(v5110.00) Normalized Operating Profit Adjustment

Use this item to change, or “normalize,” for valuation purposes, the period-by-period values for Taxable Operating Profit (v3210) that you consider abnormally high or low because of prevailing industry or economic conditions that are not expected to continue. Under most methods of calculating residual value, taxable operating profit forms the basis for calculating residual value in each period. An unusually high or low value for Taxable Operating Profit (v3210) correspondingly overstates or understates Residual Value (v5030) for that period.

This item is useful when valuing companies in industries having cyclical sales and profits or that are particularly affected by the general economy.

If you enter adjustments for periods, the amount is added to Taxable Operating Profit (v3210) for each period entered and is used in calculating Residual Value (v5030). While it affects the valuation, it will not change Operating Profit (v1150) as it appears on the Income Statement in Strategic Finance.

For example, if you believed that the third-period Taxable Operating Profit (v3210) figure of $1,000 was abnormally high and should be normalized to $700, you would enter an adjustment of -300 in the third period.

Note: This adjustment is appropriate only if you are using a residual value method that uses a perpetuity cash flow in its calculation: Perpetuity Method, Growth in Perpetuity, and Value Growth Duration.