Essay on Fair Value
Customer Retention Assumptions
Customer retention/attrition is estimated by the Company to arrive at the adjusted revenue, however, no support is provided for the 75% of probability of retention.(Exhibit XI) Retention rate can be expected by conducting statistical analysis of historical customer turnover and revenue growth rates. When historical customer data of sufficient quality is not available, it may be necessary to rely on management estimates or industry data. Probability of retention is …show more content…
The beta calculation utilized an inappropriate assumption. When calculating the beta to determine the cost of debt and equity capital and eventually the weighted average cost of capital, the existing beta must be unlevered, debt removed from comparable companies’ betas, and then re-levered, added back, to the target company’s beta. When re-levering, you must consider the company’s capital structure to find the true beta. The valuation company used a target capital structure of 50% debt and 50% equity, which probably does not reflect the company’s true capital structure because all of the comparable companies have a Debt/Equity ratio of less than 1. A capital structure of 50/50% would indicate a Debt/Equity ratio of 1 or higher. We should take a further look into the capital structure of the company to ensure, during the re-levering process, the beta reflects the current and industry appropriate capital structure.
One of the key issues we seek further clarification on is the criteria used when choosing comparable companies. Currently, companies were chosen based on similar products and services, size, and geographic area and were analyzed to come up with market multiples. Upon analysis of the exhibits included, the companies do not appear to be very similar to MMN. The comparable companies are all national builders and do not appear to be geographically isolated to