Financial Statements, Third Edition by Ittelson Thomas;

Author:Ittelson, Thomas;
Language: eng
Format: epub
Publisher: Red Wheel/Weiser

What is AppleSeed worth? How to value a company.

What’s a Business Worth? We’ve done a splendid job starting up an applesauce company. What do you think the business is worth now? A good question, one of interest to AppleSeed’s shareholders. Let’s look at several methods of company valuation.

Book Value Book value represents the value at which assets are carried on the “books” of the company. The book value of a company is defined as its total assets less its current liabilities and less any long-term debt. For AppleSeed Enterprises, Inc., book value is computed as $1,753,100 (that is, $3,029,419 in total assets less a total of $476,319 in current liabilities less some $800,000 in long-term debt outstanding).

Liquidation Value The liquidation value is what the company’s assets would bring at a forced sale. Normally the liquidation value of a going concern has little relevance since the value of an operating business is much greater than its liquidation value. For fun (?!) let’s compute AppleSeed’s liquidation value. Start with the company’s book value and then subtract what would lower that amount if, for example, we could only get 10 cents on the dollar for inventory and 50 cents on the dollar for machinery. Using these assumptions, AppleSeed’s liquidation value would be about $500,000. The bank would take it all.

Price-Earnings Multiple The company has 200,000 shares outstanding and earned a net income of $278,100 last year. Dividing net income by the number of outstanding shares gives a net income of $1.39 per share. If we assume that companies like AppleSeed are currently selling at, let’s say, 12-times earnings, then our company is worth $1.39 times this 12 multiple times 200,000 shares outstanding, equaling a value of over $3.3 million. Wow!

Market Value There is no market for AppleSeed’s stock. The company is “closely held.” Thus, there is no real “market value” for the company. Selling a private company is like selling a house. The business is worth what you can get for it.

Discounted Cash Flow The discounted cash flow method of valuation is the most sophisticated (and the most difficult) method to use in valuing the business. With this method you must estimate all the cash influxes to investors over time (dividends and ultimate stock sales) and then compute a “net present value” using an assumed discount rate (implied interest rate). There are just too many assumptions in this method to make it very useful in valuing AppleSeed. However, review the discussion in Chapter 21, Net Present Value, for a more detailed view on these calculations.

Alternative AppleSeed Enterprises Valuations

Value — Method

$1,753.100 — Book Value

$504,807 — Liquidation Value

$3,337,200 — Price-Earnings Multiple

sell to whom? — Market Value

too complex! — Discounted Cash Flow

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