Description Frame in New Media Financial Knowledgeware Income Statement Illustration
The New Media Financial Knowledgeware Enterprise Edition features FULL STRENGTH corporate valuation and acquisition analysis. Enough bragging, let's simply walk through an example. The RCM Financial Group will acquire the Microsoft corporation in a slightly leveraged buyout (MSFT is flush with cash, so we will pay the debt back immediately). I just may send a copy of the New Media Financial Knowledgeware results to Bill Gates. I hope he appreciates it.
Use this URL to View the Assumptions and Income Statements rcmfinancial.com
Before we go on, review the assumptions used in the model. Of particular import is the capitalization structure. It proposes a leverage buyout using 30% common equity and the balance split between relaitvely high quality, senior and sub-senior bonds. Therefore, RCM will need a larger suite of credit worthy backers in order to keep expenses down.
Next, we proceed to the Income Statement.
Revenues/sales are projected with present growth rate and the plethora of new products expected to be released over the next 3 years, encroaching upon the UNIX market and capitalizing on new media ventures and Internet commerce.
Cost of revenues assume the current software cost structure with the incremental inclusion of the additional costs of new media revenue production.
Sales & marketing will be increased over the nest three years (see valuation primer part I)
General and administrative expenses are to increase gradually as the mix of software and other products changes.
R&D and upfront marketing are to be just short of excessive (see valuation primer part I). They will be amortized over a five (depending on the individual project) year period, with each 20% depreciation charge to offset any income produced by the R&D results. This is the proper way to do it. Accrual accounting measures, such as in Annual Reports, allow R&D and upfront marketing costs to be lumped up front and considered an expense, when they are really an intermediate to long term investment. As you can note they are a significant amount of our new companies growth.
EBITDA =Earnings before interest, taxes, depreciation and amortization. This is a useful number for it gives earnings before many (but not all) of the accrual accounting tricks can be played.
Amortization of Goodwill - as you can see this is a significant expense that robs from the accounting earnings and gives to the??? I don't know where it goes. It is a pure ACCOUNTING term, and has no business in valuation process. If you notice it does not show up in the cash flow, DCF, or EVA analyses. Goodwill is the premium paid over the book value of a company (see Valuation Primer part I). It is amortized to account for that premium when it should be added to invested capital, as an additional hurdle for the New companies investments to overcome.
Amortization of Intangibles - includes R&D and upfront marketing investments.
Preferred dividends - we decided not to include preferred, even though that could have been a way to shovel some cash back into some pockets.
Net Income Available to Common - notice that the new Microsoft has negative earnings for the first three year of its existence. Uh Oh!!! Plunging share prices!!! Management in shareholder lawsuits!!! More like management in Armani suits!!! Let's take a look at cash flows and net values. Remember, we get special gifts from the IRS when we use these accrual rules to say we don't make money. All we have to do is put it in ongoing investments and not on our income statement.
The next post will be on the Traditional Cash Flow Statement, followed by about 13 other very informative and educational sections of the model including discounted cash flow, IRR, EVA, MVA, and debt repayment schedules.
Remember, anyone who wants to download the actual knowledge ware model can do so by filling out the form at rcmfinancial.com then proceeding to through the download link. This is a link to the retail model. If you are a decision maker at a medium to large enterprise and are intersted in alpha testing the enterprise model, leave a note at the subscription link given above, along with your position, company name and email address. |
