Boston Beer Co. Inc. Case Solution
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.
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 
Red hooks Ale 
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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