The XYZ Company is a closely held family manufacturing business. During the last five years, the company has experienced earnings of $700, $750, $400, $800, and $950 (all amounts 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 price-earnings ratio is 9.
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 long-time 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 discount is 10 percent, and the minority interest discount is 30 percent.
Determine the value of the 12 percent interest of the retiring employee.