question archive Using the chop shop method, please determine a firm's value for San Francisco, Inc
Using the chop shop method, please determine a firm's value for San Francisco, Inc
Subject:FinancePrice:2.86 Bought11
Using the chop shop method, please determine a firm's value for San Francisco, Inc. San Francisco common stock is trading at a total market price of 4 million. For San Francisco, the accounting data are divided into three business segments as given below in the tables. Data for the firm's three segments are as follows: Business segments Segment's ($000) Sales Segment's Assets Segment's ($000) Earnings before Interest and Taxes (EBIT) Consumer wholesale 1000 750 150 Specialty services 1500 700 250 Retirement centers 2200 800 550 Total 4700 2250 950 Industry data for "pure-play" firms have been computed and are summarized as follows: Firm Value/Sales Firm value/Assets Business segments Firm Value/ EBIT Consumer wholesale 0.7 0.75 12 Specialty services 1.1 0.65 10 Retirement centers 0.9 11
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The chop-shop method valuation values the firm as a sum of its multiple business segments.
Value of firm = [ Segmented Sales based valuation + Segmented Assets based
valuation + Segmented EBIT based valuation ] / 3
• Segmented Sales based valuation = 
(segment sales * firm value/sales)
| BUSINESS SEGMENT | Firm Value / Sales | Segment Sales | Product |
| Consumer Wholesale | 1000 | 0.7 | 700 |
| Specialty services | 1500 | 1.1 | 1650 |
| Retirement centers | 2200 | 1.0 | 2200 |
| Total | 4550 |
Value-based on firm value/sales is $4550000
• Segmented Assets based valuation = (segment asstes * firm value/assets)
| BUSINESS SEGMENT | Firm Value / Assets | Segment Assets | Product |
| Consumer Wholesale | 750 | 0.75 | 562.5 |
| Specialty services | 700 | 0.65 | 455 |
| Retirement centers | 800 | 0.9 | 720 |
| Total | 1737.5 |
Value-based on firm value/asstes is $1737500
• Segmented EBIT based valuation = (segment EBIT * firm value/EBIT)
| BUSINESS SEGMENT | Firm Value / EBIT | Segment EBIT | Product |
| Consumer Wholesale | 150 | 12.00 | 1800 |
| Specialty services | 250 | 10.00 | 2500 |
| Retirement centers | 550 | 11.0 | 6050 |
| Total | 10350 |
Value-based on firm value/sales is $10350000
Thus, the value of the firm = $ (4550000+1737500+10350000) / 3
= $ 16637500 / 3
= $ 5,545,850
Therefore, the value of the firm based on the chop-shop method is $5.545 mn
We can also say that the firm is undervalued as its intrinsic value is coming ut to be $5.545 mn as against it's market value of $4 mn.
