Question
You have been asked to normalize earnings for Lewis Enterprises, a company that reported losses in the most recent year. The company has tripled its
You have been asked to normalize earnings for Lewis Enterprises, a company that reported losses in the most recent year. The company has tripled its revenues over the last 5 years and its loss is entirely attributable to a natural disaster during the course of the year that did not affect revenues for the year but caused substantial costs. The company reported revenues of $ 1 billion and an operating loss of $50 million in the most recent year; its products sell at a lower price than its competitors do. Which of the following would you use as your measure of normalized pre-tax operating income?
a. Average operating income earned over the last 5 years ($25 million)
b. Operating income based upon the average pre-tax margin of the sector (10%): 10% of $1 billion = $100 million
c. Operating income based upon the average pre-tax margin of the company over the prior 5 years (5%): 5% of $ 1 billion = $50 million
d. None of the above
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