At the time of Addison's death, he owned 70% of the stock in Robin Corporation, a closely held family business. Over the past five years, Robin has averaged annual profits of $400,000 in an industry where the usual rate of return is 9%. If the book value of the corporation's assets is $1,000,000 and goodwill exists, what might be a realistic value of the stock in Addison's gross estate?

Question

Quizplus · Accepted Answer

To determine the value of the stock, we need to use the capitalized earnings method. First, we calculate the average earnings over the past five years, which is $400,000. Then we divide the earnings by the rate of return, which is 9%, to get the capitalized value of $4,444,444. We then subtract the book value of assets of $1,000,000 to get the value of goodwill, which is $3,444,444. Lastly, we multiply the goodwill by Addison's ownership percentage of 70%, which gives us a value of $2,411,110. However, the question asks for the realistic value of the stock in Addison's gross estate, which means we need to discount this value for lack of marketability and control. A reasonable discount could be around 30%, which would give us a final value of $1,785,777, rounded to $1,785,000. Therefore, the correct answer is C.

At the Time of Addison's Death, He Owned 70% of the Stock