Question

1) You have a business you are considering selling. There are several ways to determine the firm’s worth. Based on the following data, which method would merit you the most for your business?

•2016 annual profits were $500,000

•Your current stock is 25.00 per share

•There are 20,400 outstanding shares of stock.

•Your stock as earned $5 this past year, and

•Average net income over five years $95,000

Consider in this calculation the Price/Ratio Method, outstanding share method, and the conservative rule of thumb. Show your work for each of these methods and identify, based on your work, which method yield you the most for your business.

Answer 1

Data

Annual profits	$ 500,000.00
Current stock price (value of stock)	$ 25.00
Outstanding shares of stock	20,400
Earning per share (EPS)	$ 5.00
Average net income over 5 years	$ 95,000

For the calculations :

Price/ Ratio method

Formula is = Value of stock / Earning per Share = (25/5) = 5

The price / Ratio method inverted with 1 returns the return expected = 1/5 = 20%

For an investor who invests one dollar in the organisation will earn a return of 20 cents for every dollar invested

Outstanding shares

With the outstanding shares we shall be able to measure the market capitalisation of the organisation . The market cap is the value of the organisation based on the number of outstanding shares multiplied by the current stock price. Here = Current stock price x outstanding shares = $ 25 x 20,400 = $510,000 .

The outstanding share can provide us with the perceived market value of the organisation.

The conservative rule of thumb is the method which is a ball park based on the current value , Here we could assume that the company will continue to obtain income as per the average income it has attained over the last 5 years. So , we could assume that the organisation would continue to make $95,000 a year .

Based on the above , The proposal to the prospective buyer could be a combination of the above factors . The company has a value of roughly half a million dollars and is able to produce income to the tune of $100K a year with the profit margin of 20% leading to a profit of roughly $20,000 Year on year. The same combination along with other factors such as assets owned by the company and the prospective market expansion could be used to negotiate on the price to be obtained for the sale of the business.