Case Assignment
Retail Clothing Store (RCS) is a family-owned chain of clothing stores in California. The company specializes in children's clothing from infant to 14 years of age. It currently has 15 stores in major shopping malls in the state. The company is owned by the Kess family and was started by Mrs. Jane Kess and her husband 30 years ago. The company is currently run by the three children of Mr. and Mrs. Kess and some of their spouses. Mr. Kess passed away a number of years ago and Mrs. Jane Kess, passed away on 12/31/09. At the time of her passing, she owned 10% of the outstanding common stock of the company.
You have been engaged by RCS to determine the fair market value of the shares owned by Mrs. Kess as of 12/31/09 for estate tax purposes.
The attached spreadsheet contains projections prepared by RCS' management. Management expects the company to reach a steady state after fiscal year ended January 2013. Mrs. Kess's children, John, Paul, and Jane are officers of RCS. Each of the three officers is expected to draw an annual salary of $275,000 in fiscal year ending January, 2010. John is the CEO, Paul is the COO, and Jane is the CFO. An employment consultant who works with RCS has informed you that the market salary for the COO's position is expected to be $225,000 per year and the market salary for the CFO's position is expected to be $175,000 per year. In addition, officers' salaries are expected to increase at a rate of 5% per year from 2009 to 2013.
Based on your research, if applicable, the control premium would be 35% and the marketability discount would be 40%.
Using the discounted cash flow method and the discount rate that you developed last week, determine the fair market value of Mrs. Kess's interest as of 12/31/09.
Attachment:- Projections.rar