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adequately explain. We modify Dr. Bajaj’s approach only to take
into account small amounts of other income, which he takes into
account in his rebuttal testimony. Dr. Bajaj’s projected profit
margin, based upon an unweighted arithmetic average of operating
margins from 1990-1994, and including “other income” (interest
and “Heck Cellars” revenue), is 12.3 percent. We find that to be
the proper assumed operating margin for purposes of determining
Korbel’s value on the valuation date under the DCF method.
c. Cashflow Adjustments
To determine cashflow, it is necessary to modify after-tax
income by adding back depreciation and subtracting working
capital additions and capital expenditures.
Depreciation averaged 3.8 percent of sales revenues during
the 1990-1994 period and 4.1 percent for 1993 and 1994.
Dr. Bajaj, relying on a 5-year average, projected depreciation at
3.8 percent of gross sales and Dr. Spiro, relying on a 2-year
average, projected it at 4.0 percent of gross sales. Although,
for 4 out of the 5 years, total depreciation grew as a percentage
of sales revenues, the question is whether the most recent
2 years is a better measure of the trend than the last 5 years.
Neither expert took the other head-on with respect to this point,
and, since, in general, we found Dr. Bajaj’s analysis to be more
thorough than Dr. Spiro’s, we shall rely on his 5-year average as
determinative.
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