Question Cermco produces and sells specialty customer relationship management (C

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Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base.

A major reason for Cermco’s success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermco’s CRM because of its superior features.

Annual revenues for Cermco’s three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues.

Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermco’s CRM product continues to enjoy the highest industry ratings and a loyal customer base.

Cermco’s balance sheets for the most recent three years follow:

CERMCO

Balance Sheet

December 31

20X5

20X4

20X3

Assets

Current assets

Cash and cash equivalents

$390

$1,386

$2,603

Short-term investments

—

—

—

Net receivables

720

664

1,225

Inventory

—

—

—

Other current assets

412

469

892

Total current assets

$1,522

$2,519

$4,720

Long-term investments

1,215

—

—

Property, plant, and equipment

76

258

454

Goodwill

545

1,757

2,194

Intangible assets

999

1,844

3,644

Accumulated amortization

—

—

—

Other assets

—

—

—

Deferred long-term asset charges

—

—

—

Total assets

$4,357

$6,378

$11,012

Liabilities

Current liabilities

Accounts payable

$469

$1,174

$1,436

Short/Current long-term debt

—

—

600

Other current liabilities

1,227

1,358

1,496

Total current liabilities

$1,696

$2,532

$3,532

Long-term debt

—

—

—

Other liabilities

—

—

—

Deferred long-term liability charges

—

—

—

Minority Interest

—

—

—

Negative goodwill

—

—

—

Total liabilities

1,696

2,532

3,532

Stockholders' equity

Misc. stock option warrants

—

—

—

Redeemable preferred stock

—

—

—

Preferred stock

3,014

3,211

2,333

Common stock

16

16

13

Retained earnings

–25,513

–23,814

–19,165

Treasury stock

—

—

—

Capital surplus

25,168

25,564

25,862

Other stockholders’ equity

–24

–1,131

–1,563

Total stockholders’ equity

$2,661

$3,846

$7,480

Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.

Comment

CERMCO

Balance Sheet

December 31

20X5

20X4

20X3

Assets

Current assets

Cash and cash equivalents

$390

$1,386

$2,603

Short-term investments

—

—

—

Net receivables

720

664

1,225

Inventory

—

—

—

Other current assets

412

469

892

Total current assets

$1,522

$2,519

$4,720

Long-term investments

1,215

—

—

Property, plant, and equipment

76

258

454

Goodwill

545

1,757

2,194

Intangible assets

999

1,844

3,644

Accumulated amortization

—

—

—

Other assets

—

—

—

Deferred long-term asset charges

—

—

—

Total assets

$4,357

$6,378

$11,012

Liabilities

Current liabilities

Accounts payable

$469

$1,174

$1,436

Short/Current long-term debt

—

—

600

Other current liabilities

1,227

1,358

1,496

Total current liabilities

$1,696

$2,532

$3,532

Long-term debt

—

—

—

Other liabilities

—

—

—

Deferred long-term liability charges

—

—

—

Minority Interest

—

—

—

Negative goodwill

—

—

—

Total liabilities

1,696

2,532

3,532

Stockholders' equity

Misc. stock option warrants

—

—

—

Redeemable preferred stock

—

—

—

Preferred stock

3,014

3,211

2,333

Common stock

16

16

13

Retained earnings

–25,513

–23,814

–19,165

Treasury stock

—

—

—

Capital surplus

25,168

25,564

25,862

Other stockholders’ equity

–24

–1,131

–1,563

Total stockholders’ equity

$2,661

$3,846

$7,480

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