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Chapter 12 - Business Valuation Nowadays we know the price...

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338 Business Valuation “Nowadays we know the price of everything and the value of nothing.” —Oscar Wilde Valuing the M&M Mushroom Company Melissa and Mark were young and in love. They also shared a passion for mushrooms. In fact, they were so passionate about mushrooms they liked to grow them in their basement. They were quite good at it, and often had more mushrooms than they knew what to do with. Then they had the idea of selling their mushrooms to friends and neighbors. This endeavor was successful beyond their wildest dreams and soon they had quite a business going. The expanded out of their basement into dedicated production facilities, incorporated under the name “M&M Mushrooms,” and became quite famous in the local area for having the best tasting mushrooms around. The M&M Mushroom Company grew steadily for ten years, enlarging its sales territory to five states and employing 150 people in three plants. That’s when the trouble began. Melissa wanted to keep expending the business, but Mark missed the small, informal operation they used to have years ago. Also, Mark had recently begun taking flying lessons and had developed a close relationship with his flight instructor. Mark and Melissa began spending more and more time apart, and began having more and more disagreements, until it was apparent that everyone would be better off if they went their separate ways. The divorce was amicable, as Melissa and Mark had no children and the only major assets they owned were their common stock shares in the M&M Mushroom Corporation (Melissa and Mark each owned 50% of the shares outstanding, 500 shares each). Since Melissa wanted to continue managing the business and Mark wanted out, he agreed to sell her his 500 shares. However, they could not agree on a price. Melissa was of the
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339 © Falko Matte (http://www.fotolia.com/p/5520) Learning Objectives After reading this chapter, you should be able to: 1. Explain the importance of business valuation. 2. Discuss the concept of business valuation. 3. Compute the market value and the yield to maturity of a bond. 4. Calculate the market value and expected yield of preferred stock. 5. Compute the market value per share of common stock. 6. Compute the market value of total common equity. 7. Compute the yield on common stock. 8. Compute the value of a complete business. opinion that the shares were worth in the neighborhood of $1,000 each, making the total value of Mark’s 500 shares $500,000. Mark disagreed. Pointing to their steady growth during the past ten years, and current wide area of operations, he maintained the shares were worth at least $2,000 each for a total of $1,000,000. Melissa and Mark could not settle their differences on their own and soon found themselves facing each other in court. The primary issue before the court was to establish the “fair market value” of the shares in question. Each side engaged an expert to provide an opinion on the value of the shares.
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