The Boston Beer Company, Inc. Harvard Case Solution & Analysis

The Boston Beer Company, Inc. Case Study Solution

Intrinsic Value using a DCF Approach

The intrinsic value is the real value of the company and is calculated using the DCF approach. For the discounted cash flows the WACC is calculated around (appendix-2) using the cost of debt and cost of equity. For the cost of equity, the risk-free rate is the government 30-year Treasury notes 6.25% while the risk premium is assumed to be 7.2%.

For the calculation of free cash flow (appendix-3) the growth of 5% is assumed as the BBC’s sales growth rate is sustainable over the period. Thus the change in working capital and depreciation is assumed to be 5% with respect to the sales growth. The resultant cash flows are discounted to get the present value of future cash flows. Thus, the company’s intrinsic value is $5603.90 which is taken as the base for the calculation of IPO price for BBC. There is an assumption that the intrinsic value of the company is the equity value of the company. The number of shares for the determination of IPO price is 900,000 (from the case). Thus, after dividing the number of shares, the IPO price for the stock is $5.66.

Projected Long Term Growth for Craft Brewing Segment

Over the period of the last five years, the craft brewing segment had grown rapidly (approx. 40% per year) which is the reason why analysts expect long-term growth in craft brewing segment of about 25% to 40%.

With the rapid growth, the craft brewing segment faces severe competition in the market in terms of product quality and brand name as the significant growth rate encourages investors to invest in beer companies.

There are plenty of opportunities for craft beer companies to expand in the short term to gain profitability and growth. Although the long term effect would be different as the increasingly fierce competition and the saturated market of craft brewing segment hinders the long term growth of the craft beer companies.

With the excellent growth rate of Boston Beer, it may experience significant growth for a few more years; however, the industry growth will stabilize eventually. With the stabilization in industry growth, the long term growth rate for craft breweries may not be around 25% to 40%.

The overview of the beer industry is not expected to grow with such significant rates, as a consequence, the breweries will be in a constant struggle of maintaining a certain market share. Further, as soon as the market begins to mature, the companies will have to reduce expenses to increase the profits.

Thus, the growth rate of 25% to 40% in the craft brewing segment is unrealistic as the market is saturated and companies may find it difficult to maintain their significant market share.

Appendix-1 Boston Beer Company Performance

Boston Beer Company
Year Ended 9 Months Ending
31-Dec-93 31-Dec-94 30-Sep-95
Return on Equity
Profit Before Taxes/Net Sales 6% 8% 7%
x Net Sales/Average Assets 3.21 3.61 3.26
x Average Assets/Average Equity 2.72 4.81 2.52
= Return on Equity (pre-tax) 55% 135% 56%
Gross Profit/Net Sales 49% 48% 46%
SGA/Net Sales 48% 46% 45%
Operating Profit/Net Sales 6% 8% 7%
Interest Expense/Net Sales -0.003 -0.002 -0.002
Inventory Turnover 9.57 6.82 6.08
Avg Collection Period 38.38 31.98 50.52
Avg Accts Pay Period 30.01 95.36 46.24
Aggregate Size Measures
Net Sales (000’s) 77,151 114,833 108,905
Barrels Sold (000’s) 475 714 688
Total Assets (000’s) 24054 31776 33398
Total Shareholders’ Equity 8,854 6,600 13,229
Total Employees 110 138 174

Appendix-2 WACC Calculation

WACC Calculation
Total Assets 31,776
Long Term Debt 1,950
Total Equity 6,600
Debt to Total Assets 6%
Equity Ratio 94%
Pre Tax Income 9085
Income Tax Expense 3,765
Interest Expense 233
Interest Rate 12%
Tax rate 41%
Cost of Debt after Tax 7%
Beta 1
Risk Free Rate 6.26%
Market Risk Premium 7.5
Cost of Equity 7.5626
WACC 7.53%

Appendix-3 Intrinsic Value using DCF approach

Intrinsic value Using DCF calculation
  0 1 2 3 4 5
EBIT (1-TAX) 4,382 4601.03 4831.08 5072.63 5326.26 5592.58
change in Depreciation 561 589.05 618.50 649.43 681.90 715.99
less: change in WC 5,005 5255.25 5518.01 5793.91 6083.61 6387.79
CFO -62 -65 -68 -72 -75 -79
Change in FCI 395 415 435 457 480 504
FCFF 333 350 367 385 405 425
Terminal Value 5644.46
Discounting 349.58 317.46 310.00 4626.87
Intrinsic value 5603.90
IPO Price 5.66


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