Assignment:
You have been asked for your opinion as to value of Clean Bean Inc. a company that manufactures biodegradable jelly beans. The owner Mr. Barry Sanders is contemplating the sale of the business to pursue his lifelong dream of becoming a CGA.
Clean Bean Inc. was established in 1995. The company started out small and eventually grew to be one of the top jelly bean manufactures in Canada. Until about 2000, sales were primarily generated by direct sales calls by the founder and sole shareholder, Barry Sanders. In 2001, the company hired some salespeople and signed on a distributor in Western Canada and then in Ontario and Quebec.
The company does not require very much in the way of capital reinvestments, as such the amortization expenses is a good indicator of capital reinvestment requirements. Mr. Sanders is the President of the company and receives a salary in line with industry standards for his duties and responsibilities. In addition to his salary, Mr. Sanders receives a bonus. He is the only employee to receive a bonus. Mr. Sander’s son, Philippe is listed as an active employee with Clean Bean. Philippe is presently in his last year of university and receives a salary of 40,000$ per year. Philippe works for Clean Bean Inc. only four months per year.
Having worked with Mr. Sanders in the past, you know that they are great at forecasting and a review of the industry discloses that the current trend in earning is expected to continue for the foreseeable future.
Other information:
- The book value of the capital assets are equal to their FMV
- The company’s average annual capital expenditures is equal to the amortization expense
- The income tax rate is assumed to be at 19 %
- Borrowing rates on bank debt is 6%
- Management Salaries (excluding bonuses) are considered to be in line with industry benchmark
- The company pays rent to a related party and the rent expenses at fair market prices
- Macroeconomic indicators as at the valuation date for the Jelly Bean Industry are:
• Industry Benchmark Current Ration is 1.25:1
• Industry Benchmark Quick Ratio is 1:00:1.00
• Average Gross Margin is 60%
• Average Net Margin is 35%
• T Bills (1 year-3 year) : 1.5%-2.0%
• Conventional Mortgage (5 year-10 year term) : 5% – 7%
• Bank Prime Rate is 3%
• Return on investment bonds: 16.3% – 17.1%
• Return on Investment on shares: 15.4%-16.6%
• Return on investment on assets: 14.4% – 16.6%
You have been asked for your opinion as to value of Clean Bean Inc. a company that manufactures biodegradable jelly beans. The owner Mr. Barry Sanders is contemplating the sale of the business to pursue his lifelong dream of becoming a CGA.
Clean Bean Inc. was established in 1995. The company started out small and eventually grew to be one of the top jelly bean manufactures in Canada. Until about 2000, sales were primarily generated by direct sales calls by the founder and sole shareholder, Barry Sanders. In 2001, the company hired some salespeople and signed on a distributor in Western Canada and then in Ontario and Quebec.
The company does not require very much in the way of capital reinvestments, as such the amortization expenses is a good indicator of capital reinvestment requirements. Mr. Sanders is the President of the company and receives a salary in line with industry standards for his duties and responsibilities. In addition to his salary, Mr. Sanders receives a bonus. He is the only employee to receive a bonus. Mr. Sander’s son, Philippe is listed as an active employee with Clean Bean. Philippe is presently in his last year of university and receives a salary of 40,000$ per year. Philippe works for Clean Bean Inc. only four months per year.
Having worked with Mr. Sanders in the past, you know that they are great at forecasting and a review of the industry discloses that the current trend in earning is expected to continue for the foreseeable future.
Other information:
- The book value of the capital assets are equal to their FMV
- The company’s average annual capital expenditures is equal to the amortization expense
- The income tax rate is assumed to be at 19 %
- Borrowing rates on bank debt is 6%
- Management Salaries (excluding bonuses) are considered to be in line with industry benchmark
- The company pays rent to a related party and the rent expenses at fair market prices
- Macroeconomic indicators as at the valuation date for the Jelly Bean Industry are:
• Industry Benchmark Current Ration is 1.25:1
• Industry Benchmark Quick Ratio is 1:00:1.00
• Average Gross Margin is 60%
• Average Net Margin is 35%
• T Bills (1 year-3 year) : 1.5%-2.0%
• Conventional Mortgage (5 year-10 year term) : 5% – 7%
• Bank Prime Rate is 3%
• Return on investment bonds: 16.3% – 17.1%
• Return on Investment on shares: 15.4%-16.6%
• Return on investment on assets: 14.4% – 16.6%
A summary of Clean Bean Inc.’s operating results and the June 30, 2013 balance sheet are shown in appendices attached
Required:
Prepare a 450-500 word memo providing Mr. Sanders with your opinion of value of his business showing all your work as support.
Clean Bean Inc.
Balance Sheet at June 30-2013
Required:
Prepare a 450-500 word memo providing Mr. Sanders with your opinion of value of his business showing all your work as support.
Clean Bean Inc.
Balance Sheet at June 30-2013
Current Assets
Accounts Receivable 615,000
Inventory 285,000
900,000
Capital assets 500,000
Total Assets 1,400,000
Liabilities and Equity
Current Liabilities
Accounts Payable 227,000
Income Taxes Payable 72,000
299,000
Shareholder’s Equity
Capital Stock 1,000
Retained Earnings 1,100,000
Total shareholders’ equity 1,101,000
Accounts Receivable 615,000
Inventory 285,000
900,000
Capital assets 500,000
Total Assets 1,400,000
Liabilities and Equity
Current Liabilities
Accounts Payable 227,000
Income Taxes Payable 72,000
299,000
Shareholder’s Equity
Capital Stock 1,000
Retained Earnings 1,100,000
Total shareholders’ equity 1,101,000
Clean Bean Inc.
Historical Income Statements
For the years ended June 30,
2013 2012 2011 2010
Sales 3,900,000 3,700,000 3,400,000 3,300,000
Cost of Sales 1,774,000 1,600,000 1,530,000 1,580,000
Gross Profit 2,126,000 2,100,000 1,870,000 1,720,000
Expenses
Advertising 2,000 2,000 2,000 2,000
Bad Debts 8,000 8,000 35,000 2,000
Amortization 70,000 70,000 40,000 40,000
Insurance 3,000 3,000 2,000 2,000
Light & Heat 6,000 6,000 6,000 5,000
Management Bonus 60,000 60,000 50,000 50,000
Municipal Taxes 4,000 4,000 4,000 4,000
Office 20,000 20,000 15,000 14,000
Professional Fees 5,000 24,000 3,000 2,000
Repairs & Maintenance 8,000 8,000 4,000 6,000
Wages 1,500,000 1,500,000 1,300,000 1,200,000
Total Expenses 1,686,000 1,705,000 1,461,000 1,327,000
Pre tax earnings 440,000 395,000 409,000 393,000
Advertising 2,000 2,000 2,000 2,000
Bad Debts 8,000 8,000 35,000 2,000
Amortization 70,000 70,000 40,000 40,000
Insurance 3,000 3,000 2,000 2,000
Light & Heat 6,000 6,000 6,000 5,000
Management Bonus 60,000 60,000 50,000 50,000
Municipal Taxes 4,000 4,000 4,000 4,000
Office 20,000 20,000 15,000 14,000
Professional Fees 5,000 24,000 3,000 2,000
Repairs & Maintenance 8,000 8,000 4,000 6,000
Wages 1,500,000 1,500,000 1,300,000 1,200,000
Total Expenses 1,686,000 1,705,000 1,461,000 1,327,000
Pre tax earnings 440,000 395,000 409,000 393,000
