Boston Beer Co. Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Discounted Cash Flow Technique:

The discounted cash flow method is used for valuation of the project on a present value basis. The cash flows of the project are calculated and discounted by the weighted average cost of equity to calculate the present value of the cash flows. Free cash flows of Boston Beer Company are calculated by adding back all the non cash expenses that are amortization and depreciation, and changes in working capital and capital expenditure to the net income of the company. The cost of equity is used as the discount rate to discount the cash flows. Cost of equity is calculated by using the capital asset pricing model. Few assumptions of the capital asset pricing model to be undertaken which is, risk free rate of return is assumed to be 5.35 percent, beta is assumed to be 1 and the average market risk premium is assumed to be 5 percent. There are certain limitations and assumptions of the capital asset pricing model (CAPM) that is investor would have the diversified portfolio, investors can invest its investment at risk free rate of return, market is totally perfect and market premium remain same throughout the decision. The cost of equity using the formula of the capital asset pricing model is 10.35 percent.

boston beer case solution

Assumptions:

All the assumptions are taken on an average basis from year 1992 to 1995 as the percentage of sales. All the assumptions taken for calculation of discounted free cash flow are mentioned in Exhibit 5.

The present value of free cash flows of Boston Beer Company is $31,253 and the present value of terminal value is $92,905 and per share enterprise value of Boston Beer Company is $6.79. As shown in exhibit 3.

Multiple Valuation Technique:

The multiple Valuation technique is used to calculate the enterprise value per share. Boston Beer Company per share price can be calculated by using different multiples, that is sales multiples, earnings before interest, tax, amortization and depreciation (EBITDA) multiple or net earning multiple. Sales, EBITDA and EAT per share price is calculated by dividing the enterprise value with the value of sales, EBITDA and EAT. The per share value of using the sales multiple is $0.14 by the end of year 2000. The per share value of Boston Beer Company in earnings before interest, tax amortization and depreciation (EBITDA) multiple is $2.39. Per share value using the earnings is $5.47. All these calculations are shown in exhibit 4.

APPENDICES:

EXHIBIT 1:

	Pete's Brewing Company	Red hooks Ale Brewery	Average
Stock Price	24.75	27.00	25.88
Price Earnings Ratio	100	36	68


INTRINSIC VALUE
Price Earnings Ratio	68
Earnings Per Share	$0.26
Value Per Share	$17.68

EXHIBIT 2:

SENSITIVITY ANALYSIS

	Nine Months Ended
	September 30,
	1995	1995	1995
		10%	-10%
Sales	121,895	134,085	109,706
Less excise taxes	12,990	14,289	11,691
Net sales	108,905	119,796	98,015
Cost of goods sold	51,615	56,777	46,454
Gross profit	57,290	63,019	51,561
Advertising, promotional and selling
Expenses	43,408	47,749	39,067
General and administrative expenses	5,455	5,455	5,455
Total operating expenses	48,863	53,204	44,522
Operating income	8,427	9,815	7,039
Gross Profit To Sales Ratio	6.91%	7.32%	6.42%
Increase/Decrease in EBIT		16.47%	-16.47%

EXHIBIT # 03

FORCASTED DISCOUNTED FREE CASH FLOW
	1996	1997	1998	1999	2000
Revenues	227,537	318,552	445,973	624,362	874,107
Less: Excise Taxes	25,182	35,255	49,357	69,099	96,739
Net Sales	202,355	283,298	396,617	555,263	777,369
Cost of Sales	94,586	132,420	185,388	259,543	363,360
Gross profit	107,770	150,878	211,229	295,720	414,008
Advertising and selling expense	84,966	118,952	166,533	233,147	326,406
General and Administrative	11,811	16,536	23,150	32,410	45,374
Total Oprating Expense	96,777	135,488	189,683	265,556	371,779
Income (loss) from operations	10,993	15,390	21,545	30,164	42,229
Other Income (expense)	1	2	3	4	5
Interest Income	676	947	1,326	1,856	2,598
Interest Expense	(602)	(843)	(1,180)	(1,652)	(2,312)
Other Net	270	378	529	740	1,036
Total Other Income	344	482	675	944	1,322
Net Income	11,337	15,871	22,220	31,108	43,551
Tax Expense	5,423	7,592	10,629	14,881	20,833
Earning after Tax	5,914	8,279	11,591	16,227	22,718

Depreciation	1,597	2,236	3,130	4,382	6,135
Net Change in working capital	(974)	(1,364)	(1,909)	(2,673)	(3,742)
Net Change in capital expenditure	(2,485)	(3,479)	(4,870)	(6,818)	(9,545)
Free Cashflow	4,052	5,673	7,942	11,119	15,566
Discount Rate	0.9062	0.8212	0.7442	0.6744	0.6111
Present Value Of Free Cash flow	3,672	4,659	5,910	7,498	9,513