Graeme Owns a Profitable Small CCPC, ABC Co

question 1

Essay

Graeme owns a profitable small CCPC, ABC Co. that he started five years ago, which generated $75,000 in pre-tax profits this year. He is considering selling the company to a potential buyer, Steve, and the two are trying to determine an appropriate value. Graeme believes the profits will increase steadily in the future, while Steve is a bit more cautious in his predictions as he is aware of a strong competitor coming to town. Graeme believes that a capitalization rate of 20% is reasonable, while Steve believes that 40% would be more realistic for this type of sale. Graeme would like to use the after-tax profits from this year in the valuation. Steve would like to see the pre-tax profits reduced by 10% to reflect a potential decline in revenues. The corporate tax rate is 13%.
Required:
Calculate the difference in the two valuations that Graeme and Steve are considering for the sale of ABC Co. using the earnings method.

Comprehend the concept and importance of strategic choice in developing competitive advantage.

Know the characteristics of mechanistic and organic organizations and their implications for organizational design.

Understand organizational fundamentals including division of labor, hierarchy of authority, and decision-making structures.

Analyze the role of environmental factors and technological interdependence in choosing organization design.

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New York

A state in the northeastern United States, known for its significant cultural, financial, and media impact globally, with New York City as its largest city.

Maryland

A state located in the Mid-Atlantic region of the United States, known for its significant history and diverse geography.

Appellate Courts

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