Valuation for Financial Reporting : Fair Value Measurements and ...

Case Study 1: Determining Goodwill and Other Intangible Assets 89Exhibit 3.9c Target Company Projected Cash Flows Over Competitive Time HorizonScenario 2: Without Noncompete Agreement with Seller in Place Discounted Cash Flow Analysis($000s)Assumptions 2007 2008 2009 2010 2011Cost of Goods Sold 40.0% 39.0% 39.0% 39.0% 39.0%Operating Expenses 30.0% 29.0% 29.0% 29.0% 29.0%Capital Expenditures Percent of Sales 1.0% 1.0% 1.0% 1.0% 1.0%Estimated Effective Tax Rate 40.0% 40.0% 40.0% 40.0% 40.0%Debt-free Net Working Capital Percent of Revenues 15.0% 15.0% 15.0% 15.0% 15.0%Base Year Revenues 2006 $60,000For the Years Ended December 31,2007 2008 2009 2010 2011(1) Total Revenues $69,000 $79,350 $89,269 $98,196 $108,015Decline in Revenues Caused by Competition of Seller 10% 20% 10% 0% 0%Decline in Revenues $6,900 $15,870 $8,927 $0 $0Adjusted Base Revenues 62,100 63,480 80,342 98,196 108,015Cost of Goods Sold 24,840 24,757 31,333 38,296 42,126Operating Expenses 18,630 18,409 23,299 28,477 31,324EBITDA $18,630 $20,314 $25,710 $31,423 $34,565EBITDA Margin 30.0% 32.0% 32.0% 32.0% 32.0%(2) Depreciation $2,795 $4,126 $3,535 $3,120 $2,544Amortization 8,433 8,433 8,433 8,433 8,433EBIT $7,402 $7,755 $13,742 $19,870 $23,588EBIT Margin 11.9% 12.2% 17.1% 20.2% 21.8%Income Taxes $2,961 $3,102 $5,497 $7,948 $9,435Debt-free Net Income $4,441 $4,653 $8,245 $11,922 $14,153Debt-free Net Income Margin 7.2% 7.3% 10.3% 12.1% 13.1%Plus: Depreciation $2,795 $4,126 $3,535 $3,120 $2,544Plus: Amortization 8,433 8,433 8,433 8,433 8,433Less: Capital Expenditures (621) (635) (803) (982) (1,080)(3) Less: Incremental Working Capital (315) (207) (2,529) (2,678) (1,473)Debt-free Net Cash Flow $14,733 $16,370 $16,881 $19,815 $22,577Footnotes:(1) Based on Business Enterprise Analysis (BEA) – Cash Flow Forecast (Exhibit 3.5)(2) Depreciation in this exhibit give effect to an estimated reduction due to reduced net sales, which it is assumed would result inreduced capital expenditures.(3) Incremental Working Capital in Year 1 reflects a lower provision than shown in the Business Enterprise Analysis (BEA) - Cash FlowForecast (Exhibit 3.5) because the BEA provision normalizes from an actual balance, while the provision for the noncompeteagreement only accounts for the incremental amount necessary based on the growth of revenues. Incremental Working Capital inother years reflect different amounts than shown in the BEA (Exhibit 3.5) in order to fund working capital balances based ondifferent revenue projections.Note: Some amounts may not foot due to rounding.# Copyright 2007 by FVG Holdings, LC and Financial Valuation Solutions, LLC. All rights reserved. Used with permission.with the BEA, deductions are made for cost of goods sold and operating expenses.Contributory charges on the other identified assets are then taken.As already noted in Chapter 2, returns on and of or contributory charges representcharges for the use of contributory assets employed to support the subject assets and