Question

Recast Frosty Footwear's income statements for the last two years considering the potential income statement adjustments under the income approach to business value. Calculate the Non-Recasted and Recasted EBITDA.

Exhibit 1: Frosty Footwear Inc. Income Statements for Years 2005-2007 2007 2006 2005 $ 2,248,511 41,300 $ 1,789,429 30,172 $ 2,050,742 31,800 Sales Units Sold Cost of Goods Sold 596,194 185,736 26,921 12,434 62,723 Material 771,007 251,120 25,719 693,945 207,823 18,374 19,110 95,798 Direct Labor Rent Allocation 11,131 77,157 Depreciation Allocation Other 1,136,134 Total Cost of Goods Sold 884,008 1,035,050 $ 1,112,377 $ 1,015,692 Gross Profit 905,421 Operating Expenses 138,238 23,900 22,331 47,422 23,912 122,089 32,551 104,310 25,162 4,008 1,995 12,600 107,534 367,186 Owners/Mgt Compensation CEO Bonus Compensation Salaries & Wages 151,000 4,270 29,395 99,177 24,447 154,430 133,000 20,327 139,523 45,131 20,793 71,815 14,000 94,304 29,021 14,224 3,901 12,600 42,310 210,169 Professional Fees Rent Allocation Commissions Bad Debts Advertising & Promotion 74,302 25,184 24,582 2,814 12,600 19,517 264,125 Trade Shows Research Depreciation Allocation Amortization--Purchase Debt Interest Other Expense Total Operating Expenses 1,033,238 885,843 851,118 $ 164,574 Operating Profit 79,139 19,578 %24

Answer 1

EBITDA Calculation
	2005-$	2006-$	2007-$	2008-$	2009-$	2010-$
Operating Profit ( before Tax)	1,64,574	19,578	79,139	3,25,000	3,75,000	4,50,000
Add:
Depreciation Allocation	3,901	2,814	1,995	3,230	4,050	4,200
Amortization- purchase debt	12,600	12,600	12,600	12,600	12,600	12,600
Interest	42,310	19,517	1,07,534	1,17,630	1,34,955	1,56,548
EBITDA Calculation	2,23,385	54,509	2,01,268	4,58,460	5,26,605	6,23,348
( Earning before Interest , Tax , depreciation and Amortization)

EBITDA Calculation- recasted		2006-$	2007-$
Operating Profit ( before Tax)		3,93,121	5,46,615
Depreciation Allocation		2,814	1,995
Amortization- purchase debt		12,600	12,600
Interest		19,517	1,07,534
EBITDA Calculation		4,28,052	6,68,744