| Course | BUS 550 Business Finance |
|---|---|
| Module | Module 4 |
| Paper type | Stock valuation |
| Length | About 1,064 words, 6 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for BUS 550 Module 4
What Is a Quarter of the Company Worth? Valuing a Retiring Partner's Shares in a Family Dairy Distributor
Student Name
MBA Program, Aspen University
BUS 550: Business Finance
Instructor Name
Month Day, Year
What Is a Quarter of the Company Worth? Valuing a Retiring Partner's Shares in a Family Dairy Distributor
North Star Dairy Distribution, a composite family company based in St. Cloud, Minnesota, delivers milk, cheese, yogurt and butter from regional dairies to grocery stores, schools and restaurants across central Minnesota. Four partners own it. One, holding 25% of the shares, is retiring, and the partners' buy-sell agreement requires the others to buy his shares at a fair value determined by a valuation. The remaining partners want a number they can defend to the retiring partner and to the bank that will lend them part of the price. This paper values the shares.
What Is Being Valued
The valuation concerns a 25% stake in a private company, not the whole company and not a controlling interest. The first step is to value the company's equity as a whole; the second is to consider how the features of a minority stake in a private company affect what it is worth. Both matter: a quarter of a company's value is a starting point, not the answer.
Cash Flow and Required Return
The relevant cash flow for valuing shares is free cash flow to equity: cash from operations, minus capital spending, plus net new borrowing, the cash available to owners. North Star's averaged about $1.6 million over the past three years. With a new contract to supply 40 school districts beginning next year, the partners and their accountant estimate $1.8 million next year.
The required return reflects what investors would demand for the risk of owning the shares. A small, private distributor carries more risk than a large public company, so a return of about 12% is used, consistent with the return small private firms in similar businesses are commonly valued at and with the approach Brigham and Ehrhardt (2020) describe of adding a size premium to a market-based return.
The Constant-Growth Model
Gordon (1959) showed that when payments to owners grow at a steady rate forever, a share's value can be found from just three inputs: next year's payment, the return owners require and the growth rate. If North Star's cash flow to equity grew at 3% a year forever, roughly in line with inflation and population growth in its region, its equity would be worth $1.8 million divided by 9 percentage points, or $20 million.
A Two-Stage Model
The constant-growth model ignores the school contract, which should raise growth above 3% for several years. Damodaran (2012) recommends a two-stage model in such cases: forecast cash flows explicitly during a period of higher growth, then apply a constant-growth terminal value once growth settles. Assuming 8% growth for five years and 3% thereafter:
The terminal value is year five's cash flow grown 3% and divided by 9 points. The two-stage model values the equity at about $23.4 million. Two-thirds of the value comes from the terminal value, which shows how much the result depends on the long-run assumptions.
| Year | Free cash flow to equity, millions | Present value at 12%, millions |
|---|---|---|
| 1 | $1.80 | $1.61 |
| 2 | $1.94 | $1.55 |
| 3 | $2.10 | $1.49 |
| 4 | $2.27 | $1.44 |
| 5 | $2.45 | $1.39 |
| Terminal value at end of year 5 | $28.03 | $15.90 |
| Total equity value | Not applicable | $23.39 |
Cross-Checking With Multiples
Valuation professionals often check discounted cash flow results against prices paid for similar companies. Food distributors of North Star's size have recently sold at about 6 to 7 times operating earnings before interest, taxes, depreciation and amortization. With operating earnings of $3.9 million and debt net of cash of $1.4 million, these multiples imply equity values of about $22 million to $26 million, consistent with the two-stage model.
Adjusting for a Minority Private Stake
A 25% stake does not control the company and cannot be sold on a public market. Damodaran (2012) notes that discounts for lack of marketability commonly range from 15% to 35% for private companies, depending on size, profitability and restrictions on transfer. North Star's buy-sell agreement guarantees a buyer, the other partners, which reduces the marketability problem. A discount of 15% to 20% is therefore used.
How the Cash Flow Estimate Was Built
Because the result depends heavily on the first year's cash flow, its basis deserves scrutiny. The accountant started from the past three years' average of $1.6 million, added the contribution expected from the school contract, net of two additional delivery trucks and drivers, and subtracted a reserve for replacing two refrigerated trailers that are near the end of their lives. The partners also checked the estimate against the contract's pricing schedule and the company's actual margins on its existing school routes. A reviewer who questions the $1.8 million figure can trace each adjustment.
Control and the Buy-Sell Agreement
The retiring partner might argue that his stake should not be discounted because the agreement obliges the others to buy it. The remaining partners might argue for a larger discount because a 25% holder cannot direct the company. The agreement's wording settles part of this: it calls for fair market value of the shares, which normally reflects the characteristics of the specific interest being sold, including its minority status. The modest discount used here reflects the guaranteed buyer while recognizing the lack of control.
The Range for Negotiation
Using equity values from $23 million to $24 million, 25% gives $5.75 million to $6 million before any discount. A 15% to 20% discount produces a value for the retiring partner's shares of about $4.6 million to $5.1 million. Using the constant-growth value of $20 million as a floor gives about $4.0 million to $4.25 million. The partners should open discussions in the range of $4.6 million to $4.9 million.
What Moves the Answer
The value is most sensitive to the required return and long-run growth. At 11% rather than 12%, the two-stage value rises to about $26.4 million; at 13%, it falls to about $21.0 million. The school contract's renewal matters too: if it lapsed after five years, growth would revert sooner and the value would fall.
Conclusion
North Star's equity is worth about $20 million under conservative constant growth and about $23.4 million when the school contract's growth is recognized, a result supported by multiples of comparable firms. Adjusting for the stake's lack of marketability gives the retiring partner's shares a fair value of about $4.6 million to $4.9 million, a range both sides can examine and the bank can accept.
References
Brigham, E. F., & Ehrhardt, M. C. (2020). Financial management: Theory and practice (16th ed.). Cengage.
Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset (3rd ed.). Wiley.
Gordon, M. J. (1959). Dividends, earnings, and stock prices. Review of Economics and Statistics, 41(2), 99-105. https://doi.org/10.2307/1927792
BUS 550 Module 4 instructions, in plain terms
Aspen's catalog for BUS 550 includes stock valuation and the links among risk, return and value, and a valuation module usually asks students to value a company's shares with discounted cash flow methods and compare the result with other approaches. Check your classroom's instructions for required models; this example values one private stake. Define clearly what is being valued, such as a whole company or a minority stake. Estimate the cash flows to equity and justify their growth. Choose a required return with reasons. Apply at least one discounted cash flow model and show the calculations. Cross-check with multiples of comparable firms. Adjust for features of the stake, such as control or marketability. Present the result as a range and explain what drives it.
How the BUS 550 Module 4 example is put together
The paper opens with North Star Dairy Distribution, its owners and the buy-sell agreement that requires a valuation. Free cash flow to equity of $1.8 million next year is estimated from the past three years. Gordon's Review of Economics and Statistics article supplies the constant-growth model, giving $1.8 million divided by the 9-point gap between the 12% required return and 3% growth, or $20 million. A two-stage model discounts five years of cash flows growing 8% and a terminal value of about $28 million, for a total of about $23.4 million. Damodaran's Investment Valuation guides the choice of growth stages and terminal assumptions. Multiples of 6 to 7 times operating earnings give $21 million to $25 million. A 20% discount for lack of marketability is applied to the minority stake, producing a range of about $4.3 million to $4.9 million for the partner's shares.
BUS 550 Module 4 rubric: what earns full marks
Valuation papers in an MBA finance course are marked on correct definitions of cash flow and required return, accurate model calculations, sensible assumptions and a conclusion presented as a defensible range. This example states what is being valued and why the distinction between the whole company and a minority stake matters. Both models are calculated step by step, so the grader can check that the two-stage result of about $23.4 million follows from the stated inputs. Gordon's article grounds the growth model, Damodaran's book supports the two-stage structure and the marketability discount, and Brigham and Ehrhardt's text supplies the required return logic. The multiples cross-check guards against errors in the cash flow model. Presenting a range and naming the assumptions that move it most shows the judgment valuation requires.
BUS 550 Module 4 help: mistakes that cost marks
A frequent error in Module 4 is applying the constant-growth formula with a growth rate close to or above the required return, which produces absurd values. Keep long-run growth near the economy's rate and well below the discount rate. Another is mixing cash flows and discount rates that do not match, such as discounting cash flows to all investors at the cost of equity. Define your cash flow carefully. Show each step of the calculation. Use more than one method and explain differences. When valuing a private or minority stake, consider marketability and control, since a quarter of a private company rarely sells for a quarter of its full value. Give the answer as a band of values and point to the inputs that swing it hardest, such as growth and the required return.
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BUS 550 Module 4 questions, answered
What does BUS 550 Module 4 usually ask for?
Aspen's BUS 550 covers stock valuation in this module, so valuing a company's shares with discounted cash flow methods and comparing approaches is typical. Follow your classroom prompt.
What is the constant-growth model?
A valuation formula that divides next year's cash flow or dividend by the difference between the required return and a constant long-run growth rate.
Why use a two-stage valuation model?
Because many companies grow faster for a few years before settling to a stable rate; the model values the high-growth years separately and adds a terminal value for the rest.
Where can I find a free BUS 550 Module 4 sample paper?
The complete valuation is shown above: a retiring partner's stake in a dairy distributor valued with constant-growth and two-stage models, multiples and a marketability discount.
What is a discount for lack of marketability?
A reduction in value for shares that cannot be sold quickly in a public market, common when valuing stakes in private companies.