PROBLEM 8-4 Given Cost of goods sold/Revenues 65% Fixed operating costs $ 350,00

Question

PROBLEM 8-4 Given Cost of goods sold/Revenues 65% Fixed operating costs $          350,000 Variable operating costs/Revenues 10% Depreciation expense $            50,000 Salary adjustments $          100,000 Annual outsourcing savings reduction 10% Historical Incomes Statements for Toys 'n Thing, Inc. 2014 2013 2012 Revenues $        2,243,155 $        2,001,501 $        2,115,002 Cost of goods sold          (1,458,051)          (1,300,976)          (1,374,751) Gross profits              785,104               700,525               740,251 General and Administrative Expenses*             (574,316)             (550,150)             (561,500) Net Operating Income $          210,789 $           150,375 $           178,751 *Includes depreciation expense of $50,000 per year. Solution a. Years 2014 2013 2012 Net Operating Income $           210,789 $           150,375 $     178,751 Plus: Depreciation expense                50,000                50,000          50,000 EBITDA $           260,789 $           200,375 $     228,751 Valuation EBITDA Multiple 2014 2013 2012 3 4 Average I would recommend Jason…. b. 2014 2013 2012 EBITDA $           260,789 $           200,375 $     228,751 Plus: Salary adjustments               100,000               100,000         100,000 Plus: Outsourcing savings Adjusted EBITDA Valuation EBITDA Multiple 2014 2013 2012 3 4 Average Asking price = 5 x 2014 Unadjusted EBITDA Estimated value after adjustments PROBLEM 8-4 Given Cost of goods sold/Revenues 65% Fixed operating costs $          350,000 Variable operating costs/Revenues 10% Depreciation expense $            50,000 Salary adjustments $          100,000 Annual outsourcing savings reduction 10% Historical Incomes Statements for Toys 'n Thing, Inc. 2014 2013 2012 Revenues $        2,243,155 $        2,001,501 $        2,115,002 Cost of goods sold          (1,458,051)          (1,300,976)          (1,374,751) Gross profits              785,104               700,525               740,251 General and Administrative Expenses*             (574,316)             (550,150)             (561,500) Net Operating Income $          210,789 $           150,375 $           178,751 *Includes depreciation expense of $50,000 per year. Solution a. Years 2014 2013 2012 Net Operating Income $           210,789 $           150,375 $     178,751 Plus: Depreciation expense                50,000                50,000          50,000 EBITDA $           260,789 $           200,375 $     228,751 Valuation EBITDA Multiple 2014 2013 2012 3 4 Average I would recommend Jason…. b. 2014 2013 2012 EBITDA $           260,789 $           200,375 $     228,751 Plus: Salary adjustments               100,000               100,000         100,000 Plus: Outsourcing savings Adjusted EBITDA Valuation EBITDA Multiple 2014 2013 2012 3 4 Average Asking price = 5 x 2014 Unadjusted EBITDA Estimated value after adjustments

Explanation / Answer

Answer:

a. Years 2014 2013 2012 Net Operating Income $           210,789 $           150,375 $     178,751 Plus: Depreciation expense                50,000                50,000          50,000 EBITDA $           260,789 $           200,375 $     228,751 Valuation EBITDA Multiple 2014 2013 2012 3 782367 601125 686253 4 1043156 801500 915004 Average 912761.5 701312.5 800628.5 I would recommend Jason…. b. 2014 2013 2012 EBITDA 260789 200375 228751 Plus: Salary adjustments 100000 100000 100000 Plus: Outsourcing savings 224316 200150 211500 Adjusted EBITDA 585105 500525 540251 Valuation EBITDA Multiple 2014 2013 2012 3 1755315 1501575 1620753 4 2340420 2002100 2161004 Average 2047867.5 1751837.5 1890878.5 Asking price = 5 x 2014 Unadjusted EBITDA 1303945 Estimated value after adjustments 585105

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