Valuation report for Baumbach construction

Based on our review of the information provided to user firm, it is our opinion that the net realized value or fair market value of Baumbach Construction stocks are US $ 4,964,000. This value is for 55,000 shares and on the assumption that the minority shareholders are willing to sell their ownership. Therefore the price per stock is US $90

However, using book value method in the valuation, the assets of the company will be US $4,489,000 which will be equivalent to Price of US $81.6 per common stock and  discounted cash flow method  has  common stock price has US $93.

It is our opinion that the buyers will have reasonable returns on investment (R01) at this price, for compensation with the risks involved, with assumptions that the Baumbach family continues to operate prudently and the business is a going concern and there are no unforeseen adverse changes in economic conditions affecting, the business market or industry.

We have attached our report, with our certificate for valuation.

Yours faithfully,

James

For K.K. K Business Valuers, Inc

CERTIFICATE

We certify that to the best of our knowledge and belief, the statements of facts that are in this report are true and correct. The reported analysis, Conclusions and opinions are limited to the assumptions in the page below. We further state that the reported analysis, opinions and conclusions are limited by conditions and are our personal, unbiased professional analysis; Opinions and conclusions are limited to the assumptions.

K.K.K Business valuers have no present or future interest in any asset or whole company property that is subject to this report and we have no personal interest in any of the parties involved.  K.K.K Business valuers have no biased in respect to the properties involved in this valuation reports and our compensation is not contingent on an action or event resulting from our reports that is analysis, opinions and conclusions made below.

Our report has been developed with conformity to uniform standards approved by international association of consultants, Valuers and analysts. Our opinion analysis and conclusions contained in this report also confirm with the standards (IFRS).

In preparation of this report we did not seek professional assistance before signing this except a few items that the signatory of this report consulted members of K.K.K Business valuers.

This report is prepared for the intended purpose not for any other use.

DESCRIPTION OF THE COMPANY

Baumbach Construction Company.

Baumbach Construction Company was founded in 1985 by Karl Baumbach for provision of construction services. The company specializes in the area of plumbing, heating and air conditioning.  The company is owned by Mr. Adolph Baumbach, Wilma Baumbach, Fritz Baumbach and Hilder Baumbach who owns 54.5%, 36.4%, 5.5% and 3.6% respectively. They inherited this company from their father who had died and left a will for distribution of shares as stated above.

The company has 51 employees with Adolph and Wilma Baumbach being the majority share holders and the managers of the company. The company has a structure where Adolph is responsible for bidding for jobs, marketing of the company construction and supervision while Wilma is the office manager running the day-to-day activities of the office.  Under Adolph, there is a construction crew led by Jacob. There are then   foremen running various departments. There is an estimator who assists in estimating costs. Also there is maintainace section led by Peter with various mechanics.

  The company’s other activities include electrical constructors and roofing. The company’s market is in general construction in West Germany and some parts of the states. However majority of the services are in West Germany where they over moderately large scale and stable services. They do not have single large customers except government institutions. The company has many strengths including strong culture and operations successfully for sixteen years. They offer excellent products and services following international code of ethics, low employee turnover, Constant work without dependent on a specific customer, best equipments in West Germany and located in a strategic area.

The management of the company is good and capable. They have ensured the continual success of the company for the last sixteen years without business going down.

PURPOSE AND APPROACH

Business valuation is supported by principles that is: the principles of substitution and future benefits. The principle of substitution is where the buyer will not buy at a cost more than the asset value of the company. Future benefit principle is where the buyer would not pay more for the assets of the company than the present value of future benefits of the assets after adjusting the time value of money and risk of realizing those future benefits.

There are many approaches used in valuation of companies this approaches include: Income approach, Market approach and asset approach. Income approach is where valuation is based on discounted future earnings dividends or other benefit streams. This method is considered the most correct for a going concern institution however it is difficult to be used in small companies.

This approach has two methods under it, Discounted income method, and equity discounted. Discounted economic income method is where the business is valued as the present value of streams of benefits to the owners of the business into perpetuity. This method has many advantages and disadvantages. The assumptions n this method include focused for free cash flow is made, it is easy to estimate weighted average cost of capital. Adjusted present value method is where the present value for future benefits is adjusted for tax purposes and other non operating business expenses and assets like good will and depreciation.

Baumbach construction is a private limited liability company with owners being the managing director and operations officer. The two hold over 90% of share holding of the company. The purpose of this valuation is to establish the true value of the company’s assets for the purpose of selling and to establish the value for the minority shareholders. We have used the net realizable value methods or fair market value as it is described.

Fair market value is the price at which the company can change hands between a willing seller and a willing buyer when both parties are aware or have reasonable knowledge of all relevant information and facts and no party is under any obligation to buy the company or sell the company. Our approach was to determine a value, which we provide a fair and reasonable return to investors buying this company at the time this report was given to us (Brigham, 2005).

Baumbach Construction is a specially constructions company in the area of (select an appropriate SIC code from the list above). 1985. The Company remained fairly small until 1996 when the founder, Karl Baumbach died and Adolph, Wilma and their family inherited the Company. It was the intent of Karl to provide something for his two grandchildren. Karl Baumbach’s will specifically directed the distribution of the 55,000 shares of the company as outlined above. Under Adolph and Wilma’s direction, the company has been more aggressive in their marketing the company to the general construction trade.

The company is located in their own facilities, which are owned by the Baumbach & Schluter Partnership and leased back to the company. The lease rate is US $3,000 per month for the land and building from which the company operates, which consists of the office building, shop, equipment washing facility and 8 acres for equipment storage.

Baumbach Construction now has gross sales of US $7,295,000, and employs 51people. The employee turnover rate is by industry standards, which implies a high degree of employee satisfaction, a relative constant level of construction work, and low employee cost. The Company’s production workers have excellent skills and are accordingly. There is an adequate supply of labour in the area when occasional help is needed and the compensation for these individuals is average for the area. The Company operates as a guild shop.

The approach valuation using discounted cash flow which has not been used above as follows:

Forecast free cash flow during forecast horizon Estimate the cost of capital (weighted average cost of capital Estimated continuing value (=value after forecast horizon ) Discount to the present Add the value of excess cash and other non-operating assets Deduct financial debt to get market value of equity. Equity DCF method

Equity  cash flow rather than FCF is used Discount rate ==WACC Disadvantage OF Equity DCF method Discounting equity cash flow provides less information about the sources of values creation The equity DCF method is primarily applied for financial institutions ASSUMPTIONS AND LIMITING FACTOR

We have made a number of assumptions in this report and this report is subject to the following assumptions.

1.      1. The information, statements of facts, estimates and opinions contained in this report are obtained from sources considered as reliable. The sources considered as reliable include: a) Personal Consultants, Kielstrasse 53, 15873 St. Augustin     b) Quality Appraisal Company, Kielstrasse 54, 49532 St. Augustin (49) (30) 238-6290         c) Commercial Realty Company, Kielstrasse 48, 49532 St. Augustin. We have not independently vilified the information and we take no reliability for such information. The reported opinions analysis and conclusions are limited by the assumptions contained herein.

2.      This report is a valuation report meant to give an opinion of the fair market value for stocks of this company and it’s not an accountants report or the auditor’s opinion. This report should not be relied upon to disclose assets or verify financial reporting to third parties who are not the users for this report.

3.      We are ready to give evidence in a court of law or be in attendance court sessions during any hearing or depositions relating to this valuation report provided we are served with adequate notice and proper arrangements made.

4.      The estimates of value opinions to this reports applies only to Baumbach Construction Company and the date mentioned herein. The estimates are also valid for only the purpose of disposing the shares of this company. The estimates should not be used anywhere else and for other purposes not intended for.

5.      This report should not be produced or published, or being used for any purposes by any one except the client written for. Permission should be sort from the client with written consent for production or publication. Any publication, production will be illegal.

6.      Various estimates provided in this report applied to this valuation only and may not be used out of contest presented herein. This report is valid only for the purpose specified herein.

7.      Baumbach construction and her representatives gave us information which they guaranteed that it is complete and accurate to best of their knowledge and that the financial data provided reflected true operations and financial conditions in accordance with generally accepted accounting principals (international financial reporting standards). We have accepted the information supplied by Adolph and Wilma as true and correct without further vilification. We are expressing no opinion on such information.

8.      This report contemplates facts and conditions as at the valuation date. Any activities, events and conditions occurring after the date of valuation have no material importance to this report and we have no obligation to such kind of information. We are not subject to adjusting our reports to such kind of information.

9.      In accordance with professional ethics and standards as recognized by international association of consultants and valuers our fee for this service is not contingence upon conclusion of value. We have no present of future interest in this company or we have biasness to the parties involved.

10.  In preparing this report we rely upon personnel consultants Appraisal companies and really estate valuers prepared on behalf of Baumbach Construction. Their reports are obtained in separate information supplied to the John Rogers, Attorney at Law.

11.  We prepared our analysis opinions and conclusions with uniformity and conformity with professional ethics and standards as recognized by international association of consultancy, Valuers and analyst.

12.  We have not been engaged to use or we have not used international financial reporting standards or auditing standards as recognized by national accounting regulating board. Therefore we are not assuming the role of public accountants and we are not separately reporting on financial statements or focused by virtue of their incorporation in this report.

13.  The estimates of fair market value reached or stated in our report are based on the definition of fair market value as states in this report. The actual price of the stocks of this company may be concluded and a higher or lower value depending on the circumstances at the date of conclusion of the business transaction.   We make no guarantees as to the values individual buyers and sellers are willing to part with. As we state the buyer may at his will pay higher or lower.

14.  The information used in the industrial comparative analysis is imaginative and not a true a representation of the economy where Baumbach Construction company is operating.

ECONOMIC – INDUSTRY- COMPANY AND COMPARATIVE ANALYSIS.

We have used top down approach analyzing the overall economy to find out the general direction in which the economy is leading. The direction in which the economy is heading has a bearing on the performance of various industries in that economy. That is why we have taken our time to analyze the economy in which this company is operating on. We have used various rations from the provided information. Among the rations we have used are shown below.

Ratios Baumbach Construction Industrial Average 1. Gross profit margin

Gross profit / sales 9% 10.1% 2. Net profit margin

Net profit / sales 7% 7.2% 3. Return on equity

Net profit after tax/equity 32% 14% 4. Return on capital employed

Net profit after tax / capital employed 52% 17% 5. Debt to equity

Debt capital / equity 28% 13% 6. Current ratio

Current assets / current liabilities 30 times 7 times The company is operating in West Germany and parts of North America where the economy is stable. The company pays fairly high salaries as compared to the industrial average. This means that the company is prudent in decision-making regarding control of expenses. The company also pays an annual rent of 4000 which is fairly good as compared to the area average. We have analyzed the ratios as shown above.

APPROACH TO VALUATION.

We have undertaken different approaches to estimating the values of a unit in the subject of Baumbach Construction Company. We have used information provided by commercial real property to stand for the true rental income to be paid by the company.  We considered the yields the company will provide after the company has been sold.

The book value provided is on historical costs but not current but it is a good measure for this company. To get the market value of this companies the appraisers, quality Appraisal Company, provided that the market value of the company is US $ 4,964,000a report. Therefore the market value for this company using the current market approach is US $90 per share.

This approach has ignored price-earning ratio, which is normally a common yardstick for valuing the company (Eisen, 2003). For this analysis records that we obtained were limited. We have used the information to determine the mark yield that a rational investor could require in realizing a fair return on investments in view the risks involved in investing in Baumbach Company.

For Year Ended June 30: (in US $000’s) 2001

                                                                       Book value                  Market value

Assets

    Current Assets

       Cash                                                                              1,403                                      1,403

       Accounting Receivable                                             891                                         891

       Inventory                                                                     49                                           49

    Other Current Assets

       Loans to Stockholders                                                                     0                                       0

       Short – term Investments                                          2,150                                      2,150

   Total Current Assets                                                      4,493                                      4,493

Fixed Assets

     Property, Plant & Equipment                                         900                                      1358

     Land                                                                                   900                                      900

     Other Fixed Assets                                                            25                                        25

   Total Fixed Assets                                                          1,825                                      2,283

Other Assets

    Deposits                                                                          150                                         150

    Other                                                                                    0                                             0

Total Other Assets                                                            150                                         150

Total Assets                                                                       6,468                                     6,926

Liability & Equity

    Current Liability

    Notes Payable                                                                135                                         135

     Accounts Payable                                                          10                                            10

    Other Current Liabilities                                                   3                                              3

 Total Current Liabilities                                                   148                                         148

Long- Term Liabilities

     Notes Payable                                                               1,831                                      1,831

     Other Long term Liabilities                                                0                                              0

 Total Long-term Liabilities                                              1,831                                      1,831

Stockholder’s Equity

     Common Stock                                                                 55                                           55

     Paid – in Capital                                                              465                                         465

     Retained Earnings                                                         3969                                       4444

     Other Equity

        Dividends                                                                         0                                             0

  Total Other Equity                                                                 0                                             0

Total Stockholder’s Equity                                              4489                                       4964

Total Liabilities & Equity                                                6,468                                     6,926

From the market value analysis above we have noted that total equity is equivalent to US $ 4,954,000, which are the net assets of the company. In arriving at the stock value we divide by the number of shares for the company, which is fifty five thousand.

US $ 4,954,000/US $55,000 = US $90

Baumbach construction

Historical Income Sheet Summary

For Year Ended June 30: (in US $000’s)         2001

                                                                     Book value                  Market value

REVENUES

Total Revenue                                                 7,295                          7295

Operating Expenses                                             240                        158

Officer’s Compensation                                   3,495                          3495

Other Salaries & Wages                                       66                          72

Rent                                                                    405                         405

Payroll Taxes                                                      633                         633

Truck/Equipment/Auto Expenses                          68                          78

Insurance                                                             41                          41

Legal/Professional Expense                                    5                            5

Travel & Entertainment                                           18                        18

Director fee                                                          73                          73

Pension & profit sharing                                       73                          73

Depreciation & Amortization                                120                        120

Interest Expenses                                                 522                        522

Other Operating Expenses                                5,769                          5,693

Income from operations                                   1,526                          1,602

Other Income/ (Expense)                                    84                                  84

Earnings Before Tax                                        1,610                          1,686

Income Tax Expense                                       626                             655

Net Income/ (Loss)                                         984                             1031

APPEDIX

 Baumbach construction

Historical Income Sheet Summary

For Year Ended June 30: (in US $000’s)         1997    1998    1999    2000    2001

REVENUES

Total Revenue                                                 3,529   4,156   5,755   6,489   7,295

Operating Expenses                                           120     144        168     192      240

Officer’s Compensation                                   1,681   1,991   2,757   3,109   3,495

Other Salaries & Wages                                       36        42        48        54       66

Rent                                                                   196      231      320      360     405

Payroll Taxes                                                     325      411      463      520     633

Truck/Equipment/Auto Expenses                          29        36        49        61       68

Insurance                                                             26        27        29        31       41

Legal/Professional Expense                                    4          4          5          5         5

Travel & Entertainment                                           3          5          6        10       18

Director fee                                                          35        42        58        65       73

Pension & profit sharing                                       57        68        86        84       73

Depreciation & Amortization                                58        68        94      107     120

Interest Expenses                                               286      332      416      469     522

Other Operating Expenses                               2,866   3,401   4,499   5,067   5,769

Income from operations                                   663      755      1,256   1,422   1,526

Other Income/ (Expense)                                    22       31           53       67        84

Earnings Before Tax                                        685      786      3,309   1,489   1,610

Income Tax Expense                                       270      324         491      558      626

Net Income/ (Loss)                                         415      462         818      931      984

Baumbach construction

Historical Balance Sheet Summary

For Year Ended June 30: (in US $000’s)         1997    1998    1999    2000    2001

Assets

    Current Assets

       Cash                                               209                         350                         1,005                      1,435                      1,403

       Accounting Receivable              290                         750                         689                         714                         891

       Inventory                                      25                           30                           39                           45                           49

    Other Current Assets

       Loans to Stockholders                                 0                             0                               0                               0                             0

       Short – term Investments           50                           65                           514                         1,220                      2,150

   Total Current Assets                      574                         1,195                      2,247                      3,414                      4,493

Fixed Assets

     Property, Plant & Equipment       450                            475                         550                         675                         900

     Land                                                 900                            900                         900                         900                         900

     Other Fixed Assets                          12                              15                           13                           18                           25

   Total Fixed Assets                          1,362                      1,390                      1,463                      1,593                      1,825

Other Assets

    Deposits                                           150                         150                          150                         150                         150

    Other                                                     0                             0                             0                             0                             0

Total Other Assets                             150                         150                         150                         150                         150

Total Assets                                        2,086                     2,735                     3,860                     5,157                     6,468

Liability & Equity

    Current Liability

    Notes Payable                                 73                           88                           111                         119                         135

     Accounts Payable                         11                           13                             15                           12                           10

    Other Current Liabilities                  3                             5                               2                             4                             3

 Total Current Liabilities                    87                           106                         128                         135                         148

Long- Term Liabilities

     Notes Payable                                705                         830                         1,158                      1,517                      1,831

     Other Long term Liabilities               0                             0                               0                             0                             0

 Total Long-term Liabilities               705                         830                         1,158                      1,517                      1,831

Stockholder’s Equity

     Common Stock                                 55                             55                           55                           55                          55

     Paid – in Capital                             465                           465                         465                         465                         465

     Retained Earnings                         774                         1236                       2054                       2985                       3969

     Other Equity

        Dividends                                       0                             43                             0                             0                              0

  Total Other Equity                               0                             43                             0                             0                              0

Total Stockholder’s Equity               1294                       1799                       2574                       3505                       4489

Total Liabilities & Equity                 2,086                     2,735                     3,860                     5,157                     6,468

(Choi, 2000)

CONCLUSION

The intended buyer can pay US $90 for each share which is equal to the fair market value asset attributable to each share. The owners of the company should sell the shares at a price equivalent to this, as this will have a good premium for the shares. The company has a higher return on equity and the buyer will definitely have a higher ROI.

REFERENCES Eugene Brigham, Michael Ehrhardt; Financial Management, Theory and Practice, Thomson South-Western, 2005 2.   Eisen, P. Accounting the Easy Way; Barron’s Educational Series, 2003.

     3.    T. Copeland; Valuations; Wiley, 2000

     4.    International Financial Reporting Standards

5.     Frederick Choi; International Accounting & Finance: Wiley, 2000