Fair Value

948 Words Mar 3rd, 2015 4 Pages
This memo identifies the key issues that will need further investigations. Each of the following sections would identify one key issue, explain how the issue would affect impairment test, and summarize the sensitivity analysis conducted.

Customer Retention Assumptions

Customer retention/attrition is estimated by the Company to arrive at the adjusted revenue, however, no support is provided for the 75% of probability of retention.(Exhibit XI) Retention rate can be expected by conducting statistical analysis of historical customer turnover and revenue growth rates. When historical customer data of sufficient quality is not available, it may be necessary to rely on management estimates or industry data. Probability of retention is
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2011 Valuation Edition Yearbook.” (Exhibit VIII). We would like further clarification and documentation surrounding this number, and would like to look into other sources that may estimate small stock premiums of this size to compare the appraiser's estimates. * Additional Risk Premium (ARP): Appraisal Professionals assumed that there should be no additional risk premium when calculating a discount rate for MMN Builders. We would like further justification on why no additional risk premium was chosen. For MMN builders, we question whether it is appropriate to not include an additional risk premium to the WACC calculation, especially since the company is undergoing a large impairment charge, a net sales decrease by 37%, a decrease in homebuilding revenue of 26% and a decrease in net income of 85% over the last 12 months. * Effective Tax Rate: The effective tax rate used in calculating the weighted average cost of capital is 38%, and this number was justified as being “provided by management” (Exhibit VIII). Although effective tax rates can be stable and we have no reason to not trust management’s assumptions, we would like further clarification on the evidence behind this number. Because the two divisions being test for impairment are in different parts of the country (Northeast and Southwest), we have questions concerning different tax rates that may be applied

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