Question: Refer to the information in Exercise but use the average income approach to find the base valuation rather than the weighted average method. Determine the value of the 12 percent interest of the retiring employee.
Exercise: The XYZ Company is a closely held family manufacturing business. During the last five years, the company has experienced earnings of $600, $650, $500, $800, and $850 (in $1,000). The valuation expert has determined that the most appropriate approach is to use the income method with weighted average income as the most logical basis for measuring earnings. The expert weights the income so that the most recent years of earnings are the most important. Also assume that considering the small size of the business relative to its competitors, the most appropriate priceearnings ratio is 7. Also assume that the purpose of this valuation is to determine the value of the 12 percent equity in the business owned by the firm's longtime director of R&D and manufacturing who has decided to retire from the business. After careful analysis the valuation expert has determined that the loss of this key employee and the minority nature of the ownership position would require a 30 percent valuation discount from the base value. Determine the value of the 12 percent interest of the retiring employee.