You want to estimate the value of a local advertising firm. The earnings of the firm are expected to be $2 million
next year. Based on expected earnings next year, the average price-to-earnings ratio of similar firms in the same industry is 52. Therefore, you estimate the value of the firm you are valuing to be $104 million.
Further investigation shows that a large portion of the firm's business is obtained through connections that John Smith, a senior partner of the firm, has with various advertising executives at customer firms. Mr. Smith only recently started working with his junior partners to establish similar relationships with these customers.
Mr. Smith is approaching 65 years of age and might announce his retirement at the next board meeting. If he does retire, revenues will drop significantly and earnings are estimated to shrink by 35 percent. You estimate that the probability that Mr. Smith will retire this year is 50 percent. If he does not retire this year, you expect that Mr. Smith will have sufficient time to work with his junior partners so his departure will not affect earnings when he departs. How does this information affect your estimate of the value of the firm? (Round answer to 2 decimal places, e.g. 52.75.)
Value of the firm