(Learning Objective 3, 4: Valuing a business on the basis of its net income) Sherwin Williams has owned and operated SW Advertising, Inc., since its beginning 10 years ago. Recently, Williams mentioned that he would consider selling the company for the right price. Assume that you are interested in buying this business. You obtain its most recent monthly trial balance, which follows. Revenues and expenses vary little from month to month, and June is a typical month. Your investigation reveals that the trial balance does not include the effects of monthly revenues of $5,000 and expenses totaling $1,100. If you were to buy SW Advertising, you would hire a manager so you could devote your time to other duties. Assume that your manager would require a monthly salary of $6,000.
1. Assume that the most you would pay for the business is 20 times the amount of monthly net income you could expect to earn from it. Compute this possible price. (p. 147)
2. Williams states that the least he will take for the business is 1.5 times its stockholders’ equity on June 30. Compute this amount. (p. 147)
3. Under these conditions, how much should you offer Williams? Give your reason. (Challenge)
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