Individual Research Paper

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yhxntbaanungr

Business Finance

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Every few weeks, you have been collecting information on your company. Your final paper will include a final submission of all your small papers into a large financial analysis. The analysis will also require you to calculate the intrinsic price of your company using a simulation I created with help from another university.

Here is a sample paper when I taught this course at another institution: Sample Advanced Corporate Finance Panera.docx

Here is the simulation we will use to calculate final intrinsic value: Stock Simulation.xls. You will be changing information on the master inputs start here page and I can help you with that.

you have 9 hours to finish this assinment. check the uploud

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FCFF VALUATION MODEL Before you start The spreadsheet has circular reasoning. This is not a problem. Go into calculation options (in excel) and check the iteration box. What the model does This model is designed to value firms with operating income that is either positive or can be normalized to be positive. It allows for up to 15 years of high growth, and can be used either as a 2-stage or a 3-stage model. Inputs The inputs are in the following pages: 1. The bulk of the inputs are in the master inputs page. Here, you can input the numbers from the current financial statements, and review and change the inputs for the valuation. 2. If you want to normalized operating income, use the earnings normalizer worksheet. 3. If you have R&D or operating leases, you will need to input the required numbers in those worksheets. Important: Be consistent about the units you use. If you use millions, use millions for all of your inputs. Options The spreadsheet can be used to value a company, with fixed inputs for a high growth phase and different inputs for a stable growth phase (2-stage model) or it can be adjusted to allow for a transition phase (3-stage model). To switch from one to the other, enter yes in the master input page to the question of whether you want the inputs adjusted during the second half of the high growth phase. You can even make it a stable growth model, by setting the length of the high growth period to zero. Other worksheets There are two other worksheets that you might find useful at the end of this spreadsheet 1. Bottom-up beta estimator: will estimate your levered beta, given an unlevered beta (which you will have to input. 2. Industry averages: Here, you can look up industry averages for variables such as beta, return on capital, reinvestment rates and working capital. Output The output is contained in the valuation model worksheet. n excel) and check normalized to be 3-stage model. and different inputs e (3-stage model). er you want the h you will have to urn on capital, Your Stock Intrinsic Price $512.07 Master Input Sheet Do you want to capitalize R&D expenses? Do you want to convert operating leases to debt? Do you want to normalize operating income? No No No If yes, please input your numbers into If yes, please input your numbers into If yes, please input your numbers into Inputs From Current Financials Current EBIT = Current Interest Expense = Current Capital Spending Current Depreciation & Amort'n = Effective tax rate (for use on operating income) Marginal tax rate (for use on cost of debt) Current Revenues = Current Non-cash Working Capital = Chg. Working Capital = Book Value of Debt = Book Value of Equity = Cash & Marketable Securities = Value of Non-operating Assets = Minority interests Market Data for your firm Is your stock currently traded? If yes, enter the following: Current Stock Price = Number of shares outstanding = Market Value of Debt = If no, enter the following Would you like to use the book value debt ratio? If no, enter the debt ratio to use in valuation $532,720.00 ! If negative, go back and choose to normalize earnin $1,751.00 $199,926.00 $96,054.00 38.74% 38.00% Previous year-end $3,214,591.00 $2,731,224.00 $343,104.00 $119,050.00 Previous year-end $0.00 $0.00 $1,538,228.00 $1,245,926.00 $323,203.00 $0.00 $0.00 $322,553.00 $0.00 $0.00 Yes $600.61 31,080.00 $0.00 No 35% General Market Data Long Term Riskfree rate= Risk premium for equity = 3.00% 5.00% Ratings Do you want to estimate the firm's synthetic rating = If yes, choose the type of firm If not, what is the current rating of the firm? Enter the cost of debt associated with the rating = No 2 BBB 5.75% Options Do you have equity options (management options, warrants) outstanding? No If yes, enter the number of options 51.00 Average strike price $40.35 Average maturity 8.3 Standard Deviation in stock price 25% You can use the cost of capital spreadsheet to compu ! If yes, use the rating estimator worksheet that is atta Do you want to use the stock price to value the option or your estimatedCurrent value?Price Valuation Inputs High Growth Period The questions below, especially the yes or no ones, can be confusing. P Length of high growth period = 10 Beta to use for high growth period for your firm= 0.97 You can use the cost of capital spreadsheet to compu Do you want to keep the debt ratio computed from your inputs? Yes If yes, the debt ratio that will be used to compute the cost of capital is 0.00% If no, enter the debt ratio that you would like to use in the high growth period 100.00% Do you want to keep the existing ratio of working capital to revenue? Yes If yes, the working capital as a percent of revenues will be 10.67% If no, enter the ratio of working capital to revenues to use in analysis 12% Do you want to compute your growth rate from fundamentals? No If no, enter the expected growth rate in operating income for high growth period 21% If yes, the inputs to the fundamental growth calculation (based upon your inputs) are Return on Capital = 35.77% Reinvestment Rate = 68.31% Do you want to change these inputs? No Return on Capital = 19.47% Reinvestment Rate = 68.31% Do you want me to gradually adjust your high growth inputs in the second half? Yes Stable Growth Period Growth rate during stable growth period = 3.00% Beta to use in stable growth period = 1.00 Risk premium for equity in stable growth period = 5.00% Debt Ratio to use in stable growth period = 0.00% Pre-tax cost of debt in stable growth period = 9.00% Tax Rate to use in stable growth period = 38.00% To compute the reinvestment rate in stable growth, you have two options Do you want to compute reinvestment needs in stable growth based on fundamentals? Yes If yes, enter the return on capital that the firm will have in stable growth 35.27% If no, enter capital expenditure as % of depreciation in stable growth 120% (in percent) yes or no ones, can be confusing. Please read the comments on the input cells. Normalizing Earnings Approach used to normalize earnings = 3 If historical average, Average Earnings before interest and taxes = 3500 If historical average ROC, Historical average pre-tax return on capital = 22% If sector margin Pre-tax Operating Margin for Sector = 14.72% ! Look at industry average Normalized Earnings before interest and taxes = $473,081.82 Worksheet for normalization (Last 5 years of data) -5 -4 Revenues 2032 2376 EBIT 186 454 Operating Margin 9.15% 19.11% -3 2779 529 19.04% -2 3155 448 14.20% -1 3248 383 11.79% Total 13590 2000 14.72% R & D Converter This spreadsheet converts R&D expenses from operating to capital expenses. It makes the appropriate adjustments to operating income, net income, the book value of assets and the book value of equity. Inputs Over how many years do you want to amortize R&D expenses 5 ! If in doubt, use the lookup table below Enter the current year's R&D expense = $1,771.00 The maximum allowed is ten years Enter R& D expenses for past years: the number of years that you will need to enter will be determined by the amortization period Do not input numbers in the first column (Year). It will get automatically updated based on the input above. Year -1 -2 -3 -4 -5 0 0 0 0 0 Output Year Current -1 -2 -3 -4 -5 0 0 0 0 0 R& D Expenses 1678.00 ! Year -1 is the year prior to the current year 1529.00 ! Year -2 is the two years prior to the current year 1367.00 1267.00 1205.00 R&D Expense 1771.00 1678.00 1529.00 1367.00 1267.00 1205.00 0.00 0.00 0.00 0.00 0.00 Value of Research Asset = Unamortized portion 1.00 1771.00 0.80 1342.40 0.60 917.40 0.40 546.80 0.20 253.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 $4,831.00 Amortization this year $335.60 $305.80 $273.40 $253.40 $241.00 $0.00 $0.00 $0.00 $0.00 $0.00 $1,409.20 Amortization of asset for current year = Adjustment to Operating Income = Tax Effect of R&D Expensing $1,409.20 $361.80 ! A positive number indicates an increase in operating income (add to reported EBIT) $137 Look Up Table for Amortization Periods Industry Name Amortization Period Advertising 2 Aerospace/Defense 10 Air Transport 10 Aluminum 5 Apparel 3 Auto & Truck 10 Auto Parts (OEM) 5 Auto Parts (Replacement) 5 Bank 2 Bank (Canadian) 2 Bank (Foreign) 2 Bank (Midwest) 2 Beverage (Alcoholic) 3 Beverage (Soft Drink) 3 Building Materials 5 Cable TV 10 Canadian Energy 10 Cement & Aggregates 10 Chemical (Basic) 10 Chemical (Diversified) 10 Chemical (Specialty) 10 Coal/Alternate Energy 5 Computer & Peripherals 5 Computer Software & Svcs 3 Copper 5 Diversified Co. 5 Drug 10 Drugstore 3 Educational Services 3 Non-technological Service Retail, Tech Service Light Manufacturing Heavy Manufacturing Research, with Patenting Long Gestation Period 2 years 3 years 5 years 10 years 10 years 10 years Electric Util. (Central) Electric Utility (East) Electric Utility (West) Electrical Equipment Electronics Entertainment Environmental Financial Services Food Processing Food Wholesalers Foreign Electron/Entertn Foreign Telecom. Furn./Home Furnishings Gold/Silver Mining Grocery Healthcare Info Systems Home Appliance Homebuilding Hotel/Gaming Household Products Industrial Services Insurance (Diversified) Insurance (Life) Insurance (Prop/Casualty) Internet Investment Co. (Domestic) Investment Co. (Foreign) Investment Co. (Income) Machinery Manuf. Housing/Rec Veh Maritime Medical Services Medical Supplies Metal Fabricating Metals & Mining (Div.) Natural Gas (Distrib.) Natural Gas (Diversified) 10 10 10 10 5 3 5 2 3 3 5 10 3 5 2 3 5 5 3 3 3 3 3 3 3 3 3 3 10 5 10 3 5 10 5 10 10 Newspaper Office Equip & Supplies Oilfield Services/Equip. Packaging & Container Paper & Forest Products Petroleum (Integrated) Petroleum (Producing) Precision Instrument Publishing R.E.I.T. Railroad Recreation Restaurant Retail (Special Lines) Retail Building Supply Retail Store Securities Brokerage Semiconductor Semiconductor Cap Equip Shoe Steel (General) Steel (Integrated) Telecom. Equipment Telecom. Services Textile Thrift Tire & Rubber Tobacco Toiletries/Cosmetics Trucking/Transp. Leasing Utility (Foreign) Water Utility 3 5 5 5 10 5 5 5 3 3 5 5 2 2 2 2 2 5 5 3 5 5 10 5 5 2 5 5 3 5 10 10 Operating Lease Converter Inputs Operating lease expense in current year = Operating Lease Commitments (From footnote to financials) Year Commitment ! Year 1 is next year, …. 1 $ 185,866.00 2 $ 189,474.00 3 $ 189,514.00 4 $ 190,256.00 5 $ 193,243.00 6 and beyond ########### $504.00 Output Pre-tax Cost of Debt = 5.75% ! If you do not have a cost of debt, use the ratings estimator From the current financial statements, enter the following Reported Operating Income (EBIT) = $532,720.00 ! This is the EBIT reported in the current income statement Reported Debt = $0.00 ! This is the interest-bearing debt reported on the balance sheet Number of years embedded in yr 6 estimate = 10 ! I use the average lease expense over the first five years to estimate the number of years of expenses in yr 6 Converting Operating Leases into debt Year Commitment Present Value 1 $ 185,866.00 $175,759.81 2 $ 189,474.00 $169,429.44 3 $ 189,514.00 $160,250.79 4 $ 190,256.00 $152,130.70 5 $ 193,243.00 $146,117.38 6 and beyond $ 190,816.90 $1,074,626.99 ! Commitment beyond year 6 converted into an annuity for ten years Debt Value of leases = $ 1,878,315.11 Restated Financials Depreciation on Operating Lease Asset = Adjustment to Operating Earnings = Adjustment to Total Debt outstanding = $125,221.01 ! I use straight line depreciation ($124,717.01) ! Operating lease expense - Depr ########### Two-Stage FCFF Discount Model Input Summary Normalized EBIT (before adjustments) $532,720.00 Adjusted EBIT = $532,720.00 Adjusted Interest Expense = $1,751.00 Adjusted Capital Spending $199,926.00 Adjusted Depreciation & Amort'n = $96,054.00 Tax Rate on Income = Current Revenues = 38.00% $3,214,591.00 Current Non-cash Working Capital = $343,104.00 Chg. Working Capital = $119,050.00 Adjusted Book Value of Debt = $0.00 Adjusted Book Value of Equity = $1,245,926.00 Length of High Growth Period = 10 Forever 21.45% 3.00% Debt Ratio used in Cost of Capital Calculation= 0.00% 0.00% Growth Rate = Beta used for stock = 0.97 1.00 Riskfree rate = 3.00% 3.00% Risk Premium = 5.00% 5.00% Cost of Debt = 5.75% 9.00% Effective Tax rate (for cash flow) = 38.74% 38.00% Marginal tax rate (for cost of debt) = 38.00% 38.00% Return on Capital = 35.77% 35.27% Reinvestment Rate = 68.31% 8.51% Page 14 Two-Stage FCFF Discount Model Output from the program Cost of Equity = 7.85% Equity/(Debt+Equity ) = 100.00% After-tax Cost of debt = 3.57% Debt/(Debt +Equity) = 0.00% Cost of Capital = 7.85% Intermediate Output Expected Growth Rate 21.45% Working Capital as percent of revenues = 10.67% (in percent) The FCFF for the high growth phase are shown below (upto 10 years) Current 1 2 Expected Growth Rate 21.45% 21.45% Cumulated Growth 121.45% 147.50% Reinvestment Rate 68.31% 68.31% $532,720 $646,988 $785,767 Tax rate (for cash flow) 38.74% 38.67% 38.59% $326,344 $396,824 $482,524 - (CapEx-Depreciation)$103,872 $197,470 $240,225 -Chg. Working Capital$119,050 $73,596 $89,382 Free Cashflow to Firm $103,422 $125,758 $152,917 Cost of Capital 7.85% 7.85% Cumulated Cost of Capital 1.0785 1.1632 $116,605 $131,467 EBIT EBIT * (1 - tax rate) Present Value Growth Rate in Stable Phase = 3.00% Reinvestment Rate in Stable Phase = 8.51% FCFF in Stable Phase = Cost of Equity in Stable Phase = $1,340,076.48 8.00% Page 15 Two-Stage FCFF Discount Model Equity/ (Equity + Debt) = 100.00% AT Cost of Debt in Stable Phase = 5.58% Debt/ (Equity + Debt) = 0.00% Cost of Capital in Stable Phase = 8.00% Value at the end of growth phase = $26,801,529.65 Valuation Present Value of FCFF in high growth phase = Present Value of Terminal Value of Firm = Value of operating assets of the firm = Value of Cash, Marketable Securities & Non-operating assets = Value of Firm = Market Value of outstanding debt = Minority Interests Market Value of Equity = Value of Equity in Options = Value of Equity in Common Stock = Market Value of Equity/share = Page 16 Two-Stage FCFF Discount Model Input Summary Input Diagnostics Stable growth debt ratio is set to same value as high growth debt ratio. While this is possible, stable growth companies usually carry more debt. Look at the industry average This is a high cost of debt for stable growth. Consider moving this down. Your return on capital exceeds your cost of capital by more than 5%. That is unusually high. Does your company have that sustainable a competitive advantage? Imputed Return on capital forever = Page 17 Two-Stage FCFF Discount Model Output from the program 3 21.45% 179.14% 68.31% $954,315 38.52% $586,732 $292,235 $108,555 $185,942 7.85% 1.2545 $148,224 Page 18 Two-Stage FCFF Discount Model Valuation $3,056,174.22 $12,535,652.17 $15,591,826.39 $323,203.00 $15,915,029.39 $0.00 $0.00 $15,915,029.39 $0.00 $15,915,029.39 $512.07 Page 19 Two-Stage FCFF Discount Model Revisit input cell B54 B74 B77 B75 B78 B79 B82 B81-83 35.27% Page 20 Two-Stage FCFF Discount Model 4 5 6 7 8 9 10 21.45% 21.45% 17.76% 14.07% 10.38% 6.69% 3.00% 217.57% 264.23% 311.16% 354.94% 391.78% 417.99% 430.53% Terminal Year 68.31% 68.31% 56.35% 44.39% 32.43% 20.47% 8.51% $1,159,015 $1,407,624 $1,657,618 $1,890,845 $2,087,114 $2,226,742 $2,293,544 38.44% 38.37% 38.30% 38.22% 38.15% 38.07% 38.00% 38.00% $713,443 $867,519 $1,022,816 $1,168,126 $1,290,922 $1,378,932 $1,421,998 ########### $355,505 $432,473 $415,328 $368,291 $292,198 $192,289 $77,928 $52,715.22 $131,840 $160,119 $161,011 $150,212 $126,410 $89,929 $43,025 $71,865.79 $226,098 $274,927 $446,477 $649,623 $872,314 $1,096,714 $1,301,045 ########### 7.85% 7.85% 7.88% 7.91% 7.94% 7.97% 8.00% 1.3529 1.4592 1.5741 1.6986 1.8335 1.9797 2.1380 $167,116 $188,415 $283,634 $382,435 $475,759 $553,993 $608,527 Page 21 Two-Stage FCFF Discount Model Page 22 Valuing Options or Warrants Enter the current stock price = Enter the strike price on the option = Enter the expiration of the option = Enter the standard deviation in stock prices = Enter the annualized dividend yield on stock = Enter the treasury bond rate = Enter the number of warrants (options) outstanding = Enter the number of shares outstanding = $600.61 $40.35 8.3 25.00% (volatility) 0.00% 3.00% 51.00 31,080.00 Do not input any numbers below this line VALUING WARRANTS WHEN THERE IS DILUTION Stock Price= 600.61 # Warrants issued= Strike Price= 40.35 # Shares outstanding= Adjusted S = 600.5583857 T.Bond rate= Adjusted K = 40.35 Variance= Expiration (in years) = 8.3 Annualized dividend yield= Div. Adj. interest rate= d1 = N (d1) = 4.45494563 0.999995804 d2 = N (d2) = 3.734702616 0.999906031 Value per option = Value of all options outstanding = $569.10 $29,023.10 50.998 31,080 3.00% 0.0625 0.00% 3.00% Estimation of Current Cost of Capital Inputs Equity Number of Shares outstanding = Current Market Price per share = 31080.00 $600.61 Unlevered beta = Riskfree Rate = Equity Risk Premium = 0.97 3.00% 5.00% Debt Book Value of Straight Debt = Interest Expense on Debt = Average Maturity = $0.00 $1,751.00 5 Pre-tax Cost of Debt = Tax Rate = 3.65% 38% Book Value of Convertible Debt = Interest Expense on Convertible = Maturity of Convertible Bond = Market Value of Convertible = Debt value of operating leases = 0 0 0 0 $ Preferred Stock Number of Preferred Shares = Current Market Price per Share= Annual Dividend per Share = - 0 70 5 Output Estimating Market Value of Straight Debt = Estimated Value of Straight Debt in Convertible = Value of Debt in Operating leases = Estimated Value of Equity in Convertible = Levered Beta for equity = Market Value Weight in Cost of Capital Cost of Component Equity ############ 99.96% 7.86% $7,872.38 $0.00 $0.00 $0.00 0.97 Debt Preferred Stock Capital $7,872.38 $0.00 ############ 0.04% 0.00% 100.00% 2.26% 7.14% 7.86% If you are a multinational company and have a breakdown by country, you can use this Country Revenues ERP Brazil 800 Total 800 Weight 7.85% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% Weighted ERP 7.85% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 7.85% If you are a multinational company and have a breakdown only by region, you can use Region Revenues Africa Asia Australia & New Zealand Caribbean Central and South America Eastern Europe & Russia Middle East North America Western Europe Global Total ERP 0 0 0 0 40 0 0 40 Weight 10.04% 6.51% 5.00% 12.65% 8.62% 7.96% 6.14% 5.00% 6.29% 6.35% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% 0.00% 0.00% 100.00% Weighted ERP 0.0000% 0.0000% 0.0000% 0.0000% 0.0000% 0.0000% 0.0000% 5.0000% 0.0000% 0.0000% 5.0000% If you are a multi-business company, you can input the following Business Revenues EV/Sales Estimated ValueUnlevered Beta Toiletries/Cosmetics $ 100.00 1.7329 $ 173.29 0.9727 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 Company $ 100.00 $ $ $ $ $ $ $ $ $ $ $ $ 173.29 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.9727 wn by country, you can use this table (for up to 10 countries) Inputs for synthetic rating estimation Enter the type of firm = 2 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if financial service firm) Enter current Earnings before interest and taxes (EBIT) = $532,720.00 (Add back only long term interest expense fo Enter current interest expenses = $1,751.00 (Use only long term interest expense for fina Enter current long term government bond rate = 3.00% Output Interest coverage ratio = 304.24 Estimated Bond Rating = Aaa/AAA Estimated Default Spread = 0.40% Estimated Cost of Debt = 3.40% For large manufacturing firms If interest coverage ratio is > ≤ to -100000 0.199999 0.2 0.649999 0.65 0.799999 0.8 1.249999 1.25 1.499999 1.5 1.749999 1.75 1.999999 2 2.2499999 2.25 2.49999 2.5 2.999999 3 4.249999 4.25 5.499999 5.5 6.499999 6.5 8.499999 8.50 100000 Rating is D2/D C2/C Ca2/CC Caa/CCC B3/BB2/B B1/B+ Ba2/BB Ba1/BB+ Baa2/BBB A3/AA2/A A1/A+ Aa2/AA Aaa/AAA Spread is 12.00% 10.50% 9.50% 8.75% 7.25% 6.50% 5.50% 4.00% 3.00% 2.00% 1.30% 1.00% 0.85% 0.70% 0.40% For smaller and riskier firms If interest coverage ratio is greater than ≤ to -100000 0.499999 0.5 0.799999 0.8 1.249999 1.25 1.499999 1.5 1.999999 2 2.499999 2.5 2.999999 3 3.499999 3.5 3.9999999 4 4.499999 4.5 5.999999 6 7.499999 7.5 9.499999 9.5 12.499999 12.5 100000 Rating is D2/D C2/C Ca2/CC Caa/CCC B3/BB2/B B1/B+ Ba2/BB Ba1/BB+ Baa2/BBB A3/AA2/A A1/A+ Aa2/AA Aaa/AAA Spread is 12.00% 10.50% 9.50% 8.75% 7.25% 6.50% 5.50% 4.00% 3.00% 2.00% 1.30% 1.00% 0.85% 0.70% 0.40% For financial service firms If long term interest coverage ratio is greater than ≤ to -100000 0.049999 0.05 0.099999 0.1 0.199999 0.2 0.299999 0.3 0.399999 0.4 0.499999 0.5 0.599999 0.6 0.749999 0.75 0.899999 0.9 1.199999 1.2 1.49999 1.5 1.99999 2 2.49999 2.5 2.99999 3 100000 or riskier firm, 3 if financial service firm) Add back only long term interest expense for financial firms) Use only long term interest expense for financial firms) est coverage ratio is Rating is D2/D C2/C Ca2/CC Caa/CCC B3/BB2/B B1/B+ Ba2/BB Ba1/BB+ Baa2/BBB A3/AA2/A A1/A+ Aa2/AA Aaa/AAA Spread Operating is Income Decline 12.00% -50.00% 10.50% -40.00% 9.50% -40.00% 8.75% -40.00% 7.25% -25.00% 6.50% -20.00% 5.50% -20.00% 4.00% -20.00% 3.00% -20.00% 2.00% -20.00% 1.30% -17.50% 1.00% -15.00% 0.85% -10.00% 0.70% -5.00% 0.40% 0.00% Industry Name Advertising Aerospace/Defense Air Transport Apparel Auto Parts Automotive Bank Bank (Midwest) Beverage Biotechnology Building Materials Cable TV Chemical (Basic) Chemical (Diversified) Chemical (Specialty) Coal Computer Software Computers/Peripherals Diversified Co. Drug E-Commerce Educational Services Electric Util. (Central) Electric Utility (East) Electric Utility (West) Electrical Equipment Electronics Engineering & Const Entertainment Entertainment Tech Environmental Financial Svcs. (Div.) Food Processing Foreign Electronics Funeral Services Furn/Home Furnishings Healthcare Information Heavy Truck & Equip Homebuilding Hotel/Gaming Household Products Human Resources Industrial Services Information Services Insurance (Life) Insurance (Prop/Cas.) Internet Investment Co. IT Services Machinery Maritime Number Annual Average of firms Revenue growth Pre-tax- Operating Last 5 years Margin After-tax ROC Average effective tax rate 31 66 35 46 54 11 375 86 36 232 42 18 18 32 73 19 181 68 123 199 66 33 20 17 15 60 99 30 67 36 61 225 104 10 6 28 19 21 25 53 26 25 122 29 31 66 145 16 55 82 51 4.60% 12.33% 6.51% 7.48% 0.90% 9.66% 0.00% 0.00% 3.24% 23.92% 4.86% 8.74% -6.24% 9.02% 11.69% 5.79% 10.34% -0.77% 11.32% 23.48% 13.83% 3.59% -2.25% -9.80% -5.02% -2.61% 5.20% 13.10% 9.04% 5.45% 16.24% 19.02% 6.58% -9.48% 6.73% 2.97% 7.12% 3.93% 14.61% 15.36% 7.33% 7.68% 6.30% 10.26% 0.00% 4.96% 18.48% 32.20% 3.33% 3.47% -7.04% 11.44% 9.99% 8.04% 10.70% 6.88% 6.55% NA NA 20.46% 22.27% 0.55% 19.14% 14.15% 15.73% 11.66% 10.20% 26.93% 15.88% 13.18% 25.65% 12.17% 12.70% 18.58% 20.00% 16.88% 6.74% 5.97% 5.19% 21.64% 14.84% 14.23% 48.76% 9.23% 4.56% 14.72% 6.84% 13.68% 10.87% -17.62% 15.20% 16.93% 3.15% 10.23% 19.64% NA NA 14.24% 32.79% 13.66% 12.51% 10.84% 11.59% 18.08% 16.80% 14.62% 14.06% 6.10% NA NA 13.87% 16.57% -0.38% 11.44% 15.30% 15.21% 14.17% 7.65% 25.52% 29.07% 8.83% 16.78% 9.11% 25.71% 6.29% 5.45% 6.45% 4.41% 12.06% 13.83% 11.79% 14.97% 7.15% 11.19% 12.40% 6.75% 8.41% 10.10% 10.00% 15.04% -17.93% 10.23% 14.72% 11.69% 7.45% 12.07% NA NA 25.22% 93.10% 28.42% 11.76% 3.33% 16.81% 23.03% 26.03% 18.85% 17.88% 17.79% 17.91% 21.88% 17.04% 2.63% 11.27% 20.75% 21.56% 21.15% 15.52% 9.47% 13.43% 7.63% 20.27% 5.89% 10.24% 21.44% 28.85% 31.06% 28.24% 16.78% 11.65% 19.88% 14.87% 11.45% 10.82% 16.74% 21.85% 31.10% 27.80% 19.54% 18.01% 20.13% 7.09% 14.48% 23.88% 25.63% 20.04% 17.00% 20.49% 12.62% 11.27% 21.82% 18.61% 24.47% 5.99% Med Supp Invasive Med Supp Non-Invasive Medical Services Metal Fabricating Metals & Mining (Div.) Natural Gas (Div.) Natural Gas Utility Newspaper Office Equip/Supplies Oil/Gas Distribution Oilfield Svcs/Equip. Packaging & Container Paper/Forest Products Petroleum (Integrated) Petroleum (Producing) Pharmacy Services Pipeline MLPs Power Precious Metals Precision Instrument Public/Private Equity Publishing R.E.I.T. Railroad Recreation Reinsurance Restaurant Retail (Hardlines) Retail (Softlines) Retail Automotive Retail Building Supply Retail Store Retail/Wholesale Food Securities Brokerage Semiconductor Semiconductor Equip Shoe Steel Telecom. Equipment Telecom. Services Telecom. Utility Thrift Tobacco Toiletries/Cosmetics Trucking Water Utility Wireless Networking 74 127 106 25 71 30 26 12 18 11 80 26 29 28 168 16 62 92 74 76 20 21 131 13 53 12 67 69 41 19 10 36 32 30 136 10 12 32 91 61 24 170 11 15 31 9 53 1.14% 11.25% 8.35% 0.74% 2.64% -4.25% -7.97% 2.29% 0.49% -2.80% 14.20% 2.70% 5.05% 20.39% 7.01% 13.34% -1.75% -2.13% 14.61% -3.49% 14.68% -3.12% -5.51% 12.09% 10.80% 0.00% 1.40% 10.42% 7.33% 11.71% 8.37% 8.73% 10.91% -4.90% -4.41% 2.12% 5.03% 1.11% 1.39% 6.10% 0.01% 0.00% 20.51% 4.78% 1.26% 4.44% 11.83% 23.03% 7.77% 10.56% 13.69% 24.25% 18.59% 11.95% 13.30% 6.97% 12.54% 16.01% 9.62% 8.71% 10.63% 24.23% 4.76% 8.65% 7.75% 31.98% 16.03% 33.10% 8.10% 80.18% 29.50% 12.22% NA 16.31% 8.70% 10.85% 6.83% 9.34% 5.53% 3.78% 32.05% 18.28% 10.34% 11.18% 2.99% -0.15% 19.86% 15.94% NA 23.01% 10.51% 7.85% 27.63% 7.57% 16.28% 19.25% 13.73% 13.72% 13.22% 5.47% 6.31% 12.66% 10.97% 6.46% 9.70% 11.37% 8.49% 12.64% 11.54% 8.27% 7.70% 3.17% 8.98% 13.41% 13.90% 8.55% 12.59% 12.36% 9.17% NA 19.44% 14.89% 35.44% 9.54% 16.18% 13.70% 11.65% 5.43% 18.03% 9.54% 26.04% 2.14% -6.38% 12.19% 9.15% NA 33.57% 17.09% 12.48% 6.15% 4.09% 15.02% 11.14% 18.76% 16.65% 11.84% 19.04% 25.74% 29.11% 22.90% 17.33% 19.53% 23.58% 12.27% 30.70% 13.09% 23.64% 5.50% 8.99% 10.50% 13.41% 20.12% 23.36% 0.50% 30.96% 20.89% 6.53% 22.49% 23.83% 26.53% 32.89% 24.71% 23.46% 29.85% 24.32% 11.02% 20.20% 23.43% 26.96% 17.41% 17.82% 19.76% 16.03% 33.51% 29.96% 27.33% 34.28% 11.06% Unlevered Beta Equity (Levered) Cost Beta of equity Std deviation in stock pricesPre-tax cost of debt 1.13 0.87 0.92 1.17 1.50 1.14 0.62 0.86 0.71 1.27 1.28 0.71 1.20 1.24 1.03 0.89 0.90 1.29 0.88 0.99 0.82 0.85 0.35 0.26 0.37 1.34 1.10 1.15 1.18 1.33 0.34 0.95 0.76 1.15 0.81 1.33 1.08 1.46 1.40 1.14 0.86 1.50 0.68 1.02 1.66 0.81 1.02 1.47 0.94 1.09 0.71 1.30 0.92 1.07 1.20 1.66 1.70 0.88 0.95 0.81 1.24 1.69 0.96 1.32 1.32 1.13 1.44 0.85 1.28 1.15 1.04 0.82 0.78 0.55 0.39 0.54 1.35 1.14 1.10 1.33 1.06 0.45 1.19 0.85 1.11 1.01 1.39 1.07 1.79 1.79 1.49 0.94 1.47 0.93 1.14 1.62 0.81 0.95 1.19 0.90 1.19 1.48 9.54% 7.62% 8.37% 9.06% 11.35% 11.52% 7.45% 7.80% 7.08% 9.22% 11.50% 7.83% 9.63% 9.62% 8.71% 10.26% 7.28% 9.45% 8.79% 8.25% 7.13% 6.93% 5.77% 4.99% 5.76% 9.77% 8.74% 8.56% 9.71% 8.35% 5.31% 8.98% 7.29% 8.57% 8.11% 10.01% 8.37% 12.01% 11.98% 10.47% 7.75% 10.40% 7.68% 8.73% 11.14% 7.09% 7.77% 9.01% 7.56% 8.99% 10.46% 83.02% 44.75% 63.96% 67.00% 51.50% 49.51% 43.18% 32.12% 47.98% 83.67% 76.77% 37.32% 38.16% 44.72% 60.60% 46.07% 67.14% 77.26% 57.21% 84.78% 72.45% 81.04% 14.80% 13.08% 14.11% 67.15% 75.34% 56.11% 61.01% 49.47% 77.98% 54.62% 51.38% 29.83% 25.91% 45.61% 54.31% 39.16% 41.47% 58.46% 40.37% 50.44% 58.23% 55.92% 29.38% 27.38% 90.80% 66.00% 51.20% 47.09% 75.61% 5.54% 4.04% 4.54% 5.04% 4.54% 4.04% 4.04% 4.04% 4.04% 5.54% 5.04% 4.04% 4.04% 4.04% 4.54% 4.04% 5.04% 5.04% 4.54% 5.54% 5.04% 5.54% 3.54% 3.54% 3.54% 5.04% 5.04% 4.54% 4.54% 4.04% 5.04% 4.54% 4.54% 4.04% 4.04% 4.04% 4.54% 4.04% 4.04% 4.54% 4.04% 4.54% 4.54% 4.54% 4.04% 4.04% 6.04% 5.04% 4.54% 4.04% 5.04% Market Debt/Capital 26.35% 16.46% 30.31% 8.57% 18.11% 46.62% 45.74% 24.39% 18.12% 11.16% 30.25% 35.25% 18.89% 14.84% 16.36% 43.67% 7.05% 7.89% 37.79% 11.62% 7.30% 12.53% 44.44% 44.17% 41.24% 10.49% 15.50% 10.59% 16.95% 6.01% 28.42% 35.09% 17.03% 24.76% 28.09% 12.04% 7.71% 29.49% 35.22% 30.65% 13.70% 8.33% 37.91% 16.06% 26.98% 17.91% 2.34% 5.35% 5.29% 16.62% 57.16% 0.92 0.87 0.73 1.31 1.22 1.04 0.40 1.90 0.94 0.67 1.29 0.87 0.93 1.01 1.23 0.90 0.41 0.73 0.73 1.08 1.58 0.92 0.98 1.24 1.15 0.90 0.94 1.60 1.33 1.04 1.10 1.05 0.68 0.80 1.44 1.88 1.39 1.22 1.27 0.90 0.47 0.79 0.81 0.97 1.19 0.31 0.93 0.97 0.88 0.91 1.41 1.39 1.29 0.56 2.01 1.14 1.01 1.47 1.09 1.17 1.07 1.48 1.00 0.56 1.50 0.83 1.12 1.67 1.13 1.35 1.40 1.37 0.81 1.00 1.68 1.27 1.27 1.17 1.18 0.78 1.18 1.38 1.73 1.32 1.66 1.05 1.05 0.77 0.69 0.88 1.03 1.40 0.45 1.18 7.87% 7.45% 7.60% 10.07% 9.98% 9.51% 5.83% 13.08% 8.72% 8.11% 10.37% 8.48% 8.91% 8.38% 10.42% 8.05% 5.85% 10.53% 7.19% 8.65% 11.40% 8.70% 9.77% 10.03% 9.87% 7.08% 8.04% 11.44% 9.41% 9.40% 8.90% 8.95% 6.95% 8.95% 9.93% 11.71% 9.62% 11.36% 8.27% 8.30% 6.87% 6.51% 7.45% 8.18% 10.05% 5.27% 8.96% 55.16% 62.14% 72.79% 57.52% 82.87% 43.11% 29.29% 42.63% 56.56% 37.38% 53.47% 44.69% 43.52% 47.09% 72.91% 55.91% 22.33% 88.17% 66.24% 57.51% 33.66% 54.21% 29.77% 32.21% 46.18% 20.86% 53.50% 52.44% 56.84% 36.44% 28.59% 40.98% 30.14% 43.92% 49.52% 36.83% 49.98% 39.65% 61.81% 62.49% 41.97% 34.84% 30.12% 38.40% 42.67% 14.75% 62.14% 4.54% 4.54% 5.04% 4.54% 5.54% 4.04% 4.04% 4.04% 4.54% 4.04% 4.54% 4.04% 4.04% 4.04% 5.04% 4.54% 3.54% 5.54% 5.04% 4.54% 4.04% 4.54% 4.04% 4.04% 4.04% 3.54% 4.54% 4.54% 4.54% 4.04% 4.04% 4.04% 4.04% 4.04% 4.04% 4.04% 4.04% 4.04% 4.54% 4.54% 4.04% 4.04% 4.04% 4.04% 4.04% 3.54% 4.54% 12.93% 9.09% 31.09% 15.91% 19.45% 26.18% 37.22% 16.94% 31.65% 39.32% 20.69% 28.58% 27.43% 17.47% 21.52% 15.78% 29.46% 57.27% 25.52% 13.23% 21.60% 26.84% 30.52% 17.33% 23.96% 13.79% 11.67% 11.18% 4.77% 28.17% 9.81% 18.54% 23.34% 63.94% 9.85% 11.65% 3.79% 38.89% 11.02% 25.17% 47.08% 8.01% 16.33% 15.71% 23.56% 40.25% 28.78% Cost of capital Sales/Capital EV/Sales EV/EBITDA EV/EBIT Price/Book Trailing PE 7.90% 6.77% 6.66% 8.54% 9.78% 7.28% 5.15% 6.49% 6.24% 8.56% 8.94% 5.92% 8.27% 8.56% 7.73% 6.84% 6.98% 8.95% 6.50% 7.67% 6.83% 6.47% 4.15% 3.73% 4.26% 9.06% 7.85% 7.95% 8.52% 8.00% 4.66% 6.79% 6.52% 7.05% 6.51% 9.10% 7.93% 9.18% 8.61% 8.10% 7.02% 9.76% 5.80% 7.76% 8.79% 6.25% 7.67% 8.69% 7.31% 7.90% 6.21% 1.39 2.67 2.72 1.92 2.53 1.32 NA NA 0.86 0.93 1.07 0.86 1.42 1.38 1.70 0.87 1.26 2.45 0.86 0.82 1.00 3.30 0.49 0.40 0.51 1.46 2.68 3.76 0.79 1.27 0.76 0.32 1.78 2.23 0.85 1.94 1.11 1.95 0.94 0.81 1.19 6.09 1.04 0.83 NA NA 2.29 3.59 2.79 1.32 0.36 1.67 1.31 1.01 2.08 0.93 0.98 NA NA 3.59 8.17 1.64 2.62 1.59 2.07 1.71 1.40 4.09 1.67 2.18 4.06 6.01 1.02 2.61 3.09 2.46 1.91 0.83 0.61 3.31 1.96 2.36 5.48 1.40 0.54 2.24 1.34 4.74 1.14 1.84 3.10 2.65 0.52 1.56 4.05 NA NA 5.57 3.05 2.13 1.92 2.99 10.91 10.54 7.89 15.70 9.56 8.76 5.40 5.43 14.36 28.37 26.98 8.03 8.37 10.11 10.92 6.97 12.98 8.69 12.68 11.84 30.97 5.95 8.51 9.56 8.32 18.40 9.61 9.17 12.88 10.01 10.35 10.58 12.04 5.39 11.69 14.07 21.11 8.23 NA 13.81 13.13 13.14 11.24 14.48 1.51 299.00 27.77 8.17 12.62 11.60 12.20 14.64 13.08 12.56 19.42 13.48 15.02 5.40 5.43 17.56 36.70 298.53 13.68 11.25 13.16 14.68 13.73 15.20 10.53 16.55 15.82 49.33 8.02 14.04 15.46 14.60 28.29 13.95 11.81 15.27 13.18 16.55 11.24 15.15 11.74 15.25 19.64 34.62 10.51 NA 20.37 15.63 16.57 15.25 20.62 1.51 301.42 39.09 9.31 15.60 15.31 27.61 3.24 4.58 5.00 4.60 2.90 1.59 1.21 1.59 4.79 6.46 2.42 5.24 2.76 3.47 3.91 1.43 4.28 4.06 2.91 3.85 6.33 2.93 1.62 1.54 1.54 2.89 2.41 2.26 3.50 1.92 2.56 2.36 3.27 1.21 2.87 2.95 5.37 3.58 2.25 5.45 4.38 3.20 2.35 5.10 1.03 1.36 6.83 3.92 5.20 3.24 1.20 49.37 24.32 16.16 21.97 23.26 12.65 18.14 18.57 28.96 63.71 755.50 25.95 14.55 22.16 30.18 36.36 65.03 51.52 28.68 49.11 150.17 24.10 16.69 16.67 16.85 23.36 25.26 22.41 25.36 20.10 28.06 26.69 31.35 34.22 22.40 22.35 1058.24 19.88 25.56 37.99 21.02 26.37 37.63 214.35 14.72 17.61 149.75 22.44 36.04 27.41 33.50 7.20% 7.02% 6.18% 8.90% 8.68% 7.66% 4.56% 11.27% 6.82% 5.88% 8.79% 6.75% 7.13% 7.34% 8.83% 7.21% 4.75% 6.40% 6.13% 7.86% 9.46% 7.09% 7.53% 8.71% 8.08% 6.39% 7.42% 10.46% 9.09% 7.43% 8.27% 7.74% 5.90% 4.78% 9.19% 10.63% 9.34% 7.88% 7.66% 6.90% 4.77% 6.18% 6.63% 7.27% 8.26% 4.01% 7.17% 0.92 3.35 2.00 1.44 0.79 0.40 0.74 1.31 2.20 0.66 0.80 1.62 1.39 2.04 0.75 2.73 0.92 0.61 0.39 1.00 0.48 1.53 0.17 0.64 0.95 NA 1.72 2.55 5.21 2.17 2.71 3.68 4.53 0.27 1.20 1.19 3.14 1.15 2.05 0.92 0.79 NA 2.13 2.57 2.36 0.33 0.70 3.13 1.11 0.92 1.71 2.17 4.09 2.12 2.13 0.66 2.49 2.16 1.29 1.32 0.67 1.94 0.76 2.12 1.72 2.03 2.66 3.21 1.44 7.13 3.98 2.03 NA 2.71 1.87 1.27 1.08 1.51 0.65 0.54 4.35 2.78 2.07 2.06 0.84 1.59 2.00 1.86 NA 2.41 1.73 1.06 4.34 3.28 10.99 11.73 7.18 9.92 6.71 8.25 11.43 11.17 6.33 13.84 8.89 9.05 8.97 4.62 5.04 11.70 16.96 9.78 4.55 12.13 8.95 10.62 7.71 10.43 11.30 37.10 12.96 15.81 9.12 12.73 12.95 8.65 9.51 12.02 9.35 11.55 15.75 10.62 42.19 5.68 5.42 5.52 9.71 12.81 7.72 10.65 16.11 13.61 14.28 8.72 12.49 8.96 22.00 17.75 15.98 9.43 19.83 13.50 13.43 15.10 6.34 8.00 15.88 24.45 22.23 6.34 16.62 9.70 17.80 8.89 13.48 16.58 37.10 16.61 21.50 11.69 15.83 16.19 11.83 14.31 13.58 15.19 19.97 18.40 27.92 NA 10.05 11.68 5.52 10.48 16.48 13.47 15.69 43.41 3.32 3.92 2.55 2.88 1.93 2.00 2.30 3.48 1.67 2.71 1.99 3.35 2.46 1.44 1.62 2.48 3.18 1.11 0.77 2.96 1.62 3.52 1.26 3.60 2.53 0.92 7.29 6.80 5.72 4.47 5.64 3.24 3.78 1.35 3.12 2.28 5.11 0.94 2.40 2.25 2.38 1.32 14.45 7.13 4.02 1.97 3.95 31.42 42.85 28.01 19.53 94.26 51.23 17.95 26.37 20.21 26.58 31.86 21.90 22.48 17.57 51.32 15.14 40.98 206.85 18.03 32.15 23.33 18.78 19.03 21.75 26.53 10.51 35.82 24.22 23.20 20.02 31.29 23.95 29.78 28.12 41.18 41.76 21.06 24.37 33.44 108.85 20.70 55.55 16.95 29.82 21.22 21.52 74.73 Country Long-Term RatingAdj. Default Spread Abu Dhabi Aa2 0.50% Albania B1 4.50% Andorra A3 1.20% Angola Ba3 3.60% Argentina B3 6.50% Armenia Ba2 3.00% Aruba Baa1 1.60% Australia Aaa 0.00% Austria Aaa 0.00% Azerbaijan Baa3 2.20% Bahamas Baa1 1.60% Bahrain Baa2 1.90% Bangladesh Ba3 3.60% Barbados Ba1 2.50% Belarus B3 6.50% Belgium Aa3 0.60% Belize Caa2 9.00% Benin B2 5.50% Bermuda Aa3 0.60% Bolivia Ba3 3.60% Bosnia and Herzegovina B3 6.50% Botswana A2 0.85% Brazil Baa2 1.90% Bulgaria Baa2 1.90% Burkina Faso B2 5.50% Cambodia B2 5.50% Cameroon B2 5.50% Canada Aaa 0.00% Cape Verde B2 5.50% Cayman Islands Aa3 0.60% Chile Aa3 0.60% China Aa3 0.60% Colombia Baa3 2.20% Cook Islands B1 4.50% Costa Rica Baa3 2.20% Croatia Ba1 2.50% Cuba Caa1 7.50% Curacao B1 4.50% Cyprus Caa3 10.00% Czech Republic A1 0.70% Democratic Republic of CongoB3 6.50% Total Risk Premium 5.75% 11.75% 6.80% 10.40% 14.75% 9.50% 7.40% 5.00% 5.00% 8.30% 7.40% 7.85% 10.40% 8.75% 14.75% 5.90% 18.50% 13.25% 5.90% 10.40% 14.75% 6.28% 7.85% 7.85% 13.25% 13.25% 13.25% 5.00% 13.25% 5.90% 5.90% 5.90% 8.30% 11.75% 8.30% 8.75% 16.25% 11.75% 20.00% 6.05% 14.75% Denmark Dominican Republic Ecuador Egypt El Salvador Estonia Fiji Finland France Gabon Georgia Germany Ghana Greece Guatemala Honduras Hong Kong Hungary Iceland India Indonesia Ireland Isle of Man Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Korea Kuwait Latvia Lebanon Liechtenstein Lithuania Luxembourg Macao Macedonia Malaysia Malta Mauritius Aaa B1 Caa1 Caa1 Ba3 A1 B1 Aaa Aa1 Ba3 Ba3 Aaa B1 Caa3 Ba1 B2 Aa1 Ba1 Baa3 Baa3 Baa3 Ba1 Aa1 A1 Baa2 Caa3 Aa3 B1 Baa2 B1 Aa3 Aa2 Baa2 B1 Aaa Baa1 Aaa Aa3 Ba3 A3 A3 Baa1 0.00% 4.50% 7.50% 7.50% 3.60% 0.70% 4.50% 0.00% 0.40% 3.60% 3.60% 0.00% 4.50% 10.00% 2.50% 5.50% 0.40% 2.50% 2.20% 2.20% 2.20% 2.50% 0.40% 0.70% 1.90% 10.00% 0.60% 4.50% 1.90% 4.50% 0.60% 0.50% 1.90% 4.50% 0.00% 1.60% 0.00% 0.60% 3.60% 1.20% 1.20% 1.60% 5.00% 11.75% 16.25% 16.25% 10.40% 6.05% 11.75% 5.00% 5.60% 10.40% 10.40% 5.00% 11.75% 20.00% 8.75% 13.25% 5.60% 8.75% 8.30% 8.30% 8.30% 8.75% 5.60% 6.05% 7.85% 20.00% 5.90% 11.75% 7.85% 11.75% 5.90% 5.75% 7.85% 11.75% 5.00% 7.40% 5.00% 5.90% 10.40% 6.80% 6.80% 7.40% Mexico Baa1 Moldova B3 Mongolia B1 Montenegro Ba3 Montserrat Baa3 Morocco Ba1 Mozambique B1 Namibia Baa3 Netherlands Aaa New Zealand Aaa Nicaragua B3 Nigeria Ba3 Norway Aaa Oman A1 Pakistan Caa1 Panama Baa2 Papua New Guinea B1 Paraguay Ba3 Peru Baa2 Philippines Baa3 Poland A2 Portugal Ba3 Qatar Aa2 Ras Al Kaminah A2 Republic of the Congo Ba3 Romania Baa3 Russia Baa1 Rwanda B2 Saudi Arabia Aa3 Senegal B1 Serbia B1 Singapore Aaa Slovakia A2 Slovenia Ba1 South Africa Baa1 Spain Baa3 Sri Lanka B1 St. Maarten Baa1 St. Vincent & the Grenadines B2 Suriname Ba3 Sweden Aaa Switzerland Aaa 1.60% 6.50% 4.50% 3.60% 2.20% 2.50% 4.50% 2.20% 0.00% 0.00% 6.50% 3.60% 0.00% 0.70% 7.50% 1.90% 4.50% 3.60% 1.90% 2.20% 0.85% 3.60% 0.50% 0.85% 3.60% 2.20% 1.60% 5.50% 0.60% 4.50% 4.50% 0.00% 0.85% 2.50% 1.60% 2.20% 4.50% 1.60% 5.50% 3.60% 0.00% 0.00% 7.40% 14.75% 11.75% 10.40% 8.30% 8.75% 11.75% 8.30% 5.00% 5.00% 14.75% 10.40% 5.00% 6.05% 16.25% 7.85% 11.75% 10.40% 7.85% 8.30% 6.28% 10.40% 5.75% 6.28% 10.40% 8.30% 7.40% 13.25% 5.90% 11.75% 11.75% 5.00% 6.28% 8.75% 7.40% 8.30% 11.75% 7.40% 13.25% 10.40% 5.00% 5.00% Taiwan Thailand Trinidad and Tobago Tunisia Turkey Uganda Ukraine United Arab Emirates United Kingdom United States of America Uruguay Venezuela Vietnam Zambia Aa3 Baa1 Baa1 Ba3 Baa3 B1 Caa1 Aa2 Aa1 Aaa Baa3 Caa1 B2 B1 0.60% 1.60% 1.60% 3.60% 2.20% 4.50% 7.50% 0.50% 0.40% 0.00% 2.20% 7.50% 5.50% 4.50% 5.90% 7.40% 7.40% 10.40% 8.30% 11.75% 16.25% 5.75% 5.60% 5.00% 8.30% 16.25% 13.25% 11.75% Region Weighted Average: Weighted Default Spreads Average: TRP Weighted Average: CRP Africa 3.36% 10.04% 5.04% Asia 1.00% 6.51% 1.51% Australia & New Zealand 0.00% 5.00% 0.00% Caribbean 5.10% 12.65% 7.65% Central and South America 2.42% 8.62% 3.62% Eastern Europe & Russia 1.98% 7.96% 2.96% Middle East 0.76% 6.14% 1.14% North America 0.00% 5.00% 0.00% Western Europe 0.86% 6.29% 1.29% Global 0.90% 6.35% 1.35% Country Risk Premium Region 0.75% Middle East 6.75% Eastern Europe & Russia 1.80% Western Europe 5.40% Africa 9.75% Central and South America 4.50% Eastern Europe & Russia 2.40% Caribbean 0.00% Australia & New Zealand 0.00% Western Europe 3.30% Eastern Europe & Russia 2.40% Caribbean 2.85% Middle East 5.40% Asia 3.75% Caribbean 9.75% Eastern Europe & Russia 0.90% Western Europe 13.50% Central and South America 8.25% Africa 0.90% Caribbean 5.40% Central and South America 9.75% Eastern Europe & Russia 1.28% Africa 2.85% Central and South America 2.85% Eastern Europe & Russia 8.25% Africa 8.25% Asia 8.25% Africa 0.00% North America 8.25% Africa 0.90% Caribbean 0.90% Central and South America 0.90% Asia 3.30% Central and South America 6.75% Australia & New Zealand 3.30% Central and South America 3.75% Eastern Europe & Russia 11.25% Caribbean 6.75% Caribbean 15.00% Western Europe 1.05% Eastern Europe & Russia 9.75% Africa 0.00% 6.75% 11.25% 11.25% 5.40% 1.05% 6.75% 0.00% 0.60% 5.40% 5.40% 0.00% 6.75% 15.00% 3.75% 8.25% 0.60% 3.75% 3.30% 3.30% 3.30% 3.75% 0.60% 1.05% 2.85% 15.00% 0.90% 6.75% 2.85% 6.75% 0.90% 0.75% 2.85% 6.75% 0.00% 2.40% 0.00% 0.90% 5.40% 1.80% 1.80% 2.40% Western Europe Caribbean Central and South America Africa Central and South America Eastern Europe & Russia Asia Western Europe Western Europe Africa Eastern Europe & Russia Western Europe Africa Western Europe Central and South America Central and South America Asia Eastern Europe & Russia Western Europe Asia Asia Western Europe Western Europe Middle East Western Europe Caribbean Asia Middle East Eastern Europe & Russia Africa Asia Middle East Eastern Europe & Russia Middle East Western Europe Eastern Europe & Russia Western Europe Asia Eastern Europe & Russia Asia Western Europe Asia 2.40% 9.75% 6.75% 5.40% 3.30% 3.75% 6.75% 3.30% 0.00% 0.00% 9.75% 5.40% 0.00% 1.05% 11.25% 2.85% 6.75% 5.40% 2.85% 3.30% 1.28% 5.40% 0.75% 1.28% 5.40% 3.30% 2.40% 8.25% 0.90% 6.75% 6.75% 0.00% 1.28% 3.75% 2.40% 3.30% 6.75% 2.40% 8.25% 5.40% 0.00% 0.00% Central and South America Eastern Europe & Russia Asia Eastern Europe & Russia Caribbean Africa Africa Africa Western Europe Australia & New Zealand Central and South America Africa Western Europe Middle East Asia Central and South America Asia Central and South America Central and South America Asia Eastern Europe & Russia Western Europe Middle East Middle East Africa Eastern Europe & Russia Eastern Europe & Russia Africa Middle East Africa Eastern Europe & Russia Asia Eastern Europe & Russia Eastern Europe & Russia Africa Western Europe Asia Caribbean Caribbean Central and South America Western Europe Western Europe 0.90% 2.40% 2.40% 5.40% 3.30% 6.75% 11.25% 0.75% 0.60% 0.00% 3.30% 11.25% 8.25% 6.75% Asia Asia Caribbean Africa Western Europe Africa Eastern Europe & Russia Middle East Western Europe North America Central and South America Central and South America Asia Africa Student SAMPLE PROJECT Advanced Corporate Finance Sample Project: Panera Bread INTRODUCTION: The Panera Bread ® Company (Panera) is a national bakery-café restaurant with headquarters Saint Louis, MO that operates 1,541 company-owned and franchise-operated bakery-cafés in fortytwo states, the District of Columbia, Ontario, Canada; Chile, Thailand, the Philippines, and Indonesia. Panera operates under names of the Panera Bread, Saint Louis Bread Co., and Paradise Bakery & Café and its bakery-cafés are located mostly in inner-city and suburban mall locations. The company has three business segments: bakery-café operations, franchise operations, and fresh dough and other product operations. (Panera Bread Company). Panera Bread Corporation started in 1976 in Boston as Au Bon Pain, a showcase operation for Pavallier BVP SA, a French manufacturer of commercial ovens. In 1978, the company was bought by Louis I. Kane, who began expanding in the Boston area. Three years later, Ronald M. Shaich joined him, and they formed a partnership called Au Bon Pain Co. In 1987 the Rosenthal family of Kirkwood, Missouri started a bakery-café in which they used a sour dough baking method to produce what they called “St. Louis Bread.” The company expanded slowly, and seven years later they had only five stores. But in 1993 St. Louis Bread started to franchise and quickly expanded to twenty bakery-cafés. As a result, the firm appeared on Inc. magazine's list of the five hundred fastestgrowing companies in the U.S (Panera Bread Company). On June 6, 1991, Au Bon Pain went public, made its initial public offering (IPO), and continued its growth through expansion of its operations and acquisitions. This company, the future Panera Bread, made an initial public offering announcing 2.5 million Class A common shares through Morgan Stanley & Co. Inc. and Montgomery Securities, as managers of the underwriting group. Au Bon Pain offered 1.5 million shares, and additional 1 million were offered to some preferred investors. During its debut, 1.875 million new shares were sold at $9 per share, but the price grew to over $13 by that fall of 1991. Au Bon Pain was quoted on the NASDAQ National Market System under the symbol ABPC. Net proceeds from the sale of the Class A common stock were used to repay long-term and bank debt. At the time of the initial IPO, Au Bon Pain was a Boston-based chain of 92 bakery cafés, 73 of which were company-operated and 19 of which were operated by franchisees. The proceeds were used to fund a series of acquisitions such as the 1992 acquisition of Warburton’s Bakery Café, Inc., a chain of over 100 units in Chicago, Pittsburgh and Boston with price tag of $16 million. The 1993 acquisition of Saint Louis Bread Co. cost $24 million ("Au Bon Pain to go public", 1991). Prior to this acquisition, Au Bon Pain had performed well in upscale urban markets but struggled to conquer the suburban family market. Ron Shaich, the Founder and Executive Chairman of the Board of the Panera Bread Company, recalls the 1993 merger that changed the destiny of both companies: “Our investment bankers asked me to meet the owners of [the Midwestern sandwich chain] St. Louis Bread Co., who were struggling about whether to franchise or not. I realized this would be a gateway to the suburban marketplace for Au Bon Pain. So we bought it for $23 million [and renamed it Panera]” (DeBaise, 2011). At the time of the merger, St. Louis Bread owned and operated nineteen bakery-cafés and one franchised outlet. St. Louis Bread bakery-cafés kept this name in Missouri; however, everywhere else, they took a different name--Panera Bread. (Panera Bread Company). 1 Student SAMPLE PROJECT The next major step for the Panera Bread Company happened in August 1998, when the company decided to sell its Au Bon Pain Division for $72 million to Bruckmann, Rosser, Sherrill & Co. LP., a New York investment firm, who also owned many other restaurant chains such as California Pizza Kitchen, Inc., Corner Bakery Café, Not Your Average Joe's, Inc., and Bravo Brio Restaurant Group, Inc. (Portfolio Companies, 2014). Although both Au Bon Pain and Saint Louis Bread used the same basic menu and concept, the new member differed from its parent corporation in both its locations and its target customer base. Saint Louis Bread was concentrated more in suburban areas and had a more family-oriented clientele. Through this acquisition, Au Bon Pain hoped to penetrate two previously under-exploited markets: the suburbs and the Midwest. But it was hard to do in practice, so in 1999, the company decided to sell all of Au Bon Pain Co., Inc.'s business units, which were more upscale, quick-service café niche concept. The company decided to follow Panera Bread’s concept with menu including freshly baked goods, made-to-order sandwiches, soups, salads and premium café beverages, which were similar to what we see today. By the time of sale, the Panera Bread/St. Louis Bakery Company had entered many new markets, continued to grow, and soon opened fifty-one company-owned bakery-cafés and forty- four franchise-operated units. In 1992, the company also began branching into foreign markets. (Panera Bread Company). LETTER TO THE SHAREHOLDER (Company, 2013): In their annul letters to shareholders published on April 22, 2014, the Panera Bread Company, declared that 2013 was another successful and productive year for the company because its earnings per share (EPS) grew 16%, the market cap was approximately $5 billion by the end of the year, which was a roughly $3.3 billion increase over the past five years; and they recorded 39.8% compound annual growth. Panera believes that this strong financial performance was a result of strategic investments, especially those that improved the customer experience and the quality of their food. Because of these changes, average unit volumes have grown from $1.6 million annually in 2000 to roughly $2.5 million as of 2013 (Company, 2013). The CEO stated that Panera’s current strategic plan was introduced in 2010, when the company decided that to maintain continued growth they have to invest in technology, as part of a holistic and comprehensive plan to provide an even better experience for their guests. Since 2013, this comprehensive vision for Panera’s future began to take form, and it is now called Panera 2.0. The company is focused on the total quality management pattern to drive the operational integrity of their cafés. And they are focused on growth and continue to develop new growth platforms for Panera (Company, 2013). Key Initiatives of 2014 highlight the potential they see in their business. In 2014, the company is focused on improving Panera’s competitive position, on expanding growth opportunities, on ensuring the necessary capabilities to improve their competitive position, on expanding growth opportunities, and finally on delivering Panera’s 2014 financial plan. The future of Panera lies with providing their customers a better alternative than their competitors (Company, 2013). Panera 2.0 focuses on a digital future like a new app that is an integrated and comprehensive solution which brings together new capabilities for digital ordering, payment, operations, and, ultimately, consumption. The first Panera 2.0 café was opened in Boston in 2012, but since then they have opened 13 other test cafés, which have showed them that Panera 2.0 works – for the café managers, for associates and for Panera customers, generating store sales that were among the highest for the company in 2013. Panera 2.0’s Rapid Pick-Up and Mobile Order app with payment capabilities to better serve “to go” customers, are expected to be available for the all café system by 2 Student SAMPLE PROJECT the end of 2014. Panera has made a second critical improvement to their competitive position through operational excellence by delivering the following to their guests: speed, accuracy, clean and wellmaintained cafés, and kindness. The third improvement is ongoing innovations to food, environment, and marketing. For instance, they announced flatbreads as a new food choice on the Panera menu as a part of a new more robust “snacking” platform. Through these food innovations together with their new menu boards and a number of other initiatives, they will amplify their “barbell pricing” structure. In 2013, they continued to develop their loyalty program MyPanera® to provide a more “personalized” experience for their guests and increase sales. Also, Panera plans to execute a more aggressive marketing strategy in 2014 that both reinforces their brand’s differentiation and seeks to boost market share, by launching the first national advertising campaign for broadcast television (Company, 2013). Panera CEO Ron Shaich plans to make new investments to ensure expanded opportunities for growth such as opening between 115 and 125 additional new high-return locations in 2014. They are also trying to expand to high-traffic urban location by prototyping cafés designed to handle the volume that comes with high intensity, which would require new processes around baking and dough production. Another 2014 innovation is redesigning the “Panera-to-You™” delivery system. The success of this strategy depends on the reinvention of delivery hubs (formerly known as catering hubs). By the end of 2014, the company expects to have delivery hubs in place serving more than 10% of the company cafés. All these changes will require the necessary capabilities if they’re to deliver on the promise of these initiatives. Financial investments will be necessary, but Information Technology used to be a major cost expense; whereas right now IT functions as a potentially powerful competitive advantage tool and has a critical impact on the business. It serves as a barrier to entry against other restaurants that don’t offer guests technology-enabled solutions. But everything comes with a price and by the end of 2014, they expect to have spent roughly $42 million on the technology and infrastructure required to live in our digital future (Company, 2013). BIOGRAPHY OF THE CEO The current Chief Executive Officer of Panera Bread, Ronald Mark Shaich, is also a Chairman and one of its founders. He is 60 years old and a Boston native, who holds a Bachelor of Arts degree in psychology from Clark University and a Master of Business Administration degree from Harvard Business School. His successful business career started when, as he was a student at Clark, he opened a successful convenience store for students. After getting his MBA, he worked as an assistant to the president of Store 24, Inc. and then as an assistant to the vice president of marketing at CVS Stores. Shaich’s career in the bakery industry started when he got a job as the regional manager of the Original Cookie Company and also opened his Cookie Jar bakery shops in Massachusetts. Then his path crossed with the original Au Bon Pain, a company started by a French oven manufacturer, which supplied bread for his Cookie Jar. Soon Shaich learned that the investor group that owned Au Bon Pain was ready to sell all three existing stores; he saw great opportunity and convinced a real estate investor, Louis I. Kane, to become his partner in this business venture; and his journey with this company, which would span three decades, started. . From the beginning, Shaich was determined to change the way America eats, and his idea informed the successful restaurant concepts of Au Bon Pain and Panera Bread. Shaich changed the causal restaurant industry by offering an alternative to fast food – handmade, artisan food served in warm and welcoming environments suitable for young people and families. Shaich confessed in an interview with St. Louis Post–Dispatch that “[w]e’ve been considered the poster child for the 3 Student SAMPLE PROJECT collapse of McDonald’s; […] It's so ludicrous. McDonald's problems were created 10, 15 years ago.… They focused too much on convenience and not on the food people want” (Nicklaus, 2014). Under Shaich’s leadership, Panera Bread serves more than eight million people each week, employs over 80,000 associates, and is ranked number five in the foodservice category on Fortune’s “World’s Most Admired Companies” list. Shaich was awarded the 2011 MUFSO Pioneer Award for his contribution to the history of the foodservice industry. He was also awarded in the IFMA’s Gold Plate Award as an outstanding leader in the industry in 2005. Further, he received the Nation’s Restaurant News Golden Chain Award twice, and he has also been a national finalist for Ernst & Young’s Entrepreneur of the Year. As the Company’s Chairman and CEO, Shaich promotes a variety of tech innovation and strategic initiatives for Panera Bread. Shaich I a remarkable entrepreneur who grew his business from zero into a national chain of nearly 1,800 bakery-cafés all around the United States and internationally, and who is still is committed to improving it over the long term (Panera Bread Company). MERGERS AND ACQUISITIONS In 2007, Panera Bread acquired Paradise Bakery & Café®, a Phoenix-based chain with over seventy locations in ten west and southwest states. This is the classic example of a horizontal merger between two chains which were once competitors. When Panera purchased 51% interest in the Scottsdale-based Paradise Bakery & Café, both companies were able to benefit from this operating merger. Paradise Bakery & Café President David Birzon remembers the merger: “We still see ourselves as the bakery-café leader in terms of quality. Before becoming involved with Panera, we would describe ourselves as an upscale version of Panera. We’ve always thought our baby was a little bit better looking…There’s a great synergy between our companies in that we give them the opportunity to compete in smaller markets, too.” Panera Bread Co. decided to keep Paradise Bakery & Café as a separate entity, even after they bought the remaining 49 percent of the company in December 2008. (Paradise Bakery & Café, 2014).The most recent acquisition occurred on April 9, 2013 when Panera Bread Co. acquired The Florida Bakery-café for the purchase price of $2.7 million. According to the United States Securities and Exchange Commission, great synergy is expected from cost savings opportunities. Panera Bread stocks are also affected by other companies’ mergers. For example in 2010 when Starbucks' announced its accusation of La Boulange, the parent company of Bay Bread, Panera’s stock went down by 1.6%, and Starbucks gained 2.4%. Since Panera Bread is operating in a highly competitive restaurant market, the main challenge for Panera Bread Co is to determine how the company can continue to achieve high growth rates in the future and which mergers and acquisition are high and generate the most synergy ("Business Case: Panera Bread Company", 2014). BANKRUPTCY Panera Bread Co. has recently been defended in a few lawsuits: • A September 12, 2013 class action lawsuit was filed in Cleveland's Ohio federal district court for allegedly violating the Fair Labor Standards Act and the Ohio Minimum Fair Wages Standards law. • On July 26, 2013 in Boston, Massachusetts, an individual lawsuit was filed for wrongful termination and racial and disability discrimination (the employer seems to have strong case against former employee for missing shifts and inability to perform duties). This case will be heard in the front of a judge this fall. 4 Student SAMPLE PROJECT • In April, 2011 Panera Bread was subject to Shareholder Derivative Litigation by shareholders who were damaged by, among other things, Panera’s overly aggressive expansion strategy. This case was favorably resolved in in April of 2011 and since then Panera Bread has been maintaining of mutually satisfactory relations with its controlling shareholder. None of these lawsuits could force Panera Bread into bankruptcy. Shares of Panera Bread (NASDAQ:PNRA) have fallen by 13% so far in 2014, but they are still at $157.43 as of June 9, 2014. This decrease is the result of the company’s weak first-quarter earnings. The company reported declining sales growth and margin contraction that resulted in a decline in profits. The company is not opening as many stores in 2014 as it has in the past, and it is also not growing its store sales as rapidly as it did in previous years. However, analysts are still relatively optimistic. They are expecting shares to keep the average price target at about $175 per share, which is more than 10% above than the current average share price on the market price of $158 per share. Panera is suffering from a variety of problems, but the company is far from a risk of bankruptcy, even if they have to pay off lawsuits. LEASING AGREEMENTS: Panera Bread Co., like most stores, has a lot of leases, both capital and operating. The company leases nearly all of its bakery-cafe locations and all of its fresh dough facilities. Lease terms for bakery-cafe and support center leases involve the initial non-cancelable lease clause plus one renewal option period, usually for 15 years. Terms for most fresh dough facility leases also have the initial non-cancelable clause plus the option of one or two renewal periods of 20 years each. Panera’s lease terms generally require them to pay a proportional share of real estate taxes, insurance, common area maintenance, and other operating costs. Many bakery-cafe leases have provisions for contingent rental or percentage rent payments when sales exceed specified amounts. Certain lease agreements involving the company provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy. Fresh dough is the key to Panera’s high-quality, artisan bread; and fresh produce is essential to their quality salads and sandwiches. They distribute fresh dough and produce through a leased fleet of temperature controlled trucks operated by our associates. As of December 31, 2013, Panera leased 220 trucks. The optimal maximum distribution range is approximately 300 miles; however, when necessary, the distribution ranges may be up to 500 miles (Form 10-K for Panera Bread Co, 2014). Panera Bread Co., like most retailers, has a lot of leases, and therefore its financial position is far weaker than could be guessed from GAAP financial statements. Operational leases and purchase commitments produce hidden debt. At the end of 2013, the company had $1.6B of hidden debt (Grosso, 2014). Table 1: Panera Bread Leases Less than 1 year 1-3 years 3-5 years More than 5 years Total Operating leases $134,614 $264,561 $254,616 $676,126 $1,329,917 Capital lease obligations $500 $1,013 $1,033 $3,602 $6,148 5 Student SAMPLE PROJECT Purchase obligations $271,354 $44 --- --- $271,398 Uncertain tax positions $554 $1,140 $590 $455 $2,739 Total $407,022 $266,758 $256,239 $680,183 $1,610,202 VALUATION MODEL-PART 1: Table2: Valuation Part 1 Valuation of Panera Bread Present Value of FCFF in high growth phase $227,502,141 Present Value of Terminal Value of Firm $3,100,601,275 Value of operating assets of the firm $2,873,099,134 Value of Cash, Marketable Securities & Non-operating assets $125,245,000 Value of Firm $2,747,854,134 Market Value of outstanding debt $1,685,239,160 Minority Interests Market Value of Equity Value of Equity in Options Value of Equity in Common Stock Market Value of Equity/share $0 $4,433,093,293 $0 $4,433,093,293 $160 Assumptions are presented in Appendix Table 4A. All calculations are based on K-10 from 2013 as of December, 31, 2013, and they are available in Appendix Table 1-3A. The effective tax rate is 37.27%. The company reported the previous year revenue for 2013 as $2,385,002,000, and EBIT $309,756,000. Book value of debt is adjusted to include operational leases as a real debt of $1,716,019,686.33. Market price per share is set up as $176.69 as of December, 2013. The risk free rate is 3%, and it is taken from ThatsWacc.com As of today, July 28th, 2014, the price of Panera Bread stock is $143.35 per share, but the Valuation-Model-calculated-price is $160, which appears to be fairly valued. The model determines the value of Panera Bread by analyzing the company’s fundamentals such as S27,672,839 Shares Outstanding, a Reinvestment Rate of 1%, and a Return on Capital of 18.81%--as well as by examining other financial indicators. Panera Bread Company is at this time projected to have a value of $2,747,854,134 with market capitalization of $4,433,093,293, debt of $1,685,239,160, and cash on hands of $125,245,000. This company had not issued any dividends in recent years. Valuation results are very close to that of Guru Focus (Panera Bread Co Inc, 2014), but these are only estimates and they may be inaccurate because they take only a few variables into consideration. 6 Student SAMPLE PROJECT VALUATION MODEL-PART 2: Table 3: Panera Debt Analysis Debt to Stock Price Ratio Debt % Market Value of Equity/share 0% $122.19 10.0% $130.14 20.0% $138.73 30.0% $148.02 40.0% $158.07 50.0% $168.97 60.0% $180.78 70.0% $193.60 80.0% $207.52 90.0% $222.65 100.0% $239.11 Panera Bread currently holds about $125,245,000 in cash and also has positive cash flow from operations, but the company currently holds $480,970,000 in liabilities with a Debt to Equity (D/E) ratio of 0.01, which may suggest the company is not taking enough advantage of borrowing and the price of stock suffers as result. Even if Operating Leases are calculated as liabilities, Panera Bread Company has a relatively low amount of debt. Panera debt analysis presented in Table 3 and graph below indicates that Panera Bread stock prices would increase if the company decided to use more debt. The highest price is observed at 100% of debt. Panera recently announced a buyback authorization for $600 million or about 15% of shares, and the company has also secured a five-year $100-million-term loan from Bank of America, Wells Fargo and TD Bank with a variable interest rate that is currently around 1.15%. Panera Bread Company plans to use the loan for general corporate purposes, including a range of growth initiatives such as the rollout of the Panera 2.0 instore technology initiative (Panera Bread Co Inc, 2014). “This modest amount of debt is the next logical step in the evolution of our thinking around capital structure,” said Roger Matthews, Panera Bread's CFO. Matthews notes, “As we continue to grow our store base, invest in expanded growth 7 Student SAMPLE PROJECT opportunities and return capital to shareholders through consistent share repurchase, we expect this debt should allow us to achieve a range of objectives for shareholders. However, nothing has changed in our commitment to maintain modest leverage on the balance sheet as well as significant financial capacity to be opportunistic” (Yohannan, 2014). WACC IMPACTS THE VALUE OF THE FIRM Table 4: Calculations are made using Master Input and Valuation Model WACC Value of Panera 0% $3,519,217,411 10% $2,903,131,344 20% $2,412,325,334 30% $2,017,163,105 40% $1,695,943,291 50% $1,432,543,961 60% $1,214,830,270 70% $1,033,558,697 80% $881,610,714 90% $753,448,878 100% $644,725,515 Maximizing the value of the firm is equivalent to minimizing the firm’s cost of capital. Capital structure affects WACC, and therefore firm value. From results presented above, there is obvious if WACC increases, firm value decreases; therefore, Panera should choose capital structure to obtain minimum cost of capital and this would make the firm worth the maximum possible amount. 8 Student SAMPLE PROJECT ANALYST ASSESSMENT: VALUE LINE: Table 5: Value Line Value Line Recent Price 153.15 P/E Ratio 22.4 Company’s Financial Strength A++ Stock’s Price Stability 70 Price Growth Persistence 85 Earnings Predictability 95 Timeliness 3 (Lowered 11/1/13) Safety 2 (Raised 12/3/10) Technical 1 Raised 5/16/14 Beta 0.85 (1.00 = Market) 2017-19 Projections Price Gain Annual Total Return High 280 85% 16% Low 210 35% 8% The Value Line estimates Panera’s Financial Strength as A++ and earning predictability as 95, which is fairly high. Panera’s Timelines Rank is 3, which is a measurement of probable price performance during the next six to 12 months, relative to other stocks. Panera’s result is in the middle since ranks are measured from 1-highest to 5-lowest. Safety Rank measures the company’s financial strength and the stock’s long-term price stability relative to other stocks, using the same 1 to 5 ranking system. Panera’s stocks are ranked 2, which mean that the stock is considerably less risky than those ranked 3, 4, or 5. The Value Line indicates that Panera Bread’s first-quarter of 2014 results were a bit better than expected, especially because the beginning of the year was rough due to severe weather and slightly higher-than-expected food cost inflation, but later sales went up 0.1%. Overall Margins went down a bit because of an increase in compensation and higher investment and marketing spending. The Value Line predicts stronger results in the second half 2014 because of recent investments in marketing, the improvement of operations and customer service, and the addition of 115-125 new locations this year. The Value Line prediction of Panera’s 2015-2019 Annual Total Return is between 8-16%. The projections for 2017-2019 suggest that PNRA will experience good capital appreciation potential over this time, but because of stiff competition among restaurants for consumers’ dollars, earnings predictability is uncertain (Spencer, 2014). 9 Student SAMPLE PROJECT MERGENT ONLINE ASSESSMENT: Table 6: Earnings Actual and Estimated Panera Bread Co. (PNRA) Earnings Estimates Actual (A) and Estimated (E) 2011A 2012A 2013A 2014 E 2015 E 2016 E Earnings Per Share 4.65 5.89 6.68 7 8.2 9.45 Cash Flow Per Share 7.92 9.83 0 11.57 13.41 0 Sales 1822.03 2130.06 2385 2564.65 2829.4 3188.75 Operating Profit 225.26 0 309.76 434.84 397.72 EBITDA 305.16 373.81 416.28 434.28 485.86 548.28 Net Debt -222.64 -297.14 0 -88.52 -182.92 -119.85 Pre Tax Profit 224.9 283 312.72 312.01 353.9 412 Mergent Online assessment takes into consideration the historical performance of Panera’s 2011-2013 earnings to predict 2014-2016 outcomes. Looking at estimated numbers, Mergent Online predicts Panera's share price in the $210-250 range by 2017-2019 because despite decreasing gross margins, PNRA has been able to consistently increase operating margins by 1.37% since 2004. The Panera 2.0 strategy should also increase operating margins in the future. Based on past data and future trends, Panera is expected to grow operating profits by 28% for the next three years, and this number is based on the estimation that company sales will grow 5%, produces revenue of 7%, and modest operating margin expansion. The restaurant industry is extremely competitive; therefore, price, value, food quality, locations, customer service, environment, and overall customer experience are extremely important for any restaurant chain to differentiate itself from the competition and maintain current customers. Because the financial future of the company depends on competition as well, Mergent Online Assessment has a tool that allows for comparing Panera to its competition. Chipotle Mexican Grill is often mentioned as Panera’s biggest competitor since both chains stand out by serving only natural antibiotic free food. Panera must implement strong plans in these areas to maintain its competitive advantage and loyal clientele, especially because Chipotle has very strong financial numbers presented in the Table 7 below. These strong numbers include the Price Earnings Ratio (PE), Market 10 Student SAMPLE PROJECT Cap, Share Price, especially because Chipotle hires fewer people and both companies have similar assets and liabilities, even though Panera has more liabilities and fewer assets. Panera’s ability to successfully implement its growth plans and strategies will be important in the success of the company’s stock price going forward. But if Panera is unable to beat its competition in a cost effective manner, its results could be impacted. During the past few years Panera performed strongly and outperformed average of the restaurant industry, but right now looking only at numbers, Panera currently trades at about 21.9 times earnings, compared to the restaurant industry average of 29.4. Panera has a PEG ratio (price to earnings in relation to its growth rate) of around 1.1, making the stock fairly valued in comparison to its growth. Panera’s biggest competition, Chipotle, currently trades at 56.2 times earnings and has a PEG ratio of 1.7, which means that Chipotle is trading at nearly double its growth rate. Chipotle’s stock price may still rise, but it is not likely to increase much since the stock has already had its major growth. Panera, on other hand, has much more room for improvement, so Panera seems like the like a stronger investment option (Panera Bread , 2014). Table 7: Panera Bread vs. Chipotle Comp. Name Revenues Gross Margin Net Income EBITDA Total Assets Total Liabilities PE Ratio Market Cap Share Price Panera 2,385,002,000 22.95 196,169,000 410,973,000 1,180,862,000 480,970,000 21.33 3,739 M 143.35 Chipotle 3,214,591,000 26.59 327,438,000 630,525,000 2,009,280,000 470,992,000 59.40 20,892M 673.58 GURU FOCUS: The Guru Focus Valuation of Panera PNRA According to Guru Focus, Fair Value of PNRA is $193.87 based on following data: PNRA current free cash flow: Free Cash Flow Growth (%) 10 years (-1.0) 5 years (0.20) 12 moths (44.30) Table 8: Guru Focus Per Share Data Annuals (Year End) Quarterly Fiscal Period December 2011 December 2012 December 2013 March 2014 Free Cash Flow 4.31 5.89 6.81 1.55 Table 9: Guru Focus Fair Value of PNRA is $193.87 based on following data Earnings per Share $6.81 Growth rate in the next 10 years 20% Business predictability 4.5 out of 5 Terminal Growth Rate 4% Years of Terminal Growth 10 Discount Rate 12% Tangible Book Value 17.87 Growth Value $101.49 Terminal Value $92.38 11 Student Margin of Safety SAMPLE PROJECT 20% There are many ways to evaluate a stock to determine whether it is undervalued, fairlyvalued, or overvalued, based on the most common valuation metrics: Earnings per Share, Growth Rate, Price to Book and Price/Earnings Growth Ratio (PEG), etc. Panera is priced lower than Chipotle (CMG). While Panera has a larger market cap of 3.9 billion, its PEG of 1.0 indicates that the stock price is undervalued. Other metrics also show that Panera's current stock price is undervalued relative to its competitors. If the amount of growth potential that Panera 2.0 generates is taken into consideration, it is obvious that Panera's current stock price of around $144.65 (as of July, 29, 2014) is rather undervalued. Guru Focus ranks Financial Strength, which measures how strong a company’s financial situation is, based on these factors: debt, debt to revenue ratio, and Altman Z-score. Guru Focus estimated that Panera Bread has a Financial Strength Rank of 9, which is an indicator of strong financial strength—meaning that the company is unlikely to fall into distressed situations (Guru Focus, 2014). Panera Bread Co.’s Earnings per Share Growth Rate for the quarter ending on Mar 9, 2014 was 9.40%. Panera Bread’s debt to revenue ratio for the quarter that ended in Mar. 2014 was 0.00. Panera Bread has a decreasing Gross Margin of, on average, 15.8% per year. The asset growth rate of 20% is faster than the revenue growth rate of 10.3% over past 5 years, which indicates that the company is getting less efficient. Revenue per share also declined. The company is planning to issue an acceptable amount of new debt. Panera Bread has enough cash to cover all of its debt, so its financial situation is stable (Guru Focus, 2014). A Fair Valuation (or Current Intrinsic value) of Panera can be estimated using a Discounted Cash Flow Model, where free cash flow is defined as operating cash flow minus capital expenditure. Number of shares outstanding is based on the latest Q1, 2014 financial report; discount rate is assumed to be 12%, terminal growth rate is set as 4%, and the span of terminal growth is 10 years. Based on the Fair Valuate Calculator, Panera should have a Revenue Growth Rate of 19.60% during the next ten years at $193.87 per share. The Fair Valuation is the most probable scenario considering that Panera's revenue growth rate is lower than it was in previous years due to stiff competition and the decreasing of Americans’ disposable income. Its revenue growth rate should increase once it implements Panera 2.0. Panera's stock is clearly undervalued and the market is irrational in its valuation, since Panera still has a lot of growth opportunities in its new menu, the new Panera 2.0 strategy, the MyPanera-loyalty program, and other innovations. Based on Guru Focus, Panera stock will increase soon (Guru Focus, 2014) because as Warren Buffett says, “If a business does well, the stock eventually follows” (Investopedia, 2014). CONCLUSION: Overall valuation of the financial strength of Panera Bread Co is encouraging for investors. Recent financial statements of Panera Bread from the end of 2013 and the first quarter of 2014 (Q1) show a recent descendent slide, slower growth, and potential lows based on the Price to Book ratio, but the long-term valuation for Panera is more positive because of solid balance sheets, favorable health trends, and strong management. Panera’s business philosophy of selling fresh food and warm bread at reasonable price follows the general trend in dining to scale back on upscale ingredients. Panera has a strong 12 Student SAMPLE PROJECT number of loyal customers , good brand recognition, and a reputation as a place serving a modern public that appreciates free Wi-Fi and a comfortable space with fireplaces—and has no time limit for dining. Panera Bread Co., with charismatic and visionary CEO Ron Shaich, makes constant efforts to improve and find new growth. Recently the company unveiled plans for Panera 2.0 technology starting Q1 of 2014 to upgrade customers’ dining experience through online ordering, an in-store kiosk ordering, an improved website, and a mobile app. This strategy, if successful, will improve customers’ experience and the company’s financial margins. The recent financial statements show that Panera currently has no debt, but the debt analysis shows it would be beneficial for the company to take on some amount of debt, to pay for technological innovations and lower the cost of capital, repurchase shares. According to Debt Impact calculation Price of Stock is only going up when debt percentage increases and the highest price is achieved at 100% of debt. Past financial statements of Panera’s revenue growth over the last 10 years have been very impressive, with a yearly average growth revenue rate of 20%. These numbers have decreased significantly in the last 5-6 years, but this decrease is typical in business because when the company gets bigger it becomes harder to grow aggressively in size. Panera's gross margin also has decreased to 23%, but they have stayed steady since then. Panera's operating margins as a measure of its efficiency have been stable for the last decade, and they are around 12%. Panera's return on equity has been moderately good at approximately 19% and growing steadily over the last decade, which shows that the company has ability to turn sales into income profitably over a long time period (Panera Bread , 2014). The major recommendation to Panera would be take advantage of the market opportunity and expand even more in geographical regions in which the company has very little presence like the western and the southern states. Panera's management plans involve opening 115 to 125 stores in 2014, and this is recommended strategy. Even though investments in expansion decrease profits in short term, they are beneficial in long term. Panera also should consider international expansion, especially to Europe, in the next 10-15 years. Overall, Panera has the brand awareness, concept, and reputation to be able to e win the competition among casual restaurants (Panera Bread Co Inc, 2014). Panera’s expansion and innovations such as Panera 2.0 require upfront capital investments, which will negatively affect the near-term earnings, and as a result, the earnings will be lower at least for the next 6-12 months. All of that will drive the prices of Panera shares down considerably; therefore, investors should invest in this company because overall prognostics are great. Panera currently performs an operational transformation, so the price of shares is low, but the company has a great business model and has been profitable for a very long time; it has a well-known brand, a positive cash flow, and no significant debt. All presented valuations and financial data support the argument that Panera is still considered to be a high growth company and it is good investment. 13 Student SAMPLE PROJECT Works Cited "Au Bon Pain to go public". (1991, June 7). Retrieved from Boston Globe: http://www.highbeam.com/doc/1P2-7663437.html "Business Case: Panera Bread Company". (2014, June 5). Retrieved from http://www.123helpme.com/business-case-panera-bread-company-view.asp?id=164008 (2014). Retrieved from Guru Focus: http://www.gurufocus.com/term/rank_balancesheet/PNRA/Financial%2BStrength/Panera%2BBread% 2BCo%2BInc Chicago Sun-Times. (2014, January 9). Retrieved from How HarvesTime succeeds where Dominick’s failed: http://voices.suntimes.com/business-2/grid/harvestime-succeeded-dominicks-failed/ Commission, U. S. (2014). Quarterly Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange. Washington DC: Commission file number: 0-19253. Company, P. B. (2013). 2013 Annual Report to Stockholders. Sain Lois, MO. DeBaise, C. (2011). How I Built It: Panera Serves Up Business. Wall Stree Journal, Easterm editon, B. 6. (2014). Form 10-K for PANERA BREAD CO . SEC Fillings for PNRA. (2014). Form 10-K for Panera Bread Co. SEC Fillings for PNRA. Grosso, B. (2014, July 2). Seeking Alpha. Retrieved from Panera: Opportunity In The Broken Growth Story? : http://seekingalpha.com/article/2296745-panera-opportunity-in-the-broken-growth-story Investopedia. (2014, July 4). Retrieved from http://www.investopedia.com/free/ Labor, U. S. (2013). Bureau of Labor Statistics . http://www.bls.gov/opub/ted/2014/ted_20140305.htm. Oxford Dictionaries. (2013, August 4). Retrieved from http://oxforddictionaries.com/us/definition/american_english/ethics Panera Bread . (2014, June 25). Retrieved from Mergent Online: http://www.mergentonline.com.ezproxy.dom.edu/companydetail.php?pagetype=capitalstock&compnu mber=66466&issueid=1&entityid=131345&type=2 Panera Bread (PNRA) . (2010, June 4). Retrieved from Seeking Alpha: http://seekingalpha.com/news/350861 Panera Bread Co Inc (NAS:PNRA). (2014, July 15). Retrieved from Gurufocus: http://www.gurufocus.com/term/zscore/PNRA/Altman%2BZ-Score/Panera%2BBread%2BCo%2BInc Panera Bread Co Inc. (2014, July 28). Retrieved from Guru Focus: http://www.gurufocus.com//stock.php?symbol=PNRA Panera Bread Company. (n.d.). Retrieved from Reference for Business-- Company Profile, Information, Business Description, History, Background Information on Panera Bread : http://www.referenceforbusiness.com/history2/58/Panera-Bread-Company.html 14 Student SAMPLE PROJECT Panera Bread Company - Company Profile, Information, Business Description, History, Background Information on Panera Bread Company. (n.d.). Retrieved from Reference for Business : http://www.referenceforbusiness.com/history2/58/Panera-Bread-Company.html Paradise Bakery & Café. (2014). Retrieved from QSR Magazine: http://www2.qsrmagazine.com/articles/ones_to_watch/106/paradise-2.phtml Portfolio Companies. (2014, June 5). Retrieved from BRS: http://www.brs.com/port_rest.html Reitmeister, S. (2012, June 4). Seeking Alpha. Read. Decide. Invest. Retrieved from Panera Bread (PNRA) slips in after hours trading following Starbucks' (SBUX) announcement that...: http://seekingalpha.com/news/350861 Spencer, M. E. (2014, May 30). Value Line Panera Bread PNRA. Yohannan, J. (2014, June 12). Market Wired. Retrieved from Panera Bread Company Closes on $100 Million Term Loan: http://www.marketwired.com/press-release/panera-bread-company-closes-on-100million-term-loan-nasdaq-pnra-1920221.htm 15 Student SAMPLE PROJECT Appendix: Table 1 A: PANERA BREAD COMPANY CONSOLIDATED BALANCE SHEETS (Form 10-K for PANERA BREAD CO , 2014) (in thousands, except share and per share information) December 31, December 25, 2013 2012 ASSETS Current assets: Cash and cash equivalents $ 125,245 $ 297,141 Trade accounts receivable, net 32,965 43,843 Other accounts receivable 51,637 42,419 Inventories 21,916 19,714 Prepaid expenses and other 43,064 42,223 Deferred income taxes 27,889 33,502 Total current assets 302,716 478,842 Property and equipment, net 669,409 571,754 Other assets: Goodwill 123,013 121,903 Other intangible assets, net 79,768 88,073 Deposits and other 5,956 7,591 Total other assets 208,737 217,567 Total assets $ 1,180,862 $ 1,268,163 LIABILITIES Current liabilities: Accounts payable $ 17,533 $ 9,371 Accrued expenses 285,792 268,169 Total current liabilities 303,325 277,540 Deferred rent 65,974 59,822 Deferred income taxes 65,398 60,655 Other long-term liabilities 46,273 48,227 Total liabilities 480,970 446,244 Commitments and contingencies (Note 13) STOCKHOLDERS' EQUITY Common stock, $.0001 par value per share: Class A, 112,500,000 shares authorized; 30,573,851 3 3 shares issued and 26,290,446 shares outstanding at December 31, 2013 and 30,458,238 shares issued and 28,208,684 shares outstanding at December 25, 2012 Class B, 10,000,000 shares authorized; 1,382,393 shares — — issued and outstanding at December 31, 2013 and 1,383,687 shares issued and outstanding at December 25, 2012 Treasury stock, carried at cost; 4,283,405 shares at (546,570 ) (207,161 ) December 31, 2013 and 2,249,554 shares at December 25, 2012 Preferred stock, $.0001 par value per share; 2,000,000 — — shares authorized and no shares issued or outstanding 16 Student SAMPLE PROJECT at December 31, 2013 and December 25, 2012 Additional paid-in capital Accumulated other comprehensive (loss) income Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 196,908 (333 ) 1,049,884 699,892 $ 1,180,862 174,690 672 853,715 821,919 $ 1,268,163 Table 2 A: PANERA BREAD COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands, except per share information) For the fiscal year ended December 31, December 25, December 27, 2013 2012 2011 Revenues: Bakery-cafe sales, net Franchise royalties and fees Fresh dough and other product sales to franchisees Total revenues Costs and expenses: Bakery-cafe expenses: Cost of food and paper products Labor Occupancy Other operating expenses Total bakery-cafe expenses Fresh dough and other product cost of sales to franchisees Depreciation and amortization General and administrative expenses Pre-opening expenses Total costs and expenses Operating profit Interest expense Other (income) expense, net Income before income taxes Income taxes Net income Earnings per common share: Basic Diluted $ 2,108,908 112,641 163,453 $ 1,879,280 102,076 148,701 $ 1,592,951 92,793 136,288 $ 2,385,002 $ 2,130,057 $ 1,822,032 $ 625,622 625,457 148,816 295,539 1,695,434 142,160 $ 552,580 559,446 130,793 256,029 1,498,848 131,006 $ 470,398 484,014 115,290 216,237 1,285,939 116,267 $ $ $ 106,523 123,335 90,939 117,932 79,899 113,083 7,794 2,075,246 309,756 1,053 (4,017 ) 312,720 116,551 196,169 8,462 1,847,187 282,870 1,082 (1,208 ) 282,996 109,548 173,448 6,585 1,601,773 220,259 822 (466 ) 219,903 83,951 135,952 6.85 6.81 $ $ $ 5.94 5.89 $ $ $ 4.59 4.55 17 Student SAMPLE PROJECT Weighted average shares of common and common equivalent shares outstanding: Basic Diluted Other comprehensive income (loss), net of tax: Foreign currency translation adjustment Other comprehensive (loss) income Comprehensive income 28,629 28,794 29,217 29,455 29,601 29,903 $ (1,005 ) $ 364 $ 33 $ (1,005 ) $ 364 $ 33 $ 173,812 $ 135,985 $ 195,164 Table 3 A: PANERA BREAD COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the fiscal year ended December 31, December 25, December 27, 2013 2012 2011 Cash flows from operations: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation expense Tax benefit from exercise of stock options Deferred income taxes Loss on disposals of property and equipment Other Changes in operating assets and liabilities, excluding the effect of acquisitions and dispositions: Trade and other accounts receivable, net Inventories Prepaid expenses and other Deposits and other Accounts payable $ 196,169 106,523 10,703 (8,100 ) $ 173,448 90,939 9,094 (8,587 ) $ 135,952 79,899 9,861 (4,994 ) 10,356 5,764 20,334 3,995 1,351 1,789 589 475 634 (31,414 ) (16,369 ) (2,440 ) (10,995 ) 161 (6,513 ) (2,183 ) (7,323 ) 117 8,538 3,021 (2,186 ) (841 ) 1,449 8,162 18 Student SAMPLE PROJECT Accrued expenses Deferred rent Other long-term liabilities Net cash provided by operating activities Cash flows from investing activities: Additions to property and equipment Acquisitions, net of cash acquired Purchase of investments Proceeds from sale of investments Proceeds from sale of property and equipment Proceeds from sale-leaseback transactions Net cash used in investing activities Cash flows from financing activities: Repurchase of common stock Exercise of employee stock options Tax benefit from exercise of stock options Proceeds from issuance of common stock under employee benefit plans Capitalized debt issuance costs Payment of deferred acquisition holdback Net cash used in financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 13,372 5,868 (2,432 ) 348,417 49,246 5,718 (4,005 ) 289,456 19,630 6,081 3,906 236,889 (192,010 ) (2,446 ) (97,919 ) 97,936 — (152,328 ) (47,951 ) — — — 6,132 4,538 (188,307 ) (195,741 ) (152,194 ) (339,409 ) 573 8,100 (31,566 ) 4,455 8,587 (96,605 ) 3,193 4,994 2,842 2,462 2,040 (107,932 ) (44,377 ) — — 115 — — (4,112 ) (1,097 ) (2,055 ) — (4,976 ) (332,006 ) (171,896 ) (19,214 ) 74,501 (91,354 ) (6,659 ) 297,141 222,640 229,299 $ 125,245 $ 297,141 $ 222,640 Table 4 A: Assumptions Inputs From Current Financials Current EBIT = Current Interest Expense = Current Capital Spending Current Depreciation & Amortization Effective tax rate (for use on operating income) Marginal tax rate (for use on cost of debt) Current Revenues = Current Non-cash Working Capital = Panera Bread $309,756,000 $1,053,000 $192,010,000 $106,523,000 37.27% 37% $2,385,002,000 ($125,854,000) 19 Student SAMPLE PROJECT Chg. Working Capital = Book Value of Debt = Book Value of Equity = Cash & Marketable Securities = Market Data for your firm Is your stock currently traded? If yes, enter the following: Current Stock Price = Number of shares outstanding = ($30,015,000) $1,716,019,686.33 $699,892,000 125,245,000 Yes 176.69 27,672,839 Market Value of Debt = If no, enter the following Would you like to use the book value debt ratio? If no, enter the debt ratio to use in valuation No 0.01% General Market Data Long Term Risk free rate= Risk premium for equity = 3.00% 12.93% Ratings Do you want to estimate the firm's synthetic rating = If yes, choose the type of firm If not, what is the current rating of the firm? Enter the cost of debt associated with the rating = Yes 1 A++ 0.00% Options Do you have equity options (management options, warrants) outstanding? If yes, enter the number of options Average strike price Average maturity Standard Deviation in stock price Do you want to use the stock price to value the option or your estimated value? Valuation Inputs High Growth Period Length of high growth period = Beta to use for high growth period for your firm= Return on Capital = Reinvestment Rate = Do you want me to gradually adjust your high growth inputs in the second half? Stable Growth Period Growth rate during stable growth period = Beta to use in stable growth period = Risk premium for equity in stable growth period = Debt Ratio to use in stable growth period = Pre-tax cost of debt in stable growth period = $0 No 0.00 $0.00 0 0% Current Price 5 0.81 18.81% 1.00% Yes 10.00% 1.00 7.00% 30.00% 9.00% 20 Student Tax Rate to use in stable growth period = SAMPLE PROJECT 37.00% 21
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CARGILL COMPANY
Advanced Corporate Finance Sample Project: Cargill Company

INTRODUCTION:
The Cargill Cotton Company is an international company that has, for the longest time worked
with the growth, ginning, buying, selling and production of cotton. The company’s main offices are
in Memphis and Liverpool where the main merchandising is done. There are many more supporting
companies all over the globe that contribute to making the company internationally productive. As
mentioned earlier, the company works with all processes involved in making the final product of
cotton. The company is widely connected with growers of cotton, ginners who have access to their
cotton gins and warehouses, buyers of cotton, textile companies that use cotton as well as numerous
textile mills.
Cargill Cotton has been running for more than 150 years now. It was founded by W.W. Cargill
whose main aim was to help farmers prosper and create a connection between them and the
consumers of their products. In 1870, the first headquarters were established in Albert Lea,
Minnesota. The location was the best because of the then railroad expansion in Southern Minessota.
In 1880, the company expanded beyond grain and started dealing with items such as flour, feed, coal
and also ventured into other investments such as water irrigation, large scale farms, railroads, lumber
and seeds.
Between the years 1912 to 1923, the company changed names and acquired additional companies
that led to rapid expansion. In 1923, for instance, the company acquired a grain merchandising firm
which had offices that were located in the East Coast. The new company was also quite advanced in
technology which came as an added advantage to Cargill cotton. In 1930, the name Cargill became
the official name after numerous changes over the years. The first establishments were set up in other
countries such as Canada, Buenos Aires, Argentina among others. These offices were very small and
closed due to the Second World War.
After the world war, the company kept expanding and diversifying in terms of the products
involved. The offices that closed during the world war were reopened and new ideas were launched.
The years that followed marked the company’s first steps towards global expansion. In the late 1900s
Cargill Cotton reorganized its architecture and created more than one hundred business units which
were focused on providing the best products and services for their customers. In the year 2003, the
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company’s earnings finally went above $1 billion. Ever since then the company has celebrated 150
years of steady growth.
LETTER THE STAKEHOLDERS (Cargill, 2016)
In the year 2016, the company reported adjusted operating earnings of $1.64 billion which
showed a decrease in 15% from the year 2015. Based on a U.S. GAAP, the net earnings were
observed to have rose by a total of 50% to $2.38 billion. This was a boost by gains on the sales of
quite a number of businesses that were partially offset by impairments in the operations of the
company and other assets. There was a significant reduction in the company’s revenues by an
average of 11% to a value $107.2 billion which was caused by lower commodity prices.
The different trading activities yielded different results with some of the fields thriving while
others did not do as well as the others. Areas that reported good weather had a problem of sluggish
global demand which caused large food stocks that led to weaker prices and eventually, a weaker
market. In emerging economies, there were cases of stalled growth. In spite of this, most of the
companies all over the world yielded excellent results. Some of them were the companies involved in
animal feed and nutrition, grain and oil seeds, poultry, salt, among other products.
For future growth, the company has simplified the leadership and organizational structure.
The previous structure, which was two-tiered, was replaced with a smaller executive team that
represents the company’s major lines of business and key functions. The executive team is
responsible for capital allocation, portfolio management, strategic direction, talent development, to
name but a few. The advantage of this is faster decision making, increased accountability and taking
better advantage of global expansion.
BIOGRAPHY OF THE CEO
David MacLennan has been the CEO of Cargill since 2013. He was first elected into office in
the year 2008 and is currently the 9th CEO of the company since it was founded. He helped in
establishing the company’s financial business in investing and trading at the beginning of his career.
He served in the Markets division as the chief financial officer and later moved to Geneva to be in
charge of Cargill Energy. He was also a supervisor in other companies affiliated to Cargill which
majored on food ingredients. He later became the Chief Financial officer and the Chief operating
officer.
Before working in Cargill, he worked in the futures and securities sector in Chicago as a
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phone clerk, risk manager and runner. He obtained financial and commodities trading skills from the
back office to the front office. In addition to Cargill, MacLennan serves as chairman on the boards of
Minnesota business partnership and Ecolab. Previously, he served in boards of other public
companies such as First city financial and C.H. Robinson. He also volunteers with the junior
Achievement association. He has a bachelor’s degree in English and an MBA in finance from the
University of Chicago.
MERGERS AND ACQUISITIONS
Ever since it was founded, Cargill has acquired many companies that have contributed to its
current global expansion. One of the company’s earliest acquisitions was Milwaukee based Taylor
and Bournique Company, which was merchandising eastern grains with offices in Wisconsin and
New York. In 1936, a number of Cargill businesses are merged to make Cargill Incorporated. In the
year 1943, Cargill started soybean processing business with the acquisition of plants at Fort Dodge
and Cedar rapids. In 1951, the feed division of the company merged with the Royal feed and milling
company of Memphis, Tennessee which majors in feeds for poultry and livestock.
In 1966, Cargill acquired the Paramount Poultry brand and enters the broiler chicken industry. In
the next year, the company purchases Cedar Rapids, a corn wet milling industry and officially enters
the grain hauling industry. In 1969, the company joined a Taiwan company in the production of
livestock and poultry feed. Two years later, in 1971, Cargill acquired The Gordy Salt Company
which put Cargill in the evaporated salt industry. After this, Cargill acquires the Barton salt
Company. Over the years the company has made acquisitions and merges that have contributed to its
global success.
Cotton merchandising began in 1975 after the company acquired Hohenberg Bros. Company
which was located in Memphis, Tennessee. Three years later the acquisition of Leslie Salt led to the
establishment of Cargill Solar salt facilities. Later on, Cargill enters the beef-processing industry and
the coffee trading business by acquiring related companies. One of the greatest acquisitions of the
company was in 1981, the acquisition of Ralli Bros. and Coney which has processing locations across
different continents.

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CONSOLIDATED REVIEW
Table 1: Quarterly financial results

From table 1, the quarterly financial results indicate a positive change in the company’s sales and
other revenues. The table shows the results for the years 2006 and 2005. The net earnings as of the
year 2006 indicate an increase in comparison to the results in the year 2005. These results were
obtained at the end of three months.
Table 2: Nine-month financial results

The nine month financial results indicate a significant change in the net earnings. Sales and other
revenues had an increase of 6% while the cash flow from continuing operations increased by 18%.
The Capital investments had an impressive increase of 43%.
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FIVE YEAR FINANCIAL SUMMARY
Table 3. Financial summary

Over the last five years the sales and other revenues have increased between the year 2017
and 2018. However, this figure decreased significantly from the year 2014. The decrease could be
related to the then leadership. The problem was solved by creating a smaller executive board which
made it easier to manage the global company and make decisions that would contributed to the
growth of the company. The net earnings of the company have increased significantly with a total of
1822 million dollars in the year 2014 to 3103 million dollars in the year 2018. The total stockholders’
equity has increased over the years.

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ANALYSIS MODEL
Table 4. Summary of Cash flow

The cash flow, as indicated on the table, has increased from continuing operations. This is in
spite of the fact that there was a number of discontinued operations. The cash flow from the business
acquisitions also show a significant increase in the one year of the report. This can be used to predict
the overall of the trend of the company since the company is always expanding.
VALUATION MODEL
According to the table below, in a span of one year, there was a 7% increase in the
consolidated debt of the company. This can be majorly attributed to the non-recourse debt of the
company. The short term recourse date also shows an increase between the year 2005 and 2006
which is also a contributing factor to the overall increase in consolidated debt.

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Table 5. Summary of debt

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CARGILL COMPANY

CONTINUING OPERATIONS
Continuing operations of the company contribute greatly to the financial health of the company.
From the table 6, there is an increase in the earnings attributed to continuing operations. The
company indicates a significant overall increase in earnings from continued operations.
Table 6. Earnings from continuing operations

8

Student

CARGILL COMPANY

CONCLUSION:
The overall valuation of the financial strength of Cargill Company is very positive and
attractive to investors. The financial statements that are indicated in the tables above are a general
example of the growth of the company. The company indicates a steady and positive rate of
growth and much reduced risks especially based on the commodities that the business deals with.
The positive financial results are mainly attributed to the company’s management and leadership
whose change has led to significant financial improvement over the years.
Cargill’s initial idea was to provide a platform where consumers would connect with
producers of significant commodities that are used in our daily lives. Looking at the current state
of the company, the results have exceeded the initia...


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