Business Valuation 611- The dividend payout ratio (the amount of cash f lows actually distributed
to shareholders; the remainder is reinvested in the company) ranges from
55% to 65% per year.
Residual Value
The DCF valuation methodology assumes the company will be sold at some
point in the future and the business owner will receive the proceeds. Victoria
assumes ACME will be sold five years in the future, on December 31, 2005.
(Five years is common among analysts for established businesses. Start-up
businesses may require financial projections for a longer period such as 10
years until the company’s earnings become stable.) The value of a company at
the end of the financial forecast is the residual value. The residual value of
EXHIBIT 18.5 ACME Manufacturing Inc.: Projected income statements
2001–2005.
($million)
Pro Forma 2001 2002 2003 2004 2005
Revenue $50.29 $56.32 $63.08 $70.02 $77.72 $85.50
Cost of goods sold 34.58 38.86 43.53 48.32 53.63 58.99
Gross profit 15.70 17.46 19.56 21.71 24.09 26.50
Operating expenses 5.95 6.76 7.57 8.40 9.33 10.26
Officers’ salary 1.54 1.75 1.96 2.17 2.41 2.65
Depreciation & amortization 1.00 0.88 1.01 1.14 1.28 1.43
Interest expense 0.84 1.04 1.10 1.14 1.21 1.28
Operating profit 6.37 7.03 7.92 8.85 9.87 10.88
Other expenses/(income) (0.30) (0.21) (0.21) (0.21) (0.21) (0.21)
Income before taxes 6.66 7.24 8.13 9.06 10.08 11.09
Income taxes 2.67 2.90 3.25 3.63 4.03 4.44
Adjusted net income $4.00 $4.34 $4.88 $5.44 $6.05 $6.65
Common Size
Pro Forma 2001 2002 2003 2004 2005Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 68.8 69.0 69.0 69.0 69.0 69.0
Gross profit 31.2 31.0 31.0 31.0 31.0 31.0
Operating expenses 11.8 12.0 12.0 12.0 12.0 12.0
Officers’ salary 3.1 3.1 3.1 3.1 3.1 3.1
Depreciation & amortization 2.0 1.6 1.6 1.6 1.6 1.7
Interest expense 1.7 1.8 1.7 1.6 1.6 1.5
Operating profit 12.7 12.5 12.6 12.6 12.7 12.7
Other expenses/(income) −0.6 −0.4 −0.3 −0.3 −0.3 −0.2
Income before taxes 13.2 12.9 12.9 12.9 13.0 13.0
Income taxes 5.3 5.1 5.2 5.2 5.2 5.2
Adjusted net income 8.0% 7.7% 7.7% 7.8% 7.8% 7.8%