Boston Beer Co. Inc. Harvard Case Solution & Analysis

Discounted Cash Flow Technique:

The discounted cash flow method is used for valuation of the project on a present value basis. The cash flows of the project are calculated and discounted by the weighted average cost of equity to calculate the present value of the cash flows. Free cash flows of Boston Beer Company are calculated by adding back all the non cash expenses that are amortization and depreciation, and changes in working capital and capital expenditure to the net income of the company. The cost of equity is used as the discount rate to discount the cash flows. Cost of equity is calculated by using the capital asset pricing model. Few assumptions of the capital asset pricing model to be undertaken which is, risk free rate of return is assumed to be 5.35 percent, beta is assumed to be 1 and the average market risk premium is assumed to be 5 percent. There are certain limitations and assumptions of the capital asset pricing model (CAPM) that is investor would have the diversified portfolio, investors can invest its investment at risk free rate of return, market is totally perfect and market premium remain same throughout the decision. The cost of equity using the formula of the capital asset pricing model is 10.35 percent.

boston beer case solution

boston beer case solution

Assumptions:

All the assumptions are taken on an average basis from year 1992 to 1995 as the percentage of sales. All the assumptions taken for calculation of discounted free cash flow are mentioned in Exhibit 5.

The present value of free cash flows of Boston Beer Company is $31,253 and the present value of terminal value is $92,905 and per share enterprise value of Boston Beer Company  is $6.79. As shown in exhibit 3.

Multiple Valuation Technique:

The multiple Valuation technique is used to calculate the enterprise value per share. Boston Beer Company per share price can be calculated by using different multiples, that is sales multiples, earnings before interest, tax, amortization and depreciation (EBITDA) multiple or net earning multiple. Sales, EBITDA and EAT per share price is calculated by dividing the enterprise value with the value of sales, EBITDA and EAT. The per share value of using the sales multiple is $0.14 by the end of year 2000. The per share value of Boston Beer Company in earnings before interest, tax amortization and depreciation (EBITDA) multiple is $2.39. Per share value using the earnings is $5.47. All these calculations are shown in exhibit 4.

APPENDICES:

EXHIBIT 1:

Pete's Brewing
Company

Red hooks Ale
Brewery

Average

Stock Price

24.75

27.00

25.88

Price Earnings Ratio

100

36

68

INTRINSIC VALUE

Price Earnings Ratio

68

Earnings Per Share

$0.26

Value Per Share

$17.68

EXHIBIT 2:

SENSITIVITY ANALYSIS

Nine Months Ended

September 30,

1995

1995

1995

10%

-10%

Sales

121,895

134,085

109,706

Less excise taxes

12,990

14,289

11,691

Net sales

108,905

119,796

98,015

Cost of goods sold

51,615

56,777

46,454

Gross profit

57,290

63,019

51,561

Advertising, promotional and selling
Expenses

43,408

47,749

39,067

General and administrative expenses

5,455

5,455

5,455

Total operating expenses

48,863

53,204

44,522

Operating income

8,427

9,815

7,039

Gross Profit To Sales Ratio

6.91%

7.32%

6.42%

Increase/Decrease in EBIT

16.47%

-16.47%

EXHIBIT # 03

FORCASTED DISCOUNTED FREE CASH FLOW

1996

1997

1998

1999

2000

Revenues

227,537

318,552

445,973

624,362

874,107

Less: Excise Taxes

25,182

35,255

49,357

69,099

96,739

Net Sales

202,355

283,298

396,617

555,263

777,369

Cost of Sales

94,586

132,420

185,388

259,543

363,360

Gross profit

107,770

150,878

211,229

295,720

414,008

Advertising and selling expense

84,966

118,952

166,533

233,147

326,406

General and Administrative

11,811

16,536

23,150

32,410

45,374

Total Oprating Expense

96,777

135,488

189,683

265,556

371,779

Income (loss) from operations

10,993

15,390

21,545

30,164

42,229

Other Income (expense)

1

2

3

4

5

Interest Income

676

947

1,326

1,856

2,598

Interest Expense

(602)

(843)

(1,180)

(1,652)

(2,312)

Other Net

270

378

529

740

1,036

Total Other Income

344

482

675

944

1,322

Net Income

11,337

15,871

22,220

31,108

43,551

Tax Expense

5,423

7,592

10,629

14,881

20,833

Earning after Tax

5,914

8,279

11,591

16,227

22,718

Depreciation

1,597

2,236

3,130

4,382

6,135

Net Change in working capital

(974)

(1,364)

(1,909)

(2,673)

(3,742)

Net Change in capital expenditure

(2,485)

(3,479)

(4,870)

(6,818)

(9,545)

Free Cashflow

4,052

5,673

7,942

11,119

15,566

Discount Rate

0.9062

0.8212

0.7442

0.6744

0.6111

Present Value Of Free Cash flow

3,672

4,659

5,910

7,498

9,513

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