For example, if you a simple average of 5 year of either income or cash flow of: year 1    100 year2     100 year 3    100 year 4    100 year 5    100 total       500 average       100 cap rate       0.2 value           500 Now you go to the balance sheet as of the valuation date and have a cash balance of $500 and the industry working capital benchmark is $200, is it fair to add $300 to the value of the business? That is really the question. In practice, particularly matrimonial valuations, some practitioners would opine, if the owner sells the business they would realize $500 in value plus $300 in excess working capital for a total value of $800. Remember the value included the $300 ($100 each year), possibly not distributed cash flow/earnings, is that really value?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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For example, if you a simple average of 5 year of either income or cash flow of:
year 1    100
year2     100
year 3    100
year 4    100
year 5    100
total       500
average       100
cap rate       0.2
value           500

Now you go to the balance sheet as of the valuation date and have a cash balance of $500 and the industry working capital benchmark is $200, is it fair to add $300 to the value of the business? That is really the question. In practice, particularly matrimonial valuations, some practitioners would opine, if the owner sells the business they would realize $500 in value plus $300 in excess working capital for a total value of $800.

Remember the value included the $300 ($100 each year), possibly not distributed cash flow/earnings, is that really value?

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