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according to him, a weighted average of net cash-flow was less
than the straight average of net income used by Mr. Frazier. It
is for this reason that Mr. Pratt believed that Mr. Frazier’s use
of net income, although technically incorrect, produced
acceptable results. However, we think that a weighted average is
inappropriate in this case, because of the cyclical nature of the
business and the fact that it was in a trough. The weighted
average gives too much weight to the lowest point of the cycle.
Thus, we use a straight average.
With respect to the 1987 fiscal year, the record does not
contain figures for four of the items of net cash-flow to equity;
namely, capital expenditures, proceeds from sale of capital
assets, changes in net working capital, and changes in long-term
debt. Both Mr. Frazier and Ms. Eggleston used averages for 1988
through 1991 (i.e., 4-year averages) for capital expenditures and
proceeds from sale of capital assets, while using averages for
1987 through 1991 (i.e., 5-year averages) for every other figure.
(Neither Mr. Frazier nor Ms. Eggleston used any figures for net
working capital or long-term debt.) We find that it is more
accurate to use 4-year averages for all of the figures rather
than 5-year averages for some and 4-year averages for others.
6(...continued)
then one, and the total is divided by the sum of the weights, or
10.
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