# 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

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

..........................................

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution