- 19 -
reported net income is appropriate.
b. Adjustment for Income From Excess Working
Capital
Both experts agreed that Renier’s cash and short-term
investments exceeded its working capital needs, that the excess
should be treated as a nonoperating asset, and consequently that
the interest earned by the excess should be subtracted from
reported net income as a normalizing adjustment. They disagreed,
however, on the size of Renier’s excess working capital and the
method of its calculation.
Mr. Sliwoski concluded that Renier only required working
capital equal to 7 days of annual sales (7/365 of annual sales),
which resulted in estimated working capital needs during the base
period ranging from $24,417 for 1989 to $35,152 for the partial
year ending on the valuation date. Consequently, Mr. Sliwoski
made a normalizing adjustment that subtracted all interest earned
by Renier during the base period and added back an estimated
amount of interest14 that would have been generated by the
working capital he estimated was needed.
Mr. Kramer concluded that Renier required working capital
equal to 2 months of average operating expenses during the base
period, plus 1.5 times average monthly inventory purchases in
1994, or $259,205 on the valuation date, leaving $362,038 in
14 Mr. Sliwoski computed interest for this purpose at a rate
of 5 percent. To avoid “unwarranted controversy”, Mr. Kramer
adopted the same rate for purposes of his computations.
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