appraisal value - part 2

Alan Chin, the chief executive officer of Thunder Corporation, has asked his chief financial officer, Constance Ebinosa, to prepare a valuation of Thunder for the purpose of selling the company to a private investment partnership. partnership has expectations about Thunder similar to the current shareholders and management of Thunder. These investors expect to hold Thunder for an intermediate period of time and then bring the company public when market conditions are more favorable than currently. Chin is concerned about what definition of value should be used when analyzing Thunder. He notes that the stock market has been very volatile recently. He also wonders whether fair market value can be realistically estimated when the most similar recent private market transactions may not have been at arms length. Chin asks Ebinosa whether there will be differences in the process of valuing a private company like Thunder compared with a public company. Ebinosa replies that differences do exist and mentions several factors an analyst must consider. Ebinosa also explains that several approaches are available for valuing private companies. She mentions that one possibility is to use an asset-based approach because Thunder has a relatively large and efficient factory and warehouse for its products. A real estate appraiser can readily determine the value of these facilities. A second method would be the market approach and using an average of the price-to-earnings multiples for Procter & Gamble and Clorox. A third possibility is a discounted free cash flow approach. The latter would focus on a continuation of Thunders trend of slow profitable growth during the past ten years. The private investment partnership has mentioned that they are likely to use an income approach as one of their methods.

Given chin’s concern the most appropriate definition of value for Thunder is: A. intrinsic value. B. investment value. C. fair market value.