Boston Beer Co. Inc. Harvard Case Solution & Analysis

THE BOSTON BEER COMPANY:

Boston Beer Company (BBC) is one of the leading beermanufacturing company in the craft beer segment in the United States. Boston Beer Company (BBC) belongs to the German family sixth generation business. Jim Koch, founder of the Boston Beer Company analyzes through US consumers wanta change in quality and taste of the beer they are consuming. Boston Beer Company (BBC) sales growth and market increases dramatically in the recent few years as they are using quality raw materials and are using the traditional approach of Europe for its high quality beer.

boston beer case solution

boston beer case solution

QUESTION # 01:Your assessment of the intrinsic value of Boston Beer at the time of the IPO including a discussion of the underlying assumptions (and the basis for them) that you have employed.

ANSWER 1:

Intrinsic value is the real value of the company by considering all the tangible and intangible factors of the organization. Beer Company (BBC) intrinsic value is analyzed through some practical assumptions of the financial management that has taken the value from two of the major competitors of the company. Now, further explanation about the intrinsic value, it is calculated by taking the price earnings ratio of Pete’s Brewing Company and Red hook Ale Brewery on the average basis, then multiplying this price earnings ratio with the actual earnings per share of the Boston Beer Company (BBC). The Price earnings ratio of the company indicates that how much time company has earned on its share price. Earnings per share shows per share amount that the company has earned on its floating shares. The average price earnings ratio of the competitorsPete’s Brewing Company and Red hook Ale Breweryare taken as the standard price earnings ratio for the Boston Beer Company (BBC), as both of these companies have recently done their initial public offering (IPO); the market norms shows that beer industry average price earnings ratio should be 68 times. The real earnings per share of $0.29 of the Boston Beer Company (BBC) are taken as it is mentioned in the financial statement of the company. Now, intrinsic value is calculated by multiplying both these factors,that is price earnings ratio and the earning per share discussed above, the intrinsic value of Boston Beer Company is $17.68 per share.As shown in Exhibit 1.

QUESTION # 02:A sensitivity analysis that explores the impact on your valuation of variation in assumed terminal revenue growth and EBIT margin.

ANSWER 2:

Sensitivity analysis shows that what changes occur in certain variable if there is change in another variable. Sensitivity analysis of revenue and Earnings before interest and taxes show that how much earnings before interest and tax of Boston Beer Company is sensitive that if any changes occurs would change the earnings before interest and taxes. Now if there is a 10 percent increase in the sale of the Boston Beer companyof the last year 1995 sales, earnings before interest and tax of Boston Beer Company (BBC) would increase by 16 percent as compared to increase in sales of just 10 percent. Earnings before interest and tax in the year 1995 are 6.91percent of sales. If there is an increase in sales of 10 percent in the year 1995 of the Boston Beer Company the earnings before interest and taxes to sale ratio will increase from 6.91percent to 7.32 percent.  If there is a decrease of 10 percent in the sales of Boston Beer Company (BBC) in the last year 1995 sales, earnings before interest of tax of Boston Beer Company Would reduce by 16 percent. Meanwhile, if there is a decrease in sales of 10 percent in the year 1995 of the Boston Beer Company the earnings before interest and taxes to sale ratio of 6.91 percent will decrease to 6.42 percent.As shown in Exhibit 1.

QUESTION # 03: Your IPO price?

ANSWER 3:

Boston Beer Company (BBC) is going to sell its shares to the general public through an Initial Public Offering (IPO). The average market price of the competitors Pete’s Brewing Company and Red hook Ale Brewery is $25.875 which is assumed to be as a par value for the Boston Beer Company (BBC). The intrinsic value of the Boston Beer Company (BBC) is $17.68. The Boston Beer Company should launch its initial Public offering (IPO) at a discounted price as the intrinsic value is less than par value set.

QUESTION # 04:A comparison and discussion of your valuation with the actual IPO price and the closing price on the first day of trade in 1995 (see finance.yahoo.com for historical prices). What does this comparison tell you, if anything, about IPO under-pricing?

ANSWER 4:

Actual amount of Initial public offering price (IPO) of the Boston Beer Company (BBC) is $12.5as compared to the market value of share................

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Capital markets may overcapitalized craft brewing industry during the flurry of new IPO. In the context of this "hot" IPO market valuation of each company may seem reasonable. However, after careful analysis of the financial statements of each company and on a review of analysts' forecasts growth in the industry perspective, it is unclear whether the craft brewing industry overcapitalized. This could be another "hot", the "collapse" IPO industries like biotechnology or computer disk drive industry. "Hide
by Amy P. Hutton, Christopher Charron Source: HBS Premier Case Collection 29 pages. Publication Date: April 14, 1996. Prod. #: 196138-PDF-ENG

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