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Acme has had research and development activities, and those costs have ranged from $250,000 to
$500,000 per year over the past five years. Management does not expect any significant product
developments in the near future.
Victoria‟s financial analysis includes looking at Acme‟s dividend-paying capacity. Because the
company is private, she asks for information about compensation paid to family members and
perquisites. Victoria finds that officers‟ compensation, shareholder distributions, and perquisites over
the past five years have been as follows:
Private firms are often operated to minimize taxable income and therefore taxes. In contrast, public
companies are usually operated to maximize earnings for their shareholders and to increase share
prices.
When valuing a firm, a financial analysis should make adjustments so that revenues and expenses
are normalized. In this case, Victoria analyzes the amount of wages the family members have taken
from the firm and compares that amount with lower market wages of other people employed in similar
positions. The difference between the two amounts is a form of Acme‟s profits flowing out of the firm
as wages instead of dividends. Victoria‟s analysis strives to identify the firm‟s total earnings, even
though they are different from what is reported on the income statement.
In addition, Acme has about 240 employees at its six locations. The top three individuals in
management are family members, including Bob. Should the company be sold, it is unlikely that the
three family members would remain working there.
Summary of Positive and Negative Fundamental Factors
As a result of Victoria‟s analysis, she identifies the following key positive and negative factors of the
firm.
Positive
• Acme has been in existence for 20 years.
• Acme has a long-term history of growing sales and profits.
• Acme owns several trademarks for products that are well known.
• Acme has diversification in the number of its manufacturing locations.
• Acme‟s industry outlook is moderately positive.
• The demand for Acme‟s products is expected to continue.