interest DiscountA minority interest discount is a reduction to the initial indicated value due to a lack of control prerogatives such as declaring dividends, liquidating the company, going public, issuing or buying stock, directing management, setting management’s salaries, etc. In «Cell│[1]ReportWriter!b19│0││my» opinion, a minority interest discount of «Cell│[1]ReportWriter!h60│0││26.50%» is appropriate because Mr. Shirley Jones owns a minority interest in Peachtree Plumbing (36.5%) so it is appropriate to apply a Minority Interest Discount. I have chosen to use a Mergerstat Review 2003 Data base (found in the NACVA Business Valuations: Fundamentals, Techniques and Theories book chapter 7 page 13). Normally I would Subscribe to Mergerstat Review premiums and discounts to get a more recent and accurate discount pertaining to this case and industry. The Data base premiums and discounts ranged significantly over the most recent 5 year period (almost 12%) so I decided to take a five year weighted Average of the Median percentage discount. Application of Marketability DiscountIn «Cell│[1]ReportWriter!b19│0││my» opinion, a discount of «Cell│[1]ReportWriter!h61│0││42.00%» is required for lack of marketability. The discount reflects an expectation for the lack of a secondary market in which to negotiate a quick sale. Peachtree Plumbing is a closely held private company which warrants a discount for Lack of Marketability. Normally I would subscribe to Mergerstat Review Premiums and discounts to get a more recent and accurate discount pertaining to this case and industry. The Data I chose to use came from the NACVA’s Business Valuations: Fundamentals, Techniques and Theory Chapter 7 Page 36 in reference to Mandelbaum v. Commissioner, T.C. Memo 1995-225, aff’d. 91F3d 124 (3rd dir. 1996). This court case is important because it established a market discount base rate between 35% - 45%. Many factors can affect whether you increase or decrease the based rate, however I have chosen to remain on the higher discounted side (42%) because of the company’s dividend policy, access to financial information, some limited stock restrictions (right of first refusal to family members) and no prospect of public offering or sale. However I chose not to use the highest base rate said resource because of good management and the company’s economic outlook. Appendix E contains further information on the lack of a marketability discount. Application of Excess or Non-Operating AssetsExcess or Non-operating assets represent the value of resources the company has control of but are not required to operate the business. Examples are excess cash on hand, real estate or other securities not used in the production of goods or services. In «Cell│[1]ReportWriter!b19│0││my» judgment, excess and non-operating assets that need to be added back and are a part of the business’s value total $«Cell│[1]ReportWriter!h62│0││2,853,000». The bulk of these assets include excess working capital, marketable securities, and the adjacent piece of land. After several years of the company not paying out dividends and retaining and investing its earnings there has become a lot of excess which isn’t needed in a day-to-day operation. Indicated Value CalculationThe following schedule presents the indicated value using the capitalization of earnings method. As calculated, the indicated «Cell│[1]ReportWriter!b41│0││fair market value» is $«Cell│[1]ReportWriter!h63│0││4,826,181» which has been rounded to $«Cell│[1]ReportWriter!h64│0││4,826,000». «Range│[1]CoeConclusion!K12:Q34│1│0│ Directory: uploads uploads -> 587 Return function, r i(X) r i(0) r i(1) r i(2) r i(3) 1 0 2 4 6 Thermal Station, I 2 0 1 5 6 3 0 3 5 6 10 uploads -> Department of science and humanities department of mathematics part-a questions and answers uploads -> The Case Against the nypd’s Quota-Driven ‘Broken Windows’ Policing What Is It? uploads -> For want of a nail uploads -> Ownership Models There are two different types of ownership models uploads -> Police Militarization uploads -> City of rising star regular meting thursday, july 14, 2016 uploads -> Township of winfield uploads -> Stop Militarizing Law Enforcement Act of 2014 uploads -> The Black Panther Party’s Ten-Point Program What We Want Now! Download 435.27 Kb. Share with your friends:
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