Gluten-Free Baked Goods has created a niche for itself by creating and marketing a line of gluten-free cakes and desserts. The company has annual sales of $5 million. It has grown slowly but steadily; the owners have avoided all debt and have relied on internal funds to sustain growth. The firm has no debt and has generated an after-tax operating income of $400,000. The firm purchased its supplies of sugar, gluten-free flour, specialty yeasts, and other raw ingredients from a number of suppliers. Even though the owners were offered 2/10 Net/30 terms by their suppliers, they paid cash on delivery. One of the owners stated the rationale for this as follows: “We hate to owe anybody anything. Once we have the supplies and if we like the quality, we like to pay when we get the delivery. After all, our customers pay us right when they buy our product!” The cost of goods sold were 80% of the sales. The owners were recently approached by another specialty food manufacturer who wanted to buy the business for $4 million. The interested firm explained that it had simply taken the perpetuity value of the most recent after-tax operating income using a cost of capital of 12% to arrive at the value. (The analysis included a long-term growth potential of 2% per year.) The estimated value was $400,000/(0.12 − 0.02). The owners generally agreed with all the assumptions but were still a bit unsure about the value. They felt that the offer failed to reflect the conservative policies that they have been following. Do you agree with the owners? What would be your estimate of the extra value that should be offered for Gluten-Free Baked Goods?