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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 com-panies 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:

CERMCOBALANCE SHEETDECEMBER 31Thousands20X5 20X4 20X3Assets Current assets Cash and cash equivalents $ 390 $1,386 $ 2,603 Short-term investments — — — Net receivables720 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 Goodwill545 1,757 2,194 Intangible assets999 1,844 3,644 Accumulated amortization — — — Other assets— — — Deferred long-term asset charges — — — Total assets$4,357 $6,378 $11,012Liabilities 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 stock3,014 3,211 2,333 Common stock16 16 13 Retained earnings225,513223,814219,165 Treasury stock— — — Capital surplus25,168 25,564 25,862 Other stockholders’ equity22421,13121,563 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

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