If net income is all cash, is Kevin’s valuation of the company approximately accurate? Which ratio most closely reflects Kevin’s valuation metric? Why is this ratio significant in Kevin’s assessment?

GIVEN IN VIDEO:

Stats for 3 Chips: (Only from what we know from video)

Ask: $300,000 for 15% Equity

Company Value: 2,000,000 (According to Seller)

600,000 (According to Jim)

Net Sales: $850,000 (460,000 on Apple)

Expenses: 35% of Sales or $297,500 yearly (without promotions)

50 to 55% of Sales or $425,000 to 467,500 yearly (Including Promotion)

Gross Margin: 65% - $552,500 yearly (Does not include marketing expense)

*Note: Gross Margin is Net Sales minus Cost of Goods Sold, As Promotion expense is not part of COGS it makes sense not to include it but it might be misleading

Promotion cost: 15 to 20% on Promotion or $127,500 or 170,000 yearly

Taxable Income: $425,000 or $382,500 year

*Note: Taxable Income is less than $500,000, It qualifies for small business deduction (Lower tax rate)

Taxes in 2013: 4.5% Provincial (Ontario) and 11% Federal 15.5% Combined,

↑ $65,875 or 43,987.50

Net Income: $359,125 or 338,512.5

Answer rating: 100% (QA)

1 Yes Kevins valuation is approximately accurate 2 Payback period is a good valuation metric consi... View the full answer