Question

Paul Jenkins is valuing Rose Inc, a private manufacturing company. He gathers the following information regarding the company:

	Reported ($)
Revenues	7,565,500
Less: Cost of goods sold	4,387,990
Gross profit	3,177,510
Less: Selling, general, and admin. expenses	2,450,600
EBITDA	726,910
Less: Depreciation and amortization	430,000
Earnings before interest and taxes	296,910
Less: Pro forma taxes @ 40%	118,764
Operating income after taxes	178,146

The following information is also available:

Daniela Castano is the principal shareholder and CEO of Rose Inc. Her compensation for the year was $1.5 million, which was included in the company's selling, general, and administrative expenses (SG&A). Paul believes that a market-based compensation expense of $2 million is suitable for a CEO for this company.

Daniela's brother, Juan Diaz, provided consultancy services to the company for $10,000. These expenses were included in the company's SG&A. However, Paul believes that a suitable market-based compensation expense for such consultancy is $15,000.

The company incurred expenses amounting to $300,000 on a farmhouse, which Paul does not consider necessary for the core operations of the company. $200,000 worth of expenses was included in SG&A, while $100,000 was included in depreciation expense.

Daniela recently took a personal holiday for which she charged the company $4,000. These are included in the company's SG&A.

The company's normalized operating income after taxes is closest to:

Select one:

a. -$4,090

b. $57,546

c. $52,746

Answer 1

b:$ 57546

Revenues	7565500
Less COGS	4387990
Gross Profit	3177510
Less: SGA expenses	2751600
EBITDA	425910
Less: Depreciation and Amortizations	330000
EBIT	95910
Less: Taxes	38364
Operating income after taxes	57546

WORKINGS

Notes:

SG&A expenses are increased by $500,000 for additional fair compensation. They are increased by $5000 for additional consultancy services. $200,000 is deducted for removal of expenses on farmhouse. $4000 is deducted for personal holiday expenses of Daniela.

Depreciation expense is reduced by $100,000 for removal of expenses on farmhouse.