To: Dr. Lynna Martinez

Subject: Calaveras Vineyards Valuation

As per your request, my associates and I have calculated a valuation for Calaveras Vineyards using the present value of cash flows. We used the valuation of future cash flows method in order to value to value the company. We have come to the conclusion, based on a number of future projections, that the best valuation of the vineyards is $4,356,000 in assets and $1,104,000 in equity.

The process at determining this valuation was as follows:

1. First, using the projected EBIT forecasted income statement; we took out the 37% tax, change in working capital, and CAPEX for 1994-1998 and added back the depreciation and amortization expenses to arrive at free cash flows. We
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The range that we chose to use for growth rates was 1%, 1.5%, 2%, and 2.5%. We believe that Calaveras will continue to produce a high quality wine upholding a strong brand name and position in the market. Along with this, we believe that the wine industry as a whole will be growing into the future because of a growing economy. These rates represent indefinite growth; therefore, we are positioning your company to be growing slightly above the industry average.

The free cash flow that we used to calculate the terminal value was from the year 1997. We did this because we felt that the cash flow in 1998 was not a true representation of future cash flows. In 1998, there was a large drop in current liabilities due to the drop in current loans; this caused the change in working capital to be unusually high. We believe, Calaveras will return to normal levels of working capital. This will be after the new marketing push and establishment of more revolving line of credit for planned future growth in sales.

5. We discounted the terminal values of free cash flows at the same discount rate that we discounted the free cash flows. We then averaged the range of present value terminal values to get an average present terminal value of free cash flows. This value was $1,820,000.

We then calculated the terminal values of the interest tax shields by taking the 1998 interest tax shield and using the terminal value

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