Question: Earnings valuation models. Bayview Real Estate Development is a company that owns and operates a number of real estate ventures. The company also engages in real estate acquisitions and sales of properties, some of which are properties the company no longer wishes to operate. Similar real estate firms earn a 15-percent rate of return. Bayview reported the following earnings over the last five years:
Year Operating Income Assets Net Income
1 $ 1,500,000.00 $ 800,000.00 $ 2,300,000.00
2 $ 1,700,000.00 $ 900,000.00 $ 2,600,000.00
3 $ 1,800,000.00 $ 200,000.00 $ 2,000,000.00
4 $ 1,900,000.00 $ (500,000.00) $ 1,400,000.00
5 $ 2,000,000.00 $ (200,000.00) $ 1,800,000.00
Prepare a business valuation for the Bayview Real Estate Development Company using an earnings model:
a. Prepare your analysis giving equal weights to the five years of earnings data.
b. Prepare your analysis giving greater weight to the more recent earning periods (where five is more recent).
c. What assumptions or adjustments did you make in your analysis with respect to nonoperating income?