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BACKGROUND

The Big Consumer Product Company acquires 100% of Green Grass Diapers for $ 540,000 on 12/31/x0. Green Diapers company is diaper manufacturer that specializes in the manufacture of organic diapers. It started off as a cloth diaper service company. After some R & D, they launched a reasonably successful brand of ecologically friendly diapers with the "Green Grass" trademark. Assume that Big Consumer Product Company is a publicly traded company. Green Grass is a debt-free company. Green Grass holds a patent for its ecologically friendly diaper technology. The management of Big Consumer Product Company provides you with the forecast shown below. The Base year is the current year with historical data. Details of buyer specific synergies are also provided. You have previously computed the weighted average cost of capital to be 15% for Green Grass Company which is consistent with the management's estimate. Your analysis suggests that market participant revenue and cost synergies are 4% of revenues and of COGS and Operating expenses respectively. REQUIRED: Clearly state all assumptions and show your workings.

Question: The Company is assessed to have a customer retention rate of 50% for its branded products . Also, since the market for ecologically friendly diapers is heating up, management expects new product launches by competitors to wipe out its existing customer base after 4 years. Also, typically customers stay on for a period of 4 years after they first start buying the company's products. EBIT margin as estimated (17.6% of sales revenue) included marketing costs to new customers equal to 2.40% . The valuation appraiser uses a discount rate of WACC plus a premium of 5% to value this asset. Your estimate of Contributory Asset Charges on patent, assembled workforce, trademark, PPE and net working capital is 9.35% of revenue. Estimate the value of the customer relationship asset. Clearly show the computation of the retention rate using a simple arithmentic average process

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