American Greetings Harvard Case Solution & Analysis

American Greetings Case Study Solution 

WACC:

WACC is the minimum return which the investors want from American Greetings. WACC is calculated by multiplying the cost of equity with the weight of equity plus cost of debt multiply with the weight of debt. The WACC of American Greetings is approximately 9.6%. However, the current WACC is likely to be changed if the share buyback strategy is implemented because of the changes in capital structure.

Share Price as per EBITDA Multiple:

The share price of American Greetings as per the multiple of the average EBITDA of the industry is almost $32.53 per share. The average EBITDA multiple of the companies which are operating in the greeting card publishing sector is about 7.3 times, while the EBITDA of American Greetings is almost $204m. The enterprise value and the equity value of American Greetings are $1481m and $1246m respectively. The share price of American Greetings as per the EBITDA multiples is way higher than the current share price which suggests that the shares of AG are trading at a substantially lower value. In this scenario, it is recommended that the management should pursue the share buyback option.

Share Price as per P/E ratio method:

The P/E ratio of American Greeting is six times, it means that the earnings are generating the profits which are greater than earnings six times and the EPS is $2.22. The share price as per the P/E ratio method is also slightly greater than the actual amount on which the share are trading the share price is $13.32 per share.

Earnings per Share:

The earnings per share under the bullish scenario is quite favorable for American Greetings, on the other hand, the earnings per share under the bearish scenario is substantially low especially in the years 2014 and 2015. The main reason for this is the positive growth prospects under the bullish scenario regarding the revenues and operating profits, as light reduction in the operating profit and revenue growth might seriously change the figures of EPS and free cash flows.

Appendixes:

Valuation of American Greetings as per Multiples and P/E ratio:

Value of American Greetings
Valuation as per EBITDA multiple
Outstanding number of shares 38.32
EBITDA Multiple 7.3
EBITDA of American Greetings 204
Enterprise Value 1481.23
Less: Debt 235
Equity value of American Greetings 1246.59
Share price 32.53
Valuation as per P/E ratio method
P/E ratio 6
EPS 2.22
Share price 13.32

 

WACC:

Risk free rate 2.80%
Market risk premium 5.50%
Beta           1.63
Cost of equity 11.77%
Credit spread 5.76%
Rsik free rate 2.80%
Cost of debt 5.22%
Market Value of equity 479.38
Market value of debt 235
WACC 9.61%

 

Free Cash Flows:

Bullish 1 2 3 4 5
2011 2012 2013 2014 2015
Net Income 118 129 142 156 171
Add: Interest (1-Tax) 14 14 14 14 15
Less: Change in working capital                  -            (52)            (18)            (14)            (11)
FCF              131            195            174            184            196
Discounted FCF              120            162            132            127            124
WACC 9.61%
NPV  $          665
Share Price  $      17.35

 

 

Bearish 1 2 3 4 5
2011 2012 2013 2014 2015
Net Income 118 128 138 147 155
Add: Interest (1-Tax) 14 14 14 14 14
Less: Change in working capital                  -            (55)            (22)            (18)            (16)
FCF              131            196            173            179            185
Discounted FCF              120            163            131            124            117
WACC 9.61%
NPV  $          655
Share price  $      17.10

American Greetings Harvard Case Solution & Analysis

 

 

Earnings per Share:

Bullish 2011 2012 2013 2014 2015
Net Income 118 129 142 156 171
Outstanding Shares 38.3 38.3 38.3 38.3 38.3
EPS (Bullish)           3.07           3.37           3.70           4.06           4.45
Bearish 2011 2012 2013 2014 2015
Net Income 118 128 138 147 155
Outstanding Shares 38.3 38.3 38.3 38.3 38.3
EPS (Bearish)           3.07           3.34           3.60           3.84           4.05

 

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