Eddie Bauer Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Eddie Bauer Case Solution

Assumptions

The assumptions used in the projections, are given in the case study. Few assumptions are stated as follows:

Sales revenue has increased by 1% in 2005, 5.4% in 2006, 7.5% in 2007 and 8% in 2008.
The cost of goods sold is calculated as a percentage of sales revenue. In 2004, the COGS as sales percentage was 53.1%, which was expected to reach 53.3% in 2005 and then gradually decrease and becoming 52.1% by fiscal year 2008, as the company’s buying and occupancy costs are expected to become low.
SG&A expenses are also taken as a sales percentage. In 2004, the percentage was 37.6% and it was expected to be 36.1% in 2005, 35.8% in 2006, 35.2% in 2007 and 34.3% in 2008. It is because the firm will be operating smaller new stores, ultimately reducing the SG&A costs.
Depreciation and amortization expenses are expected to decrease by 10% in 2005, due to the disposal of few assets. For the fiscal years 2006-2008, the company’s depreciation and amortization are based on the remaining assets’ life, including the capital expenditures.

DCF Valuation

The DCF valuation method is used to calculate the share price of Eddie Bauer. First of all, the company’s cash flows are determined, whereby the company’s projected operating income is used tod determine the NOPAT, which is equal to the company’s operating income after subtracting the taxes. Afterwards, the depreciation and amortization is added back to the NOPAT, as these are non-cash expenses and necessary to determine the free cash flows to the firm.

In addition the net working capital is calculated from 2005-2008 by subtracting the projected current liabilities from the projected current assets. The changes in working capital are then subtracted from NOPAT. Lastly, the company’s capital expenditures are subtracted, which resulted in free cash flows to the firm for each year. A terminal value is calculated ta the fiscal year 2008, using the equation “TV = FCFF*(1+G) / WACC – G”.

Lastly, the cash flows are discounted using thegiven discount rate of 9.9%, which resulted in a firm’s value of $2,058,909.71. Lastly, the comp0any’ debt is subtracted from firm value and the divided by the number of outstanding shares, which resulted in the share price of Eddie Bauer being $60.15 (See Appendix 1).

Appendix 1: DCF Valuation

Working Capital
	2004	2005	2006	2007	2008
Current Assets	$223,904	$291,952	$362,882	$460,831	$543,491
Current Liabilities	$149,214	$140,193	$134,481	$138,780	$146,981
Working Capital	$74,690	$151,759	$228,401	$322,051	$396,510
Change in WC		$77,069	$76,642	$93,650	$74,459

DCF VALUATION
	1	2	3	4
	2005	2006	2007	2008
EBIT	$90,644	$110,909	$132,982	$157,074
EBIT*(1-T)	$59,825	$73,200	$87,768	$103,669
Add: Depreciation & Amortization	$28,332	$27,674	$27,925	$30,913
Less: Change in Working Capital	$77,069	$76,642	$93,650	$74,459
Less: Capital Expenditures	-$49,065	-$37,481	-$39,376	-$51,876
FCFF	$60,153	$61,713	$61,419	$111,999
Terminal Value				$2,669,622
Total Cash Flows	$60,153	$61,713	$61,419	$2,781,621
Discounted cash Flows	$54,734.34	$51,095.29	$46,271.17	$1,906,808.91
Firm Value				$2,058,909.71
Less: Long Term Debt				$254,281.00
Equity Value				$1,804,628.71
Outstanding Shares				$30,000.00
Intrinsic Value				$60.15