Question

17-42 FORENSIC AND INVESTIGATIVE ACCOUNTING 17. The XYZ Company is a closely held family manu- 20. facturing business. During the last five years, the company has experienced earnings of $700, $750, $400, $800, and $950 (all amounts in $1,000). The valuation expert has determined that the most ap- propriate approach is to use the income method with weighted average income as the most logical basis for measuring earnings. The expert weights the income so that the most recent years of earnings are 21 the most important. Also, assume that considering the small size of the business relative to its competi- tors, the most appropriate price-earnings ratio is 9. Also, assume that the purpose of this valuation is to determine the value of the 12 percent equity in the business owned by the firm's long-time director of R&D and manufacturing who has decided to retire from the business. After careful analysis the valua- tion expert has determined that the loss of this key employee discount is 10 percent, and the minority interest discount is 30 percent. Determine the value of the 12 percent interest of the retiring employee.

Answer 1

Answery page: 0 B From the problem Required calculation of weighted average profit 20.0f years profit la) weights -pacogit (6) faxb) 700 3500 150 3000 400 1200 1600 800 950 950 10250 10250 -= 683:33 weighted average profit - To price corning ratio =9 Total share value of XYZ CO =1683, 33x9) = 6150 loss a key employee discount @ 1011. - 6150615 minority interest discount @ 3014. = 1845 Total share value of xyz.co. after all adjustments . : = (6150 -615-1845) 482 •fi interest of the gebring employee = 4..8.80] = 3690