Florida Dreams, Sound Financial Decisions
John and Susan Peterson, both CPAs, were considering purchasing a smaller CPA practice in Florida to facilitate their relocation and expansion. They were concerned about accurately assessing the risk of the target firm, especially given the different economic environment in Florida compared to New York. They lacked a clear way to isolate the business risk from the impact of the target firm's existing debt.
Using the Unlevered Beta Calculator, we determined the target firm's unlevered beta to be 0.85, indicating a relatively lower level of inherent business risk than initially perceived. Factoring in the market risk premium and current risk-free rate, this helped the Petersons negotiate a more favorable purchase price, reflecting a realistic assessment of the firm's operational risk. We also utilized the Tax Equivalent Yield calculator to assess the impact of Florida's lower tax environment on the after-tax returns from the practice.
The Unlevered Beta Calculator required inputting the target firm's beta, tax rate, and debt-to-equity ratio. The resulting unlevered beta provided a clear picture of the operational risk, while the Tax Equivalent Yield calculator compared New York's and Florida's tax advantages.
$50,000 reduction in the purchase price, reflecting a more accurate risk assessment and improved after-tax returns projections.
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