Financial Management, the case entitled “InBev and Anheuser-Busch.”

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BAFI517 Financial Management
HW2
Please prepare a report based on the case entitled “InBev and Anheuser-Busch.”
Please post your Excel sheet and analysis report by 1:30pm
Your report should at least address the following questions:
1. What is the intrinsic value? Why is it so important? How is it estimated in
business valuation?
2. What is WACC? Why is it so important in business valuation? Please estimate
WACC for Anheuser in 2008 using the Excel template attached. In your
estimation of cost of equity, use either CAPM or Dividend Discount Model but
make sure to justify your model selection.
3. Assess InBev’s bids for Anheuser in 2008 based on discounted cash flow
valuation model. How do they compare with the firm’s intrinsic value?
a. Complete the attached Excel sheet by projecting free cash flows, with the
terminal date at the end. What should determine the “terminal date,” i.e.,
when you stop forecasting annual cash flows and estimate a terminal
value? Do you think 2012 is the appropriate “terminal date” for
Anheuser-Busch given its circumstances at the end of 2007? Why?
b. Could you recommend an appropriate growth-rate assumption for
Anheuser-Busch in the estimation of its terminal value? Justify your
growth-rate assumption and estimate Anheuser’s terminal value.
c. What is your best estimate (or the range of your estimates) of AnheuserBusch’s intrinsic value?
d. Should InBev’s shareholders endorse the acquisition of Anheuser at $70
per share?
A suggested outline for the report is as follows: (1) An executive summary that
includes your recommendation; (2) A statement of the issue(s) the financial
managers face; (3) A presentation and discussion of your Excel findings; (4) Your
analysis; (5) Concluding remarks.
Exhibit1. Anheuser-Busch Balance Sheet (in Million $, except per share)
Dec.31 2006
Assets
Current Assets
Accounts receivable
Inventories
Other Current assets
Investments in affiliated companies
Total Current Assets
Plant & equipment, net
Intangible assets, including goodwill
Other assets
Total Assets
Liabilities and shareholders’ equity
Current liability
Accounts payable
Accrued salaries, wages and benefits
Arrued taxes
Accrued interest
Total Current liability
Retirement benefits
Debt
Deferred income taxes
Other long term liabilities
Shareholders’ Equity
Common stock, $1 par value, authorized 1.6 billion shares
Capital in excess of par value
Retained earnings
Treasury stock, at cost
Accumulated non-owner changes in shareholder equity
Total shareholders’ equity
Commitments and contingencies
Total liabilities and shareholders’ equity
219.20
720.20
694.90
195.20
1,829.50
3,680.30
8,916.10
1,367.20
584.10
16,377.20
1,426.30
342.80
133.90
124.20
218.90
2,246.10
1,191.50
7,653.50
1,194.50
152.90
1,473.70
2,962.50
16,741.00
-16,007.70
-1230.80
3938.70
16377.2
Source: Andrew Inkpen, InBev and Anheuser-Busch, Thunderbird School of Global Management, 2010.
per share)
Dec.31 2007
283.20
805.20
723.50
212.60
2,024.50
4,019.50
8,833.50
1,547.90
729.60
17,155.00
1,464.50
374.30
106.20
136.40
222.40
2,303.80
1,002.50
9,140.30
1,314.60
242.20
1,482.50
3,382.10
17,923.90
-18714.70
-922.20
3151.6
17155
f Global Management, 2010.
Exhibit2: Income Statement and Assumptions
(Millions of dollars)
Years Ended December 31,
2003
2004
2005
2006
14,147 100.0%
Net sales
OPERATING EXPENSES:
Cost of goods Sold
7,572
53.5%
S, G & A expenses
2,498
17.7%
Depreciation, Depletion, and Amortization 877
6.2%
14,934 100.0%
8,050
2,591
933
53.9%
17.3%
6.2%
8,601
2,730
979
57.2%
18.2%
6.5%
9,176
2,833
989
OPERATING INCOME (EBIT)
OTHER EXPENSES (INCOME):
Interest expense
Non-operating income/expense
3,199
22.6%
3,361
22.5%
2,726
18.1%
2,720
402
365
2.8%
2.6%
3.0%
2.9%
455
508
3.0%
3.4%
451
597
PRETAX INCOME
INCOME TAXES
3,169
1,093
22.4%
7.7%
3,404
1,163
22.8%
7.8%
2,690
850
17.9%
5.7%
2,866
901
NET INCOME
2,076
14.7%
2,240
15.0%
1,939
12.9%
1,965
454.5
437
15,036
100.0%
15,717
NET INCOME PER SHARE,BASIC
4.95
4.56
5.72
6.05
NET INCOME PER SHARE,DILUTED
Effective tax rate
4.89
0.34
4.52
0.34
5.63
0.32
5.96
0.31
Capital expenditures (millions of $)
812.50
Working Capital
Source:
5,640
Anheuser-Busch Annual Reports except the last three columns.
2006
5 yrs
2007
100.0%
16,686
1 yr
Revenue
100.0%
3.4%
6.2% 100.0%
58.4%
18.0%
6.3%
9,840
2,982
996
59.0%
17.9%
6.0%
5.4%
3.6%
2.6%
7.2%
5.3%
0.8%
56.4%
17.8%
6.2%
17.3%
2,894
17.3%
-2.0%
6.4%
19.6%
2.9%
3.8%
484
685
2.9%
4.1%
3.8%
13.4%
7.3%
14.7%
2.9%
3.4%
18.2%
5.7%
3,095
970
18.5%
5.8%
-0.5%
-2.4%
8.0%
7.7%
20.0%
6.5%
12.5%
2,125
12.7%
0.5%
8.1%
13.6%
0.04%
0.0%
0.04%
5.3%
5.8%
5.3%
6.0%
6.40
6.32
0.31
5 year
0.33
5.2%
870.00
5.2%
7.1%
5.2%
35.9%
6,136
36.8%
8.8%
51.2%
10-yr
Exhibit 1
(in Million $, except where noted)
31-Dec-06
15,717.10
31-Dec-07
16,685.70
% change
6.20%
5,552.10
5,849.60
5.40%
35.33%
35.06%
(0.2) pts
2,719.60
2,894.00
6.40%
17.30%
17.30%
(0.0) pts
Net Income
1,965.20
2,115.30
7.60%
Diluted EPS
2.53
2.79
10.30%
Net Sales
Gross Profit
As a % of sales
Operating Income
As a % of sales
# of shares outstanding
Operating cash flow before the
change in working capital
Common dividend paid per share (in
$)
Return on shareholders’ equity
Total assets
Capital expenditures
Closing stock price (in $)
715.00
2,502.60
2,963.10
18.40%
1.13
1.25
10.60%
51.60%
59.70%
(8.1) pts
6,377.00
17,155.00
169.00%
812.50
870.00
7.10%
49.20
52.34
6.40%
Source: Andrew Inkpen, InBev and Anheuser-Busch, Thunderbird School of Global Management, 2010.
Exhibit
$ millions
Equity market cap as of 12/31/2007
Book value of debt as of 12/31/2007
Credit rating
Beta
10-year U.S. treasury YTM as of 12/31/2007
A 10-yr corporate bond yield as of 12/31/2007
expected annual market risk premium
tax rate
dividend growth rate
last dividend
closing share price 12/31/2007
Cost of Equity Ke:
CAPM
Constant dividend growth (or “Dividend Discount Model”)
WACC:
with Ke based on CAPM
with Ke based on Constant dividend growth model
Sources:
(a) Find relevant information from the “Other Info” tab.
(b) Source: http://www.netadvantage.standardandpoors.com
(c)Souce: Center for Research on Security Price
(d) http://www.federalreserve.gov/releases/h15/data.htm
(e) http://ycharts.com
(f)http://people.stern.nyu.edu/adamodar/pdfiles/papers/ERP2012.pdf
(g) Estimated based on historical dividend payments.
A
0.6
4.10%
5.50%
4.79%
32.61%
4.75%
Weight
Notes
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(g)
(a)
(a)
Assumption
Period
Sales
6.00% annual growth rate
OPERATING EXPENSES:
Cost of sales
S G & A
Dep. and am.
59.0% of total revenue
17.8% of total revenue
6.2% of total revenue
Total operating expenses
OPERATING INCOME (EBIT)
PROVISION FOR INCOME TAXES
32.61% of operating income
Operating Cash Flows
EBIT
Taxes
Depreciation and amortization
Operating Cash Flows
Net Capital Spending
Change in NWC
FREE CASH FLOW
5.19% of revenue or depr (whichever is greater)
51.21% of incremental sales
(=OCF-NCS-Change in NWC)
Base Year
2007
2008
2009
2010
2011
1
2
3
4
0
$
16,685.70
9,840
2,982
996




13,818
2,894
970
$
$
870
496
0
$
$
$
(8,544) $
0

0
$
$

0
$
$

2012
Notes for assumptions made
5
1. Historical pattern (including one-year growth rate of 6.1%); (2) Expectation of recession a
Expectation of rising commodity prices

0
$
$

Expectation of recession and (3) strategy to expand globally
Discounted Cash Flow Valuation Based on Constant Growth Assumption
Your Growth Rate Assumption for TV
WACC
No. of common shares O/S (millions)
Debt
Year
Period
Free Cash Flows (millions)
Terminal value (millions)
PV of Free Cash Flows through year 2012
PV of Terminal Value
Estimated Value of Firm V firm
Less: Value of Long-term Debt V d
Estimated Value of Equity V e
Estimated Share Value
2007
0
nt Growth Assumption
2008
1
2009
2
2010
3
2011
4
2012
5

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