Overview of Valuation Approaches and Methods

As previously specified, various approaches have been used to value the Company. These
approaches, described below, are the:
1. Asset Approach
2. Income Approach,
3. Market Approach, and
4. Other.
The Asset Approach is generally considered to yield the minimum benchmark of value for an
operating enterprise. The most common methods within this approach are Net Asset Value and
Liquidation Value. Net Asset Value represents net equity of the business after assets and liabilities
have been adjusted to their fair market values. The Liquidation Value of the business represents
the present value of the estimated net proceeds from liquidating the Company’s assets and
paying off its liabilities.
The Income Approach serves to estimate value by considering the income (benefits) generated
by the asset over a period of time. This approach is based on the fundamental valuation
principle that the value of a business is equal to the present worth of the future benefits of
ownership. The term income does not necessarily refer to income in the accounting sense but to
future benefits accruing to the owner. The most common methods under this approach are
Capitalization of Earnings and Discounted Future Earnings. Under the Capitalization of Earnings
method, normalized historic earnings are capitalized at a rate that reflects the risk inherent in the
expected future growth in those earnings. The Discounted Future Earnings method discounts
projected future earnings back to present value at a rate that reflects the risk inherent in the
projected earnings.
The Market Approach compares the subject company to the prices of similar companies
operating in the same industry that are either publicly traded or, if privately-owned, have been
sold recently. A common problem for privately owned businesses is a lack of publicly available
comparable data.
The Other methods consist of valuation methods that cannot be classified into one of the
previously discussed approaches. The methods utilized in the Other Approach are Capitalization
of Excess Earnings and Multiple of Discretionary Earnings. Commonly referred to as the “formula
method,” the Capitalization of Excess Earnings method determines the value of tangible and
intangible assets separately and combines these component values for an indication of total
entity value. Under the Multiple of Discretionary Earnings method, the entity is valued based on a
multiple of “discretionary earnings,” i.e., earnings available to the owner who is also a manager.
Both of these methods are normally used to value small businesses and professional practices.
The methods utilized under each approach are presented and discussed in the following
Net Asset Value
The Net Asset Value of Netgroup A/S is estimated to be DKK 20,172,185. The Net Asset Value
method assumes that the value of a business will be realized by the hypothetical sale of its net
assets as part of a going concern. In our analysis, assets and liabilities from the most recent
historic, unadjusted balance sheet have been adjusted to their individual tax bases. Assets and
liabilities were further adjusted to their individual appraised values. A tax adjustment in the
amount of DKK 0 was then estimated based on the difference between the appraised value and
the tax basis of assets and liabilities using an effective tax rate of 34.00%. The net result is the total
entity value.
Liquidation Value
The Liquidation Value of Netgroup A/S is estimated to be DKK 20,172,185. Liquidation Value is
defined as the present value of the net cash remaining if all assets are sold in a quick and
orderly, piecemeal sale and all liabilities are paid at face value with the proceeds. In our
analysis, the appraised value of individual assets and liabilities has been adjusted to reflect the
value that could be obtained in a quick and orderly liquidation. A tax adjustment in the amount
of DKK 0 was then estimated based on the difference between the appraised value and the tax
basis of assets and liabilities using an effective tax rate of 34.00%. In addition, estimated
liquidation costs in the amount of DKK 0 have been deducted. The net result is the total entity
value. See the Liquidation Value schedule for detailed value calculations and the Estimated
Liquidation Cost schedule for the calculation of estimated liquidation costs.
Discount & Capitalization Rate Estimates
For purposes of this analysis, various risk rates applicable to historic and projected earnings have
been estimated. Generally stated, these risk-adjusted rates reflect the expected rate of return
attainable on alternative investment opportunities with comparable risk.Private and Strictly Confidential
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First, a Discount Rate applicable to the Discounted Future Earnings valuation method has been
calculated. This Discount Rate is then converted into a Capitalization Rate for use in the
Capitalization of Earnings valuation method. These calculations are summarized in the table
Build-Up Model, Risk Factors:
Risk-Free Rate 2.00%
Market Equity Risk Premium 33.00%
Size Premium 25.00%
Discount Rate 60.00%
Less: Long-term growth in Net Income 0.00%
Capitalization Rate 60.00%
Divided by: 1 + Long-term growth in Net Income 0.00%
Historic Earnings Capitalization Rate 60.00%
Historic Excess Earnings Capitalization Rate 60.00%
In developing the Discount and Capitalization Rates to apply to the benefit stream of the
Company, the Build-Up Model was used. The Build-Up Model is based on a combination of risk
factors including a Risk-Free Rate, a Market Equity Risk Premium, a Size Premium and other
identifiable risk factors specific to the subject company. When added together, these risk factors
provide an indication of the Discount Rate for the subject company. This Discount Rate
represents the total return, in terms of cash flows and appreciation in value, which an investor
would require in order to make an equity investment in the subject company.
Capitalization of Earnings
The Capitalization of Earnings method arrives at an estimate of value by dividing current
normalized operations, which are weighted and averaged to approximate future earnings
expectations, by a capitalization rate. As shown below, The Total Entity Value of Netgroup A/S
based on the Capitalization of Earnings method is estimated to be DKK 6,951,309 In the
Capitalization of Earnings method, weighted average, normalized Net Income is divided by the
capitalization rate, 60.00%, to determine Total Entity Value. See the Income Statement
Adjustments section for a listing of any adjustments made to historic earnings and the Discount &
Capitalization Rates section for the capitalization rate calculations.
Capitalization of Earnings Normalized
Net Income
Fiscal Year End 2009 5,413,044 1.0 5,413,044
Fiscal Year End 2010 4,145,508 1.0 4,145,508
Fiscal Year End 2011 3,639,143 1.0 3,639,143
Sum of Weighted earnings 13,197,695
Divided by: Sum of weighting factors 3.0
Weighted average earnings 4,399,231
Divided by: Historic capitalization rate 60.00%
Operating value 6,951,309
Plus: Net non-operating assets 0
Total entity value 6,951,309Private and Strictly Confidential
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Net non-operating assets in the amount of DKK 0 has been added in the determination of Total
Entity Value under this method because net non-operating assets do not contribute to the
earnings capacity of the business. See the Net Asset Value schedule for the presentation of net
non-operating assets.
Discounted Future Earnings
The underlying premise for this valuation method is the basic valuation principle that an
investment in a business is worth the present value of all the future benefits it will produce for its
owner(s), with each expected future benefit discounted back to present value at a discount
rate that reflects the risk (degree of uncertainty) that those benefits may not be realized.
Therefore, the application of this method requires a determination of the present value of an
expected future income stream that the business generates for that owner.
To determine the expected future income stream, management prepared projections of the
financial statements for the first 5 years after the valuation date. An overall summary of the
projections is presented below, followed by the individual statements in condensed format. (See
the Projection Assumptions and Projection schedules for complete details.). This projection
reflects the fundamental change in the business system.

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