American Greetings Case Study Solution
WACC:
WACC is the minimum return which the investors want from American Greetings. WACC is calculated by multiplying the cost of equity with the weight of equity plus cost of debt multiply with the weight of debt. The WACC of American Greetings is approximately 9.6%. However, the current WACC is likely to be changed if the share buyback strategy is implemented because of the changes in capital structure.
Share Price as per EBITDA Multiple:
The share price of American Greetings as per the multiple of the average EBITDA of the industry is almost $32.53 per share. The average EBITDA multiple of the companies which are operating in the greeting card publishing sector is about 7.3 times, while the EBITDA of American Greetings is almost $204m. The enterprise value and the equity value of American Greetings are $1481m and $1246m respectively. The share price of American Greetings as per the EBITDA multiples is way higher than the current share price which suggests that the shares of AG are trading at a substantially lower value. In this scenario, it is recommended that the management should pursue the share buyback option.
Share Price as per P/E ratio method:
The P/E ratio of American Greeting is six times, it means that the earnings are generating the profits which are greater than earnings six times and the EPS is $2.22. The share price as per the P/E ratio method is also slightly greater than the actual amount on which the share are trading the share price is $13.32 per share.
Earnings per Share:
The earnings per share under the bullish scenario is quite favorable for American Greetings, on the other hand, the earnings per share under the bearish scenario is substantially low especially in the years 2014 and 2015. The main reason for this is the positive growth prospects under the bullish scenario regarding the revenues and operating profits, as light reduction in the operating profit and revenue growth might seriously change the figures of EPS and free cash flows.
Appendixes:
Valuation of American Greetings as per Multiples and P/E ratio:
| Value of American Greetings | |
| Valuation as per EBITDA multiple | |
| Outstanding number of shares | 38.32 |
| EBITDA Multiple | 7.3 |
| EBITDA of American Greetings | 204 |
| Enterprise Value | 1481.23 |
| Less: Debt | 235 |
| Equity value of American Greetings | 1246.59 |
| Share price | 32.53 |
| Valuation as per P/E ratio method | |
| P/E ratio | 6 |
| EPS | 2.22 |
| Share price | 13.32 |
WACC:
| Risk free rate | 2.80% |
| Market risk premium | 5.50% |
| Beta | 1.63 |
| Cost of equity | 11.77% |
| Credit spread | 5.76% |
| Rsik free rate | 2.80% |
| Cost of debt | 5.22% |
| Market Value of equity | 479.38 |
| Market value of debt | 235 |
| WACC | 9.61% |
Free Cash Flows:
| Bullish | 1 | 2 | 3 | 4 | 5 |
| 2011 | 2012 | 2013 | 2014 | 2015 | |
| Net Income | 118 | 129 | 142 | 156 | 171 |
| Add: Interest (1-Tax) | 14 | 14 | 14 | 14 | 15 |
| Less: Change in working capital | - | (52) | (18) | (14) | (11) |
| FCF | 131 | 195 | 174 | 184 | 196 |
| Discounted FCF | 120 | 162 | 132 | 127 | 124 |
| WACC | 9.61% | ||||
| NPV | $ 665 | ||||
| Share Price | $ 17.35 |
| Bearish | 1 | 2 | 3 | 4 | 5 |
| 2011 | 2012 | 2013 | 2014 | 2015 | |
| Net Income | 118 | 128 | 138 | 147 | 155 |
| Add: Interest (1-Tax) | 14 | 14 | 14 | 14 | 14 |
| Less: Change in working capital | - | (55) | (22) | (18) | (16) |
| FCF | 131 | 196 | 173 | 179 | 185 |
| Discounted FCF | 120 | 163 | 131 | 124 | 117 |
| WACC | 9.61% | ||||
| NPV | $ 655 | ||||
| Share price | $ 17.10 |
American Greetings Harvard Case Solution & Analysis
Earnings per Share:
| Bullish | 2011 | 2012 | 2013 | 2014 | 2015 |
| Net Income | 118 | 129 | 142 | 156 | 171 |
| Outstanding Shares | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 |
| EPS (Bullish) | 3.07 | 3.37 | 3.70 | 4.06 | 4.45 |
| Bearish | 2011 | 2012 | 2013 | 2014 | 2015 |
| Net Income | 118 | 128 | 138 | 147 | 155 |
| Outstanding Shares | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 |
| EPS (Bearish) | 3.07 | 3.34 | 3.60 | 3.84 | 4.05 |
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