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:

In Process

Relating to materials or products that are in the course of being manufactured but are not yet completed.

Equivalent Units

A concept used in process costing that converts partially completed units into a number of fully completed units.

In Process

A term that describes items or activities that are currently underway but not yet completed, often used in manufacturing and project management.

Conversion Cost

Refers to the combination of labor and manufacturing overhead costs incurred to convert raw materials into finished goods.