Question

Mayfield Real Estate Development is a company that owns and operates a number of real estate ventures. The company also engages in real estate acquisitions and sales of properties, some of which are properties the company no longer wishes to operate. Similar real estate firms earn a 15-percent rate of return. Mayfield reported the following earnings over the last five years:

Year Operating Income Gain(Loss) on Sale of Assets Net Income 1 $1,000,000 $700,000 $1,700,000 2 $600,000 $2,100,000 $1,500,000 $1,100,000 3 $1,500,000 4 $1,600,000 $400,000 (200,000) (400,000) $1,400,000 5 $1,800,000 $1,400,000

Prepare a business valuation report for Mayfield Real Estate Development using the income statement method.

Provide analysis for giving equal weights to the five years of earning data versus giving greater weight to the more recent earning periods (where five is more recent).

Given the type of industry Mayfield Real Estate Development is in, do you believe 5 years of financial information is sufficient to provide an accurate picture?

Answer 1

Value of Business As per Discounted Cash Flow Method
Year	Operating Income	Gain (Loss) on Sale of Assets	Net Income	PVIF @ 15%	Discounted Cash Flow
1	1,000,000	700,000	1,700,000	0.8696	$                                    1,478,260.87
2	1,500,000	600,000	2,100,000	0.7561	$                                    1,587,901.70
3	1,100,000	400,000	1,500,000	0.6575	$                                        986,274.35
4	1,600,000	(200,000)	1,400,000	0.5718	$                                        800,454.54
5	1,800,000	(400,000)	1,400,000	0.4972	$                                        696,047.43
	Value of Business As per Discounted Cash Flow Method	$                                    5,548,938.89

Value of Business As per Discounted Weighted Average Method
Year	Operating Income	Gain (Loss) on Sale of Assets	Net Income	Weights	Weighted Income
1	1,000,000	700,000	1,700,000	1	$                                    1,700,000.00
2	1,500,000	600,000	2,100,000	2	$                                    4,200,000.00
3	1,100,000	400,000	1,500,000	3	$                                    4,500,000.00
4	1,600,000	(200,000)	1,400,000	4	$                                    5,600,000.00
5	1,800,000	(400,000)	1,400,000	5	$                                    7,000,000.00
				15	23,000,000
		Weighted Average Income	Weighted Income Weights	$                                  23,000,000.00
		15
					$                                    1,533,333.33
			PVIFA @ 15%	3.3522
			Value of Business=	Weighted Average Income * PVIFA
					1533333*3.3522
Value of Business	$                                    5,139,971.15

Mayfield Real Estate Development is in the field of building residential apartments. Yes, it is sufficient if years data is available. Here they are using past data analysis for the valuation using the past trends that’s is based on historical earnings. If we are able to value the same using future projected cash flows its more reasonable.