We will now set up our income statement to calculate net income available to common shareholders. However, we won't be able to actually compute net income yet because we do not know the levels of debt, preferred stock, and cash upon which interest expense/income in each year is to be calculated. Note that dividends on preferred stock are deducted when calculating the net income available to common shareholders to reflect preferred stock's priority over common equity in the capital structure. For simplicity, we have assumed that no dividends are paid on common stock. This makes sense, since all available income should normally be used to repay debt as quickly as possible, rather than distributed to shareholders. In fact, debt instrument term sheets may prohibit dividends to common shareholders until the company achieves specified leverage ratios or repays debt.
Note that in 2013, we assume noncontrolling (i.e. minortity) interest remains a constant percent of sales. Technically, this isn't a very good assumption because the minority shareholders would likely own only a stake in one or more subsidiaries of the target, rather than the consolidated target. It would be better to compute noncontrolling interest as a percent of the subsidiary's sales alone. Without detailed subsidiary financial results, however, this is the best we can do.comments powered by Disqus