Instructor key — Module 4: Quality of Earnings (QoE) Self-Defense: Defending and Haircutting Add-Backs
Instructor/solutions version. Keep separate from the student assignment during assessment.
Calculation solution
A claimed $40,000 add-back includes $8,000 capitalized spending, $11,000 recurring expense and requires $6,000 replacement expense. Calculate the accepted net adjustment.
Calculated result: 15,000.00000000 (actual USD, except where the question requests a ratio or return). Only $32,000 reduced EBITDA; $17,000 of that benefit is recurring or replaced. Use appropriate display rounding while retaining formula precision. This result is generated from the independent assignment inputs, not copied from the chapter answer.
Conceptual and judgment marking
A complete conceptual response identifies the measure's economic purpose, the defined perimeter and the risk of confusing it with another metric. Award up to 20 points for explanation, not terminology alone. For the applied question, award up to 15 for linking evidence to a concrete acquisition consequence; do not require an optimistic recommendation.
Spreadsheet marking
Award 15 of the 30 spreadsheet points for live links from assumptions, 10 for a coherent 10% mutation and predicted direction, and 5 for units, readable formatting and checks. Inspect formulas directly rather than accepting cached numbers. Use the instructor workbook for the controlling capstone model; this independent lab uses different inputs.
Calculation marking: 10 points for the correct equation/perimeter, 15 for intermediate arithmetic, and 10 for result, units and rounding. Overall pass requires 80 and all critical checks in the student version.
Original chapter practice solutions
The following solutions were moved out of the chapter so full answers no longer sit immediately below student questions. Match them in order to the chapter's practice problems.
Worked solution: Begin with the $42,000 expense that affected EBITDA. Keep $12,000 recurring consulting and deduct $5,000 replacement expense. The accepted adjustment is $25,000. The $8,000 capitalized amount cannot be added to EBITDA. The $25,000 difference from the seller's claim has three separate explanations, each of which should appear in the register.
Worked solution: Reduce earnings by $20,000 for management, $12,000 for truck costs, $4,000 for travel, and $15,000 for rent. Total reduction is $51,000, producing $565,000 EBITDA. The illustrative EV reduction is $51,000 × 4 = $204,000. No additional inventory or repair adjustment is made because those treatments are unchanged from the base bridge.
Worked solution: Keep the earned revenue and associated operating profit, but reflect the delayed receipt in receivables and the cash forecast. Under a simple isolated sensitivity, the delay can absorb $80,000 temporarily. Test liquidity and financing capacity. If new evidence instead establishes a dispute or unearned sale, reassess collectibility or revenue recognition; do not use the same treatment for all three situations.
Worked solution: The reported year contains only half the required annual cost. Deduct the missing $45,000 to reach $455,000 recurring EBITDA. Deducting the full $90,000 would charge the first half twice. The forecast should then include the full annual expense prospectively, with hiring timing modeled separately if necessary.
Worked solution: The escrow may secure a defined claim, depending on final documents, but it does not replace $100,000 of recurring annual contribution. The buyer should run customer-retention and loss scenarios, assess fixed-cost response and debt service, and require appropriate resolution or revised economics. Contract security and sustainable operating earnings address different exposures. A rational decision may be to pause, reprice, restructure, or decline even if the escrow is collectible.