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Historical Performance Measures Approach
To avoid having to take into account differing amounts of
leverage, Ms. Walker decided to perform her analysis on a “debt
free” basis. She examined Demco’s audited and unaudited
financial statements for the 5 years prior to the year of the
gifts, i.e., for 1987-91; she then used those statements to
develop measures of what Demco’s financial performance would have
been, if it had had no debt.11
The debt-free performance measures Ms. Walker developed were
the following:
1. Earnings before interest and taxes (EBIT) for 1991 and
for 1987-91.
2. Earnings before depreciation (including amortization),
interest, and taxes (EBDIT) for 1991 and 1987-91.
3. Debt free net income (DFNI) for 1991 and 1987-91.
4. Debt free cash-flow (DFCF) for 1991 and 1987-91.
5. Debt free book value of total invested capital (BVIC)
for 1991.
Ms. Walker determined that seven publicly traded companies
were sufficiently similar to Demco to serve as guideline
companies.12 She examined the performance measures and trading
11 Because she wanted to perform her analysis on a
continuing operations basis, Ms. Walker further adjusted her
performance measures to eliminate financial results attributable
to Demco’s media division, which was sold in June 1991.
12 The companies were Action Products International, Inc.;
(continued...)
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