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HML determined the unadjusted value under the income method
was $8,109,000. Under this method, HML determined the present
value of Deft's future cash flows for the 5 years following the
valuation date ($4,271,000) and the present value of a terminal
value computed for the fifth year ($3,838,000) using a 19-percent
discount rate. HML added these present values together to find
the unadjusted value under this method.
Under the market method, HML examined eight publicly traded
companies primarily engaged in the manufacture and sale of paint
and coatings. These companies had similar distribution channels
to Deft, earned a profit over the last fiscal year, and possessed
similar business and financial characteristics to Deft. HML
focused on the two companies that were most similar to Deft--Grow
Group and Pratt & Lambert. HML determined the average price to
earnings multiple for each of the two companies.
Although these two companies were the most similar to Deft,
they were significantly larger than Deft in terms of sales, total
assets, and total market capitalization. Given these
differences, HML applied a 30-percent downward adjustment to the
average market multiple of the two guideline public companies.
HML also added a 25-percent control premium to account for the
fact that HML derived the multiples from information pertaining
to minority interests. HML determined that the unadjusted value
under the market method was $10,410,000.
After determining the unadjusted value under each of the
above methods, HML weighted each of the methods equally and found
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Last modified: May 25, 2011