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VALUATION ANALYSIS OF A CLOSELY - HELD BUSINESS : CASE STUDY OF AN INDIAN INDUSTRY.

Introduction

Business Valuation is considered as a central theme of finance. Investment, Financing and Dividend Decisions are taken to enhance value of the business. Publicly traded or Closely held Firms focuses on value based planning. Private firms overwhelmingly dominate the economic landscape of our world (Fogel (1)). For example, in the U.S.A., while there are over 6 million private enterprises with employees, there are only about 5000 companies traded on the major stock exchanges and this latter number has been in continuous decline since 1997 (Stuart (2)). Understanding what determines the value of a firm and how to estimate that value seems to be a prerequisite for making sensible decisions. The choice of the appropriate valuation approach (or approaches) to be used in a given valuation case is based on the judgment of the valuer.

The valuer's choice of methods is determined by the characteristics of the business to be valued, the purpose and use of the valuation and its report, the pattern of historical performance and earnings of the subject company, the company's competitive market position, experience and quality of management, the availability of reliable information requisite to the various valuation methods, the marketability of equity ownership interest to be valued, and others. These factors are embraced by the Internal Revenue Services' Revenue Ruling 59-60(1959), which outlines relevant considerations when determining value of a closely held business: History and nature of the business; Industry and general economic outlook; Book value and financial condition; Earning capacity; Dividend-paying capacity; Existence of goodwill or other intangible value; Prior sales and size of the block of stock; and Comparisons to similar publicly traded guideline companies.

Transactional market data can be found in transactions consisting of either minority or controlling interests in either publicly traded or closely held companies. There are basic considerations that will provide useful guidelines in the selection of comparative publicly traded companies or acquisitions. Some of the more important considerations include the availability of adequate financial and price information; the company's line of business, location, quality, and depth of management; the size of the comparative company; trading activity in the stock; and the specific block of stock or equity ownership interest that is the subject of the valuation assignment.

Business Valuation

In general, the market for closely held companies has the following characteristics:

i) limited access to data where financial data is often prepared for tax purposes;

ii) closely held companies are typically similar in size; and

iii) there are more fundamental similarities between closely held companies because of their common interests and because they do not benefit from the relatively easy liquidity of the public market.

With some 25 million businesses in operation, and less than one-half of one percent traded in any meaningful way, the need for valuations of small and/or privately held businesses is large and increasing. Valuations will be made, in many cases required to be made, for various reasons, i.e. sale of a minority stock position; sale of the entire business; going public; estate, gift and inheritance tax purposes; the formation of a limited partnership; or valuation for the purpose of forming an Employee Stock Ownership Plan (ESOP) and annually following the startup of an ESOP. However, the magnitude of the need is dwarfed by the lack of consistency in the valuation process. (Dukes (3)). Business valuation results varies on both standard and premise of value. Standard of value address two questions- value matters to whom and under what circumstances. Fair market value, Investment value and Intrinsic value are the three applicable standard value for the purpose of valuation. Fair market value is defined by the ASA as
the amount at which property would change hands between a willing
seller and a willing buyer when neither is acting under compulsion and
when both have reasonable knowledge of the relevant facts.


This definition comports to that found in the Internal Revenue Code and Revenue Ruling 59-60. Investment Value- In real estate terminology, investment value is defined as "the specific value of an investment to a particular investor or class of investors based on individual investment requirements; distinguished from market value, which is impersonal and detached." Fortunately, business appraisal terminology embraces the same distinction in most contexts.

Intrinsic Value-The amount that an investor considers, on the basis of an evaluation of available facts, to be the "true" or "real" worth of an item, usually an equity security. In reality all businesses may be appraised either under Going-concern or Liquidation premises.

Going concern - Value in continued use, as a mass assemblage of income-producing assets, and as a going-concern business enterprise.

Liquidation -Value in place, as part of a mass assemblage of assets, but not in current use in the production of income, and not as a going-concern business enterprise or value as an orderly disposition/forced liquidation. Keeping in mind all standard and premises valuer can decide any of these approaches for valuation purpose.

Income Approach - Earnings is a final crux of the business activity. Earnings are linked with all other fundamentals of the business like growth, capital requirements, risk involvement or uncertainty, etc. and so, valuation of business based on its earning capacity can be a better proxy. The Income Approach derives an estimation of value based on the sum of the present value of expected economic benefits associated with the asset or business (Economic benefits have two components: cash flow (or dividends) and capital appreciation). Under the Income Approach, the appraiser may select a single period capitalization method or a multi-period discounted future income method.

Asset Approach - The Asset-based Approach involves methods of determining a company's value by analyzing the value of a company's assets. This valuation approach often serves as a valuation floor since most companies have greater value as a going concern than they would if liquidated, i.e., the present value of future cash flows generated by the assets usually far exceed the liquidation value of those assets. This methodology is likely to be appropriate for a business whose value derives mainly from the underlying value of its assets rather than its earnings, such as property holding and investment business.

Market Approach - Market value is also known as extrinsic value. It is rooted in the economic principle of competition. In Free market forces of demand and supply will drive the price of business assets to certain equilibrium.

There is no established marketplace for minority interests in closely held companies. The researcher for the purpose used databases of sales of controlling interests in closely held businesses. Databases reviewed are, Bizcomps, Done Deals, Pratt's Stats, and the IB A Market Comparison Database. The sales price for each reported sales transaction in each of these databases is used to derive separately calculated price-to-sales and price-to-earnings (assuming earnings are positive) multiples for each given transaction. Each multiple represents a ratio that is calculated based on the sales price to the net sales (revenue) or the net profit from the property, which is then either applied against the subject company's sales or net profit to arrive at a value. The two components are the sales or the net profit.

CASE STUDY OF REDMOND PRO PRINTING, INC

The company operates from its headquarters located at 339 N. Tampa, St., Tampa, FL 33602 is a manufacturer of wide variety of printing products with service approach. It was originally formed by Mr. Redmond and a former business partner, Justin Baker in 1983 as Redmond/Baker Printing. Mr. Jack & Ms Diane purchased Mr. Baker's interest in the business in 1986. In 1986, it had annual sales of $100,000 and only five employees. It offers a wide range of services, including graphic design, electronic prepress, multi-color offset printing, variable image printing, finishing, and mailing and fulfillment services.

It has an estimated market share of 0.75 per cent of greater Tampa's market. The Company's services are marketed through the reputation of the company and its long standing within the business community. It has no subsidiaries, but does have an affiliate company Jack and Diane Family Limited Partnership (JDFLP) a real estate venture owned by the company's principal shareholders, Jack and Diane Redmond. In addition of seven key personnel, Redmond Pro Printing, Inc., currently employees 103 full time individuals, using the contract workers as need arises.

Redmond Pro Printing, Inc., is a commercial printing company. All most all of its customers are located in Tampa, FL, most are located within 75 miles of the Tampa metropolitan area. Redmond pro has one large account in Miami, FL. Currently the company has 20 customers account that each generated more than $100,000 of annual revenue. The Company seeks to establish long-term relationships with its customers in order to continue providing them with quality products. No single customer accounts for more than about 5 per cent of sales (except one). The principal materials used by the Company in manufacturing its wide range of services include, paper, ink, cardboard, printers, and computer peripherals.

Operational Performance of Redmond Pro

Redmond Pro is solvent. Its total assets at book value are currently about $6.1 million and reported shareholders' equity is about $4.94 million at October 31, 2012. Net fixed assets represent about 21.967 per cent of total assets, or about $1.34 million at October 31, 2012, a decrease from 45.03 per cent of total assets at October 31, 2008, or $2.63 million. A significant portion of this decrease represented a modernization & replacement of its manufacturing facility in 2010. Redmond Pro's total accounts receivable at October 31, 2008 of $1.80 million decreased to about $1.34 million at October 31, 2012, which currently represents about 21.96 per cent of its total assets of $6.1 million. Interestingly, the inventory balance of about $0,297 million at October 31, 2008 which was 2.58 per cent of sales has increased over a period to 4.13 per cent in 2012. This is purely with introduction of new products in the process of production and services. The company is also able to implement all the modernization and replacement plans without any long term debt, and retained earnings to the shareholders also increased from 73,80 to total capital employed in October 2008 to 76.93 per cent in October 31, 2012. In addition to all the initiatives and execution over a period of time, the company is able to build its cash & equivalents from $0,428 million to about $2.48 million in October 2012 and is also attributable to the quality of products and services with modernization & replacement of assets. In addition, the Company has an unsecured working capital line of credit with a commercial bank to the tune of $1.5 million-which they rarely utilized.

Except for 2012, the Company's historical performance showed a steady increase in revenue since 2008--from $11.4 million to hit an all time high in 2011 of $13.04 million, growing at an annual compounded rate of 1.13 per cent. Income from operations which were negative in 2008 has made mark of positives from in 2009 and in 2012 the same are $0.04 million. However, Income from operations dropped drastically in 2012 from 2011, i.e., from $0,287 million to $0,042 million. The reason being, increase in operating expenses from 26 per cent of revenue in 2008 to 29 per cent in 2012. Cost of Goods Sold which were 73.86 per cent of sales in 2008 have improved to 69.74 in 2012. This has really facilitated to build the gross profit with modern technology in place. However, selling, administration and other expenses to the sales have gone up to hold the operating profit at a meager rate of 0.35 per cent of sales in 2012.

Similarly, depreciation expense increased from $471,000 in 2008-09 to $737,000 in 2012, i.e., during the same time frame, but this was attributable to the expansion of the manufacturing facility.

Normalization of Adjustments

i. Cash in Excess of Operating Needs: It was found that the Company had excess cash of 14 per cent of total assets, amounting $813,960.

ii. Accounts Receivable : It was also found from the industry averages that, the aging of receivables is less than industry average. However, a receivable to the tune of $89,000 which is more than 120 days need to be adjusted.

iii. Inventory: The Company values inventory at the lower of cost or market using a first-in first-out (FIFO) method. Work in process inventory includes direct labor and allocated overhead cost. Financial analysis indicated that certain inventory is obsolete. It was determined that approximately five per cent of the inventory is obsolete. The inventory balance at October 31, 2012 was $496,000. Hence, reduction of inventory balances by $24,800 of its book value to arrive at an appropriate proxy for current market value. However, FIFO method value of inventory $505,000 is recognized and adjusted to the effete of $9,000 is done.

iv. Fixed Assets: The Company leases its real estate through an affiliated company. The fair market values of the other fixed assets were based upon a machinery and equipment appraisal. A portion of the machinery and equipment difference is attributable to Internal Revenue Code section 179 (i.e., costs of machinery and equipment that were allowed as a tax deduction upon the purchase of the asset). The fair market value of the total fixed assets reported on the books at December 31, 2012 was $2,100,000.

v. Non-operating Asset: Town home: A town home, located in Tampa, was purchased for cash in January 2009 for $600,000 (not far from High Point). This town home is provided to potential customers for their use. The home is furnished with newly designed furniture by Redmond Pro and is decorated with artwork costing $69,600 (also originally purchased in January 2009). The furniture is left in the town home until the next show when it is replaced with newly designed furniture. The artwork is shipped back to Jack's home after each year.

Depreciation expense for the town home, as well as the artwork, is recorded in the "Miscellaneous (Income) Expense" category. Depreciation on the town home was $43,200 in 2009 and $52,800 for 2010 through 2012. Depreciation on the artwork was $4,000 in 2009 and $8,000 for 2010 through 2012. Also included in this category of expenses are the town home property taxes.

The fair market value of the town home was appraised at $705,000 and the artwork was appraised at $55,000.

vi. Trademark, Assembled Workforce, and Other Intangible Property: This balance represents the fair market value of the trademark, assembled workforce, and other intangible property, which we have reported as $1.5 million.

vii. Reconciling Adjustments: These are adjustments made to group totals in order to reconcile the adjustments to specific line items.

Income and expense adjustments are:

i. Depreciation Expense : Depreciation expense is added back here because it is a non-cash expense.

ii. Other Salaries and Wages : During the valuation process it was discovered that the co-owner Diane's salary is more by $50,000. In addition, 4,100 in related payroll taxes should also be eliminated, as well as insurance expense of $ 1,500 per year was attributable to his benefit. Therefore, a total of $55,600 is required to be added back each year to income for the same.

iii. Excess rent paid to the tune of $ 900 per month, amounting $ 10,800 per year also need to be adjusted.

iv. Elimination of town home expenses: Depreciation expense for the town home, as well as the art work, is recorded in the "Miscellaneous (Income) Expense" category. Depreciation on the town home was $43,200 in 2009 and $52,800 for 2010 through 2012. Depreciation on the artwork was $4,000 in 2009 and $8,000 for 2010 through 2012. In addition, real estate taxes on the town home were $7,000 (2009); $7,400 (2010); $7,600 (2011); and $8,100 (2012), which were also recorded to the same miscellaneous expense account.

v. Other Adjustments: Management provided other forecasted cash flow outlays, including working capital increases, fixed-asset additions, and debt repayments (net of new loans).

Capitalization Rate

The capitalization rate is any divisor (usually expressed as a percentage) used to convert anticipated benefits into value. Alternatively, the discount rate is a rate of return (cost of capital) used to convert a monetary sum, payable or receivable in the future, into present value and also must be appropriate to the forecasted income streams. The discount rate represents the total rate of return that an investor would demand on the purchase of an investment given the level of risk associated with the investment. Basically, the difference between the two rates is the capitalization rate equals the discount rate less the expected growth rate (Pratt et.al.).

The expected rate of return for an investment in the subject company is based on the risk associated with that investment and the rates of return available on alternative investments. The expected rate of return determined, or the capitalization rate plus the expected growth rate, must combine to meet the expectations of the hypothetical buyer (investor) under the fair market value standard, as required in this valuation assignment. In addition, this rate of return must also be one that is acceptable to the "willing seller," as also inherently embedded in the definition of the fair market value. In accordance with this definition of value, the valuation analyst must determine an acceptable rate of return that both a hypothetical willing buyer and a hypothetical willing seller would deem acceptable without compulsion and with knowledge of relevant information.

Furthermore, the buyer is a financial and not a strategic buyer. Therefore, the buyer is not motivated by any synergy or other strategic advantage. It also is important to note that an investor will require a higher rate of return, as expected returns are perceived to contain more risk. Empirical studies have indicated that investors of publicly traded firms have required rates of return of above prevailing risk-free rates of return. Naturally, investors of private firms would require substantially higher rates of return because of the additional risk associated with private firms. For example, closely held firms have limited access to public capital markets increasing the inherent risk and thus the required rate of return.

Risk free rate: The risk-free rate of return is generally the rate of return an investor can obtain without taking on market risk (i.e., free of the risk of default). The consensus of financial analysts today use the 20-year US Treasury yield to maturity as of the effective date of the valuation for the risk-free rate of return. The estimated 20-year US Treasury bond yield as of December 31,2011 was 2.48 per cent.

Equity Risk Premium (Reflecting Systematic Risk): The equity risk premium ("ERP") is thereward required by investors to accept uncertain outcomes associated with owning equity securities and is measured by distributions (dividends and withdrawals), the reinvestment of dividends in the market, and the capital gain or loss in the value of the investment. It represents the extra return that equity holders expect to achieve over risk-free assets on average. The ERP is calculated by Ibbotson Associates using the arithmetic average returns on the Standard & Poor's 500 from 1926 to December 31, 2011 over the income return for the same period on the 20-year US Treasury bond as the benchmark for the risk-free rate. The ERP as of December 31, 2011 is equal to 6.62.

Small Company Risk Premium : The risk premium for size is again obtained from Ibbotson Associates Annual Studies. The realized return in excess of the riskless rate for the 10th decile, or 11.77 per cent (2012 Yearbook), less the ERP of 6.62 per cent would normally equal the risk premium for size, or 5.15 per cent.

Industry Risk Premium : The industry risk premium appropriate for Redmond Pro is classified under three separate Standard Industrial Classification System (SIC) codes of 2572--Commercial Printing. This industry code to arrive at an industry premium percentage of 0.63 (0.6 rounded).

Specific Company Risk Premium : This last increment relates to other factors specific to the subject company and is based on the valuer's professional judgment, as no empirical data or evidence presently exists to measure these specific risk drivers. The Valuer not only needs to identify these specific risk drivers applicable to the subject company, but must also determine their incremental magnitude to the rate of return. The rate considered by the Valuer-researcher is 5 per cent in the light of expected decline of industry at 3 per cent.

Long-term Sustainable Growth : We arrived 2.61 per cent as our long-term sustainable growth rate for the Company, based on the return the shareholders earned during the last five years i.e, CAGR and discussion with the management. This rate is above a composite industry growth rate estimate over the next five years ending 2017 as 1.8 per cent. It's anticipated that the consolidation in the industry, introduction of new technology, digital media will affect the commercial printing industry, and in particular Redmond Pro's projected growth. Based on the foregoing, we believe that a 2.61 per cent rate is a reasonable growth proxy, keeping mind the current growth rate of the company and future plans to Redmond Pro.

Capitalization of Earnings by the Capitalization Rate By dividing the selected normalized net earnings by the capitalization rate, we arrive at the value indicated under this method.

Adjustments

Almost all the difference in control versus minority value in the income approach is found in the numerator-the expected economic income-rather than in the denominator-the discount or capitalization rate (Pratt 1996). This means that to the extent the normalizing adjustments represent those that are solely at the discretion of the controlling owners, the resulting indicated value represents a control value. Alternatively, if a minority value is required, then it is inappropriate to record a controlling adjustment
TABLE 5
i) CAPITALIZATION OF EARNINGS: VALUATION OF EQUITY

Description            Sources   Amounts

Average Weighted       Table 2   $1,121,350
Normalized Net
Cash Flow to Equity
Capitalization Rate    Table 3           15.25 per cent
Application to Net
Cash Flow to Equity
Fair Market Value of              7,353,115
100% Equity, As
if Freely Traded


1. Non-Operating Assets

Non-operating assets include excess cash of $813,960, the town home valued at $600,000, and artwork valued at $69,600. The total of $1,482,960 represents an adjustment to the indicated enterprise value.
ii) Adjusted Indication Value Including Non-Operating Assets

Enterprise Indication of Value            $7,350,000
Non-Operating Assets                      $1,482,960
Control Value                             $8,832,960


2. According to Mergerstat Review, the median acquisition price premium paid in publicly traded company acquisitions was 58.8 per cent in 2012. In the pertinent case due to industry consolidation and negative growth, it was decided to use 30 per cent as premium. Which is worked out based upon the CAGR of revenue over the life of company, i.e, 20.22 per cent plus, 4.72 per cent premium of key personnel, and 5 per cent premium for lack of financial risk i.e, Zero debt.

3. In Redmond Pro's, we are valuing a controlling ownership interest. Currently, there are no empirical studies of market data that measure the discount for lack of marketability for sales of controlling ownership interests. But, it is recognized within the business valuation profession that if a marketability discount upon the acquisition of a controlling interest were appropriate, it would be expected to be much lower than a similar discount on a minority ownership interest, possibly ranging from 0 per cent to 25 per cent. Based on our review of Redmond Pro's and the factors indicated above, it is our opinion that a 5.0 per cent discount for lack of marketability is justified for the determination of value under the capitalization of earnings method.
iii) Adjustment to Indicated Value   US$

Indicated Value                      8,832,960
Add: Control Premium (0 per cent)    --
Less: Lack of Marketability
Discount (5 per cent)                  441,648
Adjusted Value                       8,391,312
Determined Value                     8,391,312


Based on our analysis, the estimate of value of 100 per cent of the stock of Redmond Pro Printing, Inc. is eight million three hundred thousand dollars ($ 8,300,000 or $16,600 Per Share (500 Shares Issued & Outstanding) based on only available information(known or knowable) as of the valuation date of October 31, 2012 (Estate of Rorak V. Commissioner 2004).

In this case Valuation is an estimation of Future Cash inflow at particular time period considering the risk involved in the subject property.

SUPPORTING REFERENCES

1. Revenue Ruling 59-60: 1959-1, Cumulative Bulletin 237. Also, Section 20. 2031-l(b) of the Estate Tax Regulations (Section 81.10 of the Estate Tax Regulations 105).

2. Estate of Roark V. Commissioner, T.C. Memo 2004-27. IRS Regulation 1.170-13[c] (3) (ii) is followed.

3. Stocks, Bonds, Bills & Inflation, Valuation Edition, 2012 Yearbook, (Chicago: Ibbotson Associates, 2012), Table 6-5:" Long-Term Returns in Excess of CAPM Estimation for Decile Portfolios of the NYSE/AMEX/NASDAQ".

4. Shannon P. Pratt, Robert F. Reilly, and Robert P. Schweihs, Valuing a Business, The Analysis of Closely Held Companies, 4th Edition, 2000, pl63.

i) Shannon P. Pratt, with Robert F. Reilly, and Robert P. Schweihs, Valuing A Business, The Analysis and Appraisal of Closely Held Companies, (Irwin Professional Publishing, 1996).

ii) BIZCOMPS for transactional data, San Diego, CA (obtained through CEIR).

iii) Pratt, Shannon; Reilly, Robert F and Schweihs, Robert P; Valuing Small Businesses and Professional Practices, (McGraw-Hill, 1998).

5. Business Valuations: Fundamentals, Techniques and Theory, NACVA, Salt Lake City, UT.

6. Center for Economic and Industry Research, Salt Lake City, UT--for economic and industry information..

7. Done Deals, www.nvst.com, for transactional data.

8. EDGAR ONLINE, The SEC database : www.edgar-online.com.

9. IBA Transactional Database, Institute Business Appraisers, Plantation, FL.

13. Pratt's Stats; Willamette Management, Portland, OR.

14. "Stocks, Bonds, Bills & Inflation," Valuation Edition, 2001 Yearbook, Ibbotson Associates of Chicago, IL.

15. National Association of Realtors, Federal Housing Finance Authority, R.L. Polk & Co, U.S. Department of Commerce.

16. U.S. Department of Labor, U.S. Department of Transportation, Florida Association of Realtors & Wells Fargo Securities, LLC Forecast as of: November 03, 2014.

17. Company financial statements.

18. IBIS World, (August 2012).

19. Dukes, William P., Where Do We Stand on Closely-Held Firm Valuation? Journal of Entrepreneurial Finance Vol 6(1), 129-155 (2001).

20. Fogel, K. Oligarchic family control, social economic outcomes, and the quality of government. Journal of International Business Studies. 37: 603-622 (2006).

21. Stuart, A. Missing Public Companies: Why is the number of public traded companies in the U.S. declining? Cfo.com (2011).

22. Damodaran, Aswath. "Valuation Approaches And Metrics: A Survey Of The Theory And Evidence". Foundations and Trends in Finance 1.8 (2006): 693-784. Web.

23. Sharma, Pramodita and Carney, Michael, Value Creation and Performance in Private Family Firms: Measurement and Methodological Issues, Family Business Review 25 (3) 233- 242 (2012)

24. Nagar, V., K. Petroni and D. Wolfenzon, 'Governance Problems in Close Corporations', Journal of Financial and Quantitative Analysis, Vol. 46, No. 4, pp. 943-966 (2011).

25. Natalwala, CA H. (2011) Business valuation - Needs & Techniques [Online], Available: http://220.227.161.86/17798business_valuation.pdf [03 April 2015].

26. Pratt, Shannon H. Valuing Small Businesses and Professional Practices. 3rd ed., (New York).

Professor DNS KUMAR, Ph.D.

Professor of Finance and Associate Director

Centre for Research-Projects

Christ University, Bengaluru, INDIA

email : dns.kumar@christuniversity.in
TABLE 1
MATCHING THE PURPOSE OF VALUATION WITH THE STANDARD OF VALUE

Purpose of Valuation            Applicable Standard of Value

Gift, estate, and inheritance   Fair market value
taxes and charitable
contribution
Purchase or sale                Generally fair market value, but in many
                                instances investment value, reflecting
                                unique circumstances or motivations of
                                a particular buyer or seller
Marital dissolution             No statutory standards of value. Courts
                                have wide discretion to achieve
                                equitable distribution. Requires careful
                                study of relevant case law.
Buy-sell agreements             Parties can do anything they want. Very
                                important that all parties to the
                                agreement understand the valuation
                                implications of the wording in the
                                agreement.
Dissenting stockholder actions  Fair value in almost all states.
                                Consider relevant statute and case law
                                to determine how interpreted in the
                                particular state
Minority oppression action      Generally, fair value in those states
                                that address it at all. Not always
                                interpreted the same as fair value for
                                dissenting stockholder actions
Employee stock                  Fair market value
ownership plans (ESOPs)
Ad valorem (property) taxes     Generally, fair market value with
                                varied nuances of interpretation. In
                                many states, intangible portion of
                                value excluded by statute.
Going private                   Fair value in most states; governed by
                                state statutes.
Corporate or partnership        Fair value under minority oppression
dissolutions                    statutes
Antitrust cases                 Damages based on federal case law
                                precedent; varies from circuit to
                                circuit.
Other damage cases              Mostly governed by state statute and
                                case law precedent; varies by type of
                                case from state to state.
Financial reporting             Fair value, as defined by FASB

TABLE 2
NORMALIZED OPERATING TANGIBLE EQUITY AS OF 31 OCTOBER 2012

Balance Sheet
Summary of
Redmond Pro
Printing, Inc.
                            Sub Sec No.   Accounting B/S   Adjustment
Assets
Currents Assets
Cash and Equivalents        1             2486.00          (813.96)
Accounts Receivable         2             1340.00           (89.00)
Other Receivables                           44.00
Inventory                   3              496.00           (15.80)
Deposit on Equipments                        0.00
Prepaid Expenses                           131.00
Prepaid Income Taxes                        44.00
Prepaid Sales Taxes                         14.00
Deferred Tax Assets                         53.00
Other current assets                         0.00
Total Current Assets                      4608.00          (918.76)
Fixed Assets
Land                                       225.00
Lease hold                                 168.00
improvements
Furniture, Fixtures                       9783.00
and Equipments
Vehicles                                   131.00
Total Fixed Assets                       10307.00
Less: Accumulated                        -8967.00
Depreciation
Net Fixed Assets            4             1340.00           760.00
Other Assets
Cash Surrender                             234.00
Value of Life
Insurance
Investments -Town home      5                0.00          (440.00)
Deferred                                     0.00             0.00
Tax asset
Intangibles 6                             1500.00          1500.00
Total Other                                234.00          1060.00
Assets
TOTAL                                     6182.00           901.24
ASSETS
Liability & Equity
Current liabilities
Notes Payable                                0.00
Accounts Payable                           439.00
Customer deposits                           68.00
Accrued wages                              393.00
& bonuses
Profit sharing                              75.00
contribution
Accrued Income                               0.00
Taxes
Other Accrued                               58.00
liabilities
Total current                             1033.00
liabilities
Long Term
Liabilities
Long term debt                               0.00
Deferred                                   224.00
Income taxes
Total Long                                 224.00
Term Liabilities
Total Liabilities                         1257.00
Stakeholders Equity
Common Stock                                 3.00
Additional                                 166.00
Paid-in Capital
Retained Earnings           7             4756.00           901.24
Unrealized                                   0.00
Gain/(loss)
on Investments
Total stockholders' equity                4925.00           901.24
TOTAL LIABILITIES & EQUITY                6182.00           901.24

Balance Sheet
Summary of
Redmond Pro
Printing, Inc.
                             Normalized Tan Equity
Assets
Currents Assets
Cash and Equivalents         1672.04
Accounts Receivable          1251.00
Other Receivables              44.00
Inventory                     480.20
Deposit on Equipments           0.00
Prepaid Expenses              131.00
Prepaid Income Taxes           44.00
Prepaid Sales Taxes            14.00
Deferred Tax Assets            53.00
Other current assets            0.00
Total Current Assets         3689.24
Fixed Assets
Land
Lease hold
improvements
Furniture, Fixtures
and Equipments
Vehicles
Total Fixed Assets
Less: Accumulated
Depreciation
Net Fixed Assets             2100.00
Other Assets
Cash Surrender                234.00
Value of Life
Insurance
Investments -Town home       (440.00)
Deferred                        0.00
Tax asset
Intangibles 6
Total Other                  1294.00
Assets
TOTAL                        7083.24
ASSETS
Liability & Equity
Current liabilities
Notes Payable                   0.00
Accounts Payable              439.00
Customer deposits              68.00
Accrued wages                 393.00
& bonuses
Profit sharing                 75.00
contribution
Accrued Income                  0.00
Taxes
Other Accrued                  58.00
liabilities
Total current                1033.00
liabilities
Long Term
Liabilities
Long term debt                  0.00
Deferred                      224.00
Income taxes
Total Long                    224.00
Term Liabilities
Total Liabilities            1257.00
Stakeholders Equity
Common Stock                    3.00
Additional                    166.00
Paid-in Capital
Retained Earnings            5657.24
Unrealized                      0.00
Gain/(loss)
on Investments
Total stockholders' equity   5826.24
TOTAL LIABILITIES & EQUITY   7083.24

TABLE 3
NORMALIZED INCOME STATEMENT
Redmond Pro Printing, Inc.

Particulars                                         Year
                              2008       2009       2010       2011
Months of operation           12         12         12         12
in period

Total Revenue                 11484.00   11636.00   12350.00   13049.00
Cost of                        8482.00    8399.00    8599.00    9025.00
Goods Sold
Gross Profit                   3002.00    3237.00    3751.00    4024.00
Selling, General               3084.00    3236.00    3464.00    3737.00
& Administrative
Expenses
Operating Income                -82.00       1.00     287.00     287.00
Depreciation and               1047.00    1045.00    1024.00     983.00
Amortization
(10 per cent of
Gross Fixed
Assets Depreciable)
Operating EBITDA                965.00    1046.00    1311.00    1270.00
Less Depreciation              1047.00    1045.00    1024.00     983.00
and Amortization
Operating                       -82.00       1.00     287.00     287.00
Income-EBIT
Gain/(loss)                     -10.00      -8.00       7.00       0.00
on sale of assets
Other Income                     18.00       8.00      23.00      58.00
Interest expenses                 0.00      -1.00       0.00       0.00
Total other income                8.00      -1.00      30.00      58.00
Earnings                        -74.00       0.00     317.00     345.00
Before Taxes
APPRAISAL ADJUSTMENTS
Depreciation &
Amortization--See
Below
Officers' Compensation           55.60      55.60      55.60      55.60
& Benefits Diane
Non operating                    10.80      65.00      79.00      79.20
expenses
Total Adjustments                66.40     120.60     134.60     134.80
Normalized                       -7.60     120.60     451.60     479.80
Pre-tax Income(loss)
Weights applied                      -          -          -       1
Weighted                            $-        $ -        $ -    $479.80
Pre-Tax
Income (Loss)
Aggregate
Pre-tax
Income(loss)
Divide by
aggregate
weights applied
Average Weighted
Normalized
Pre-Tax
Income(Loss)
Income Taxes
(Combined Federal
& State-Estimated)
Average Weighted
Normalized
after tax
income (loss)
Depreciation & Amortization
Average of 2011&2012
Average weighted
Normalized Gross
Cash flows
Less: Expected
additional Working
Capital--CAGR
of 18.96 per cent)
18.96 per cent
of Sales growth
Less: Expected
Capital
expenditure
(Management expectation)
Less: Expected Loan
Principal Repayments
Average Weighted
Normalized net
Cash Flow to Equity
Operating income                -82.00       1.00     287.00     287.00
(Loss)-EBIT
Weights applied                                                    1
Weighted EBIT                                                    287.00
Average EBIT
Divide by
aggregate
weights applied
Average weighted
normalized EBIT
Add: officers
compensation
Add: Depreciation &
Amortization--
Average of 2011 &2012
Average Weighted
normalized EBIT
after officers
compensation & Depreciation
Operating Income                965       1046       1311       1270
(Loss)--EBITDA)
Weights applied                 --         --         --           1
Weighted EBITDA                                                 1270.00
Aggregate of EBITDA
Divide by
aggregate
weights applied
Aggregate EBITDA
Add: Officers'
compensation -Normalized
Estimate
Average Weighted
Normalized EBITDA after
officers' compensation.
Computation of
Average Weighted
Normalized Sales
Revenue                       11484.00   11636.00   12350.00   13049.00
Weights applied               --         --         --             1
Weighted Revenues                                              13049.00
Aggregate of
Normalized Sales
Divide by
Aggregate
Weights Applied
Average
Weighted
normalized sales

Particulars                   Year
                              2012
Months of operation           12
in period

Total Revenue                  12011.00
Cost of                         8376.00
Goods Sold
Gross Profit                    3635.00
Selling, General                3593.00
& Administrative
Expenses
Operating Income                  42.00
Depreciation and                 991.00
Amortization
(10 per cent of
Gross Fixed
Assets Depreciable)
Operating EBITDA                1033.00
Less Depreciation                991.00
and Amortization
Operating                         42.00
Income-EBIT
Gain/(loss)                       44.00
on sale of assets
Other Income                      64.00
Interest expenses                  0.00
Total other income               108.00
Earnings                         150.00
Before Taxes
APPRAISAL ADJUSTMENTS
Depreciation &
Amortization--See
Below
Officers' Compensation            55.60
& Benefits Diane
Non operating                     79.70
expenses
Total Adjustments                135.30
Normalized                       285.30
Pre-tax Income(loss)
Weights applied                    2
Weighted                       $ 570.60
Pre-Tax
Income (Loss)
Aggregate                     $ 1050.40
Pre-tax
Income(loss)
Divide by                          3
aggregate
weights applied
Average Weighted                 350.13
Normalized
Pre-Tax
Income(Loss)
Income Taxes                     140.05
(Combined Federal
& State-Estimated)
Average Weighted                 210.08
Normalized
after tax
income (loss)
Depreciation & Amortization      987.00
Average of 2011&2012
Average weighted                1197.08
Normalized Gross
Cash flows
Less: Expected
additional Working
Capital--CAGR
of 18.96 per cent)               (25.73)
18.96 per cent
of Sales growth
Less: Expected
Capital
expenditure
(Management expectation)         (50.00)
Less: Expected Loan               -
Principal Repayments
Average Weighted                1121.35
Normalized net
Cash Flow to Equity
Operating income                  42.00
(Loss)-EBIT
Weights applied                    2
Weighted EBIT                     84.00
Average EBIT                     371.00
Divide by                          3
aggregate
weights applied
Average weighted                 123.67
normalized EBIT
Add: officers                    120.00
compensation
Add: Depreciation &
Amortization--
Average of 2011 &2012            987.00
Average Weighted
normalized EBIT
after officers
compensation & Depreciation     1230.67
Operating Income                 1033
(Loss)--EBITDA)
Weights applied                    2
Weighted EBITDA                 2066.00
Aggregate of EBITDA             3336.00
Divide by                          3
aggregate
weights applied
Aggregate EBITDA                1112.00
Add: Officers'                   120.00
compensation -Normalized
Estimate
Average Weighted
Normalized EBITDA after
officers' compensation.         1232.00
Computation of
Average Weighted
Normalized Sales
Revenue                        12011.00
Weights applied                    2
Weighted Revenues              24022.00
Aggregate of                   37071.00
Normalized Sales
Divide by                          3
Aggregate
Weights Applied
Average                        12357.00
Weighted
normalized sales

TABLE 4
DETERMINATION OF CAPITALIZATION RATE
Redmond Pro Printing, Inc.
Schematic Diagram of the Elements of a Discount/Capitalization Rate

MATH  Explanation of Component                          Component
                                                        Value (%)

+     Risk Free Rate            Available 20 Year       2.48
                                US Treasury Bill
                                Rate at or Near
                                the Valuation
                                Date Rate
+     Equity Risk n             Data Available          6.62
      (Reflecting               from Ibbotson
      Systematic                Associates
      Risk)                     Represents
                                Equity Return
                                (S&P500) Over
                                US Treasury
                                Instrument Rates
+     Impact of Size            Incremental             5.15
      Effect on Risk            Addition to the
                                Discount Rate:
                                Additional
                                return to
                                stocks of
                                companies
+     Industry Risk             Incremental             0.6
      Premium                   Adjustments to
                                the Discount
                                Rate that applies
                                to the Characteristic
                                of the industry
                                in which the subject
                                company participates
                                --SIC 2752
+     Specific Risk             Matter of Appraiser's   5
                                Judgment: Compare
                                subject company to
                                industry averages or
                                specific guideline
                                companies and/or
                                qualitative factors
                                of subject company.
=     Net Cash Flow                                     19.85
      Discount Rate
      Long term                 2.61                    CAGR based
      Sustainable                                       on retained
      Growth Rate                                       earnings and
                                                        discussion
                                                        with management
                                                        of Redmond Pro
=     NCF Capitalization        17.24
      rate for next year
/     Divided By: Time          1.13
      adjustment (1+ GR)
=     Net after tax             15.25
      cash flow
      capitalization
      rate-current

MATH  Source

+     20 Year US
      Treasury Bond
      Yield as
      of Dec. 2011.
+     Long Horizon
      Expected Equity
      Risk Premium.
      Ibbotson SBBI
      2012 year book
      valuation edition.
+     Expected Small
      Stock Premium:
      IbbotsonSBBI
      2012 year book
      valuation edition.
+     Industry Risk
      Premium Source :
      Ibbotson SBBI2012
      yearbook valuation
      edition
+     Subjective
      risk premium
      for Redmond Pro
=
=
/
=
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Author:KUMAR, D.N.S.
Publication:Journal of Financial Management & Analysis
Article Type:Report
Geographic Code:9INDI
Date:Jan 1, 2018
Words:6368
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