06.07.2022 - 01:52

# We are going to calculate the fair value of a private business called Sandy’s Bakery. Sandy owns Sandy’s Bakery and is looking to sell her business in the next few years. However, Sandy is unaware of how much her business is worth. Sandy wants to know how

Question:

We are going to calculate the fair value of a private business called Sandy’s Bakery. Sandy owns Sandy’s Bakery and is looking to sell her business in the next few years. However, Sandy is unaware of how much her business is worth. Sandy wants to know how much her business is worth now to strategize how to negotiate the sale of her business.

Sandy’s Bakery brings in $500,000 per year in free cash flows. Sandy’s Bakery is also growing at a steady rate of 5% per year. We are going to stick with 3 years. Sandy’s Bakery is a private business with low liquidity; therefore, we are going to go with a target compounded rate of return of 15% per year. How much is Sandy s Bakery worth? Answers (1) • April 8, 2023 в 05:03 Using the discounted cash flow method, Sandy's Bakery is worth \approx imately$1,534,830. This is calculated by taking the present value of the future free cash flows (FCF) projected over the next three years using a discount rate of 15% per year. The FCF for the first year is $525,000 ($500,000 + 5% growth), the second year is $551,250 ($525,000 + 5% growth), and the third year is $578,813 ($551,250 + 5% growth). The present value of these cash flows is then calculated using the formula PV = FCF / (1 + r)t, where r is the discount rate and t is the number of years. The sum of these present values is \approx imately \$1,534,830, which is the fair value of Sandy's Bakery.