Valuation for Mergers, Buyouts, and Restructuring, Second Edition

Technical Notes

NOTES TO CHAPTER 2

N2.1 Projecting Financial Statements Line Items

This note provides details about the line-item projections of AdvPak for each year t as shown in Exhibits 2.2–2.4.

Income Statements

• Sales_t = Sales_t−1 × (1 + Growth Rate of Sales_t)
• Cost of Sales_t = Cost of Sales as % Sales_t × Sales_t
• Gross Profit_t = Sales_t − Cost of Sales_t
• Sales, General and Adm. Expenses_t (SG&A_t) = SG&A_t as % of Sales_t × Sales_t
• Research and Development_t (R&D_t) = R&D as % of Sales_t × Sales_t
• EBITDA_t = Gross Profit_t − (SG&A_t + R&D_t)
• Depreciation_t = Depreciation as % PP&E_t × PP&E_t (PP&E from balance sheet)
• EBIT_t = EBITDA_t − Depreciation_t
• Interest Expense_t = Interest Rate on Debt_t × Debt_t−1 (Debt from balance sheet)

To simplify, interest expense is based upon the level of debt at the beginning of the year. An alternative computation is to base it on the average debt balance during the year. The effect on valuation is usually immaterial.

Interest Income_t = Interest Rate on Cash and Marketable Securities_t (C&MS_t) × C&MS_t−1 (C&MS from balance sheet)

Pretax Income_t = EBIT_t − Interest Expense_t + Interest Income_t

Current Income Tax_t = Tax Rate on Income_t × Pre-Tax Income_t − Deferred Tax_t

Deferred Tax_t = Tax Rate on Income_t × (Tax Depreciation_t − Book Depreciation_t)

Net Income_t = Pre-Tax Income_t − (Current Income Tax_t + Deferred Tax_t)

Balance Sheets

Cash and Marketable Securities_t = End of Year C&MS_t (from cash flow statement)

Accounts Receivable_t (AR_t) = AR as % of Sales_t × Sales_t

Inventories ...