Finance Simulation: M&A in Wine Country

Valuation Exercise
Note:
This exercise is designed to help you determine the value of the assigned enterprise. Use assumptions supplied in the
Foreground Reading and in the spreadsheet to estimate free cash flows, a WACC, and terminal values for Bel Vino Corporation
and Starshine Vineyards.
Complete the valuation exercise and submit to your instructor as directed.
 M&A in Wine Country
Bel Vino Base Case Valuation: Expanded

<=History Pro Forma =>

Operating Forecasts 2006 2007 2008 2009 2010 2011 2012 2013 Pro forma assumptions

US Sales 330 328 330 0.5% annual growth

International Sales 29 32 36 13.0% annual growth
Net Sales 359 360 366
Cost of Goods Sold 160 150 140 38.0% of sales
Depreciation 24 9 9 20.0% of beginning net PP&E
Marketing Expense 23 24 24 7.0% of sales
Other SG&A 107 108 111 30.0% of sales
EBIT 45 69 82

Supplementary Schedules
Net Working Capital
working cash 10 10 10 2.8% of sales
A/R 98 99 100 100 days sales outstanding
Inventory 310 291 272 708 days of COGS
Other CA 7 7 7 2.0% of sales
A/P 90 90 90 90 days of cash op expenses
Net working capital 335 317 299
D NWC

Other assets 45 45 45 12.50% of sales

D Other assets

Beginning net PP&E 144 140 132

Capital Expenditures 20 20 20 given
Depreciation 24 28 26 20% of beginning net PP&E
Ending Net PP&E 140 132 126

Free Cash Flow Calculation Pro Forma =>

2009 2010 2011 2012 2013 WACC Calculation
EBIT Asset beta 0.82
EBIT(1-t) tax rate = 40% Risk-free rate 4.86%
Depreciation Market Risk Premium 5.00%
Capital expenditures Cost of debt 6.00%
D NWC Target D/V 35%
D Other assets
Free cash flow Implied debt beta
Terminal value Perp. g = 3% growing perpetuity
Re-levered equity beta
Discount factor Cost of equity
PV(FCF + TV) WACC
PV Enterprise
Less EOY 2008 Debt 301
Estimated Equity Value
number of shares (000,000s) 10

Value per share $ -

 M&A in Wine Country
Starshine Base Case Valuation: Expanded

<=History Pro Forma =>

Operating Forecasts 2006 2007 2008 2009 2010 2011 2012

US Sales 250 255 265

International Sales 225 240 260
Net Sales 475 495 525
Cost of Goods Sold 200 205 230
Depreciation 40 55 46
Marketing Expense 52 53 53
Other SG&A 148 152 152
EBIT 35 30 44

Supplementary Schedules
Net Working Capital
working cash 40 30 21
A/R 175 179 181
Inventory 250 262 271
Other CA 33 34 34
A/P 83 85 86
Net working capital 415 419 422
D NWC

Other assets 24 24 24
D Other assets

Beginning net PP&E 307 277 232

Capital Expenditures 10 10 10
Depreciation 40 55 46
Ending Net PP&E 277 232 195

Free Cash Flow Calculation Pro Forma =>

2009 2010 2011 2012
EBIT
EBIT(1-t) tax rate = 40%
Depreciation
Capital expenditures
D NWC
D Other assets
Free cash flow
Terminal value Perp. g = 3%

Discount factor
PV(FCF + TV)
PV Enterprise
Less EOY 2008 Debt 235
Estimated Equity Value
number of shares (000,000s) 8.0

Value per share $ -

2013 Pro forma assumptions

4.0% annual growth

8.0% annual growth

43.8% of sales
20.0% of beginning net PP&E
10.0% of sales
29.0% of sales

4.0% of sales
126 days sales outstanding
430 days of COGS
6.5% of sales
136 days of COGS

4.7% of sales

given
20% of beginning net PP&E

2013 WACC Calculation

Asset beta 0.82
Risk-free rate 4.86%
Market Risk Premium 5.00%
Cost of debt 6.00%
Target D/V 27%
 Implied debt beta
growing perpetuity
Re-levered equity beta
Cost of equity
WACC