You are a professional accountant in public practice. You have just left a meeting with Michel Lessard, a local entrepreneur, who is considering a potential acquisition. Mr. Lessard, with four others, is considering buying Darcy Ltd (DL), a company that is now the subsidiary of Micah Holdings Limited (MHL), a private investment holding company.

The group of potential investors is scheduled to meet later in the week to finalize an offer for DL. You have the financial statements prepared by the company and a page of notes from your discussion with Mr. Lessard. While the group has hired a lawyer to investigate various issues and appropriate conditions for the purchase, they would like advice on the price to be offered in the first round of negotiations.

You generally understand that the potential investors would be willing to pay six times earnings, a common valuation rule of thumb in this industry. Another valuation norm in this industry is 1.2 times net tangible assets less liabilities. Mr. Lessard has asked that both valuation rules be applied, and he is hoping the two results will be in the same ballpark.
When earnings are used for valuation purposes, earnings must be “sustainable” or “continuing” earnings, excluding unusual and infrequent items, and, in valuation, elements must be measured at fair values, neither high nor low. Appropriate accounting policies must be used for this measurement of earnings and net assets, recognizing the purpose of the accounting measurements.
Required:
Evaluate the investment based on the information given, and provide a report that provides a range of valuation for the potential investors to discuss next week and any other issues you think are important. Your report must include an explanation of adjustments made.