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 typical after-tax 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

The realistic value of the stock can be calculated by capitalizing the average annual profits at the industry rate of return. The value of the business is $400,000 / 0.09 = $4,444,444. Addison's 70% share is $3,111,111. However, since the book value of the assets is $1,000,000, the goodwill is the difference between the business value and the book value. Therefore, the realistic value of the stock in Addison's estate is $1,785,000 (70% of $2,550,000, which is the sum of the book value and goodwill).

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