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In connection with their respective income approaches to
valuation, both Mr. Sliwoski and Mr. Kramer concluded that some
of Renier’s assets were not necessary for its core retail
operation. After excluding the income and expenses associated
with these “nonoperating” assets, both experts estimated the
value of Renier’s “operating” assets on the valuation date by
capitalizing an estimate of Renier’s expected future income.
Each expert then added his income-based valuation of Renier’s
operating assets to an asset-based estimate of the nonoperating
assets to produce a total valuation figure.
As part of their income capitalization approaches, the
experts agreed that the appropriate starting point for estimating
Renier’s expected future income was to take an average of
Renier’s historical reported net income.4 The experts further
agreed that it was necessary to make certain adjustments to
4 Although Mr. Sliwoski believed that cash-flow, rather than
net income, was the appropriate income base to capitalize, he
concluded that net income was an adequate approximation for cash-
flow. In reaching this conclusion, he assumed that Renier’s
accounts receivable and inventory levels were sufficient as of
the valuation date to sustain probable future growth, that
required equipment additions would equal Renier’s depreciation
expense, and that no interest-bearing liabilities, other than
short-term liabilities, would be required to finance probable
future sales growth. In addition, as discussed infra, since Mr.
Sliwoski used a capitalization rate based on returns to both
equity and debt, it was necessary for him to add back Renier’s
interest expense to the income base used in his capitalization
formula.
Mr. Kramer used net income as his base for capitalization
but believed that an adjustment to the capitalization rate was
required to account for the fact that he was employing net income
rather than cash-flow as his base.
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Last modified: May 25, 2011