Mini-Case 7-2: Building Supply

question 30

Essay

Mini-Case 7-2: Building Supply
You have recently decided to purchase a local building supply store. The business has passed the initial screening test and you are ready to begin discussing prices with the present owner. An independent appraisal has calculated the tangible net worth of the business to be $175,000. You determine the rate of return on an investment of similar risk to be 25 percent. You plan to draw a salary of $19,000. Your CPA estimates the net profit of the business (before your salary is deducted) to be $75,000. The present owner has selected a goodwill value of $65,000, and is asking $240,000 for the business.
-You have found two similar businesses whose stock is publicly traded on the OTC market. Their price-earnings ratios are 3.19 and 2.91. Using these two firms as a benchmark, what do you estimate the business to be worth using the market approach?

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Definitions:

Demand Function

An equation that relates the quantity of a good demanded by consumers to its price and other factors like income and prices of related goods.

Income Elasticity

Measures how the demand for a good or service changes relative to a change in consumers' income levels.

Bagels

A dense bread product, often shaped into a ring, made from dough that is boiled before it is baked.

Demand Function

A mathematical model expressing the quantity demanded of a good or service as a function of its price, and possibly other factors.