Pretty Pedals Ltd.

You, CBV student and Valuations Manager, are just getting ready to depart from the office for
the day when Dan Wayne stops by your office. “I just came out of meeting with Betty MacLean;
she owns Pretty Petals. Betty is starting to think about retirement and is wondering what her
business might be worth. Let’s meet tomorrow to discuss.”
The next morning on October 1, 2020, you meet with Dan who is a senior tax manager at your
full service accounting firm, Peggy’s Cove Accounting LLP. Dan provides the following
background on Pretty Petals:
Mrs. MacLean is the founder of Pretty Petals, a successful flower shop located in the
downtown core of Halifax.
Established in 1993, Pretty Petals has been a mainstay, mixing a traditional florist delivery
model while adapting to current trends, including the recent addition of a mobile app to allow
on-line ordering.
The company’s customers consist of a mix between corporate/commercial recurring clients
and individuals shopping for baby showers, weddings, funerals and other occasions. In addition,
holidays (particularly Valentine’s Day) drive a large part of her annual sales.

Competition is quite fierce with cheaper products offered by big box grocery stores and road-
side vendors. Mrs. MacLean and her sales staff continue to innovate and work towards

developing their brand of high-quality product at reasonable prices.
Pretty Petals’ general manager, Lisa, is a long-time employee of over 10 years and is
interested in taking over the company.
Dan provides you with a summary of the historical financial statements, which can be found in
Appendix 1.

After your meeting with Dan, you have a conversation with Mrs. MacLean, where she provides
the following information:
A real estate agent has indicated that the store is worth approximate $1,000,000. Mrs.
MacLean indicates that upon any sale, she would intend to keep the building and enter into a
long-term lease with the new owner. She indicates that market rent would be $22 per sq. foot
(rent includes property taxes, repairs and maintenance costs); the space is approximately 2,200
square feet. The net book value of the real estate as at the valuation date is $266,764, consisting
of the original cost allocated to land, as the building has been fully depreciated.
As at August 31, 2020 the market value of the investments is $300,000.
Mrs. MacLean’s salary is considered comparable to similar positions in the industry. Her 20
years old son, Jack, has drawn a salary of $5,000 per annum to assist with his college education
over the last 3 years; he does not work in the business.

During fiscal 2020 the company experienced a theft and damage to product that resulted in a
loss of $140,000.
Amortization approximates annual sustaining capital reinvestment requirements.
Your additional research indicates the following:
Risk free rate as at the valuation date is 2%
Equity risk premium is 12%
Industry risk premium is 2%
Size premium applicable to Pretty Petals is 4%
The long-term industry growth rate, given that it’s a mature industry, is 1%
The industry debt to equity structure is 25% debt to 75% equity

Required:
Calculate the Enterprise Value and the FMV of Equity of Pretty Petals Ltd as at August 31, 2020
(show your calculations).
© B. Pasquali FCPA, FCA and CBV 2020.

Appendix 1
Pretty Pedals Ltd.
Balance Sheet
As at August 31 Fiscal Year ACTUAL
2020 2019 2018

ASSETS
Cash $ 7,750 $ 30,782 $ 25,627
Accounts Receivable 48,473 45,729 43,970
Inventories 213,281 194,121 186,215
Prepaid Expenses 1,532 1,498 1,534
Total Current Assets 271,036 272,130 257,346
Capital Assets (net of accumulated depreciation) 406,795 418,999 431,569
Long Term Investments 169,231 241,080 189,723
Total Assets 847,062 932,209 878,638
LIABILITIES
Accounts Payable and Accrued Liabilities $ 159,346 $ 147,896 $ 141,572
Due to Shareholder (interest rate 4%) 9,000 9,500 7,500
Current Portion of Term Debt 3,672 3,459 3,258
Total Current Liabilities 172,018 160,855 152,330
Term Debt (interest rate 4%) 136,792 140,464 143,922
Total Liabilities 308,810 301,319 296,252
SHAREHOLDERS' EQUITY
Common Shares 100 100 100
Retained Earnings 538,152 630,790 582,286
538,252 630,890 582,386
Total Liabilities and Shareholders' Equity 847,062 932,209 878,638

Appendix 1
Pretty Pedals Ltd.
Statement of Operations and Retained Earnings
For the Years Ended

Budget Fiscal Year ACTUAL
2021 2020 2019 2018
Revenue $ 5,000,000 $ 4,847,299 $ 4,572,924 $ 4,397,042
Cost of revenue, exclusive of amortization (4,225,000) (4,265,623) (3,882,412) (3,724,295)
Gross Profit 775,000 581,676 690,512 672,747
Wages and benefits (500,000) (484,730) (457,292) (439,704)
Advertising (25,000) (24,236) (22,865) (21,985)
Insurance (3,700) (3,645) (3,789) (3,745)
Interest on long-term debt (8,200) (8,328) (8,541) (8,742)
Credit card charges (25,000) (24,236) (22,865) (21,985)
Professional fees (8,600) (8,532) (8,645) (9,342)
Office supplies/cleaning costs (1,800) (1,753) (1,802) (1,674)
Utilities (17,000) (16,848) (16,517) (16,194)
Property taxes (14,000) (13,535) (13,269) (13,009)
Telephone (2,000) (2,076) (2,035) (1,995)
Repairs & maintenance-building (68,000) (66,662) (65,355) (64,073)
Travel & entertainment (5,000) (4,847) (4,573) (4,397)
Amortization (11,594) (12,204) (12,570) (12,947)
Investment income 10,446 10,258 10,770 7,226
Pre-tax earnings 95,552 (79,698) 61,164 60,181
Income taxes (14,333) 11,955 (9,175) (9,027)
Net Earnings 81,219 (67,743) 51,989 51,154

Answer rating: 100% (QA)

Enterprise Value The enterprise value of Pretty Petals Ltd a... View the full answer