Stock Market and Class A Shares

Topics: Stock market, Stock, Discounted cash flow Pages: 20 (3063 words) Published: April 14, 2014
EMPRESAS POLAR vs. BAVARIA, S.A
ACQUISITION OF MINORITY BLOCKS OF
BACKUS & JOHNSTON’S VOTING STOCK

A INTERNATIONAL CORPORATE
GOVERNENCE CASE STUDY

CASE SUBMITTED TO:
PROFESSOR LOPEZ DE SILANES

STUDENT DETAILS
NAME

COURSE

MS FINANCE

TRACK

17 JANUARI 2014

VINEETH VIJAYAN
CORPORATE FINANCE & BANKING

ROLL NUMBER 13030






DO A DCF OF BACKUS.

SPELL OUT YOUR ASSUMPTIONS ABOUT THE COMPANY, THE
INDUSTRY AND PERU. IN ADDITION TO ASSUMPTIONS ABOUT
THE GROWTH OF BEER DEMAND IN PERU,
YOU WILL NEED TO USE INFORMATION ABOUT PRICE AND
INCOME ELASTICITY'S TO MAKE YOUR PROJECTIONS.

DCF MODEL ASSUMPTIONS
Key Input Metric


COST OF EQUITY

METRIC

VALUE

REMARK

Risk free rate

4.7%

Peruvian Brady Bonds corrected for country risk

Levered Beta

0.7

Based on Exhibit 22. Stock Market Synchronocity

Equity Risk Premium

9.01%

Country base equity spread. http://pages.stern.nyu.edu/~adamodar/

Cost of Equity

11.0%

Using the Classic CAPM Model for market

MACRO ECONOMIC INPUTS
METRIC
PERU LONG TERM
GROWTH RATE

VALUE
3.42% (Exhibit 18)

Average Analyst Projections for the year 2002-2003
normalized over long term growth

CAPITAL EXPENDITURE
GROWTH RATE

7%

Based on industry standards accounting for firm’s
present capex spread over a 10 year window

Inflation Rate

2.5%

Projected Consumer Price Index used as proxy spread
over 10 year period

Depreciation Rate

10%

Based on Net fixed Assets projected on historical data
NET WORKING CAPITAL: a function of EBITDA( 40%)
( Based on Industry Average and Analyst reports)

Exhibit 19: Financial Results of Backus &
Johnston Company.

CASH FLOW GROWTH RATE
Cash flow growth taken as function of both fast growing macro economic factors + company specific performance

Macro Economic Factors
Beer growth in local Peru market taken at 3% growth p.a ( Exhibit 1-5) GDP Growth rate of 3.42% (Average Analyst Projections for the year 2002-2003 normalized over long term growth)

Per capita beer consumption of Peru assumed to triple over 10 year time and matching global standards of 72 litres by terminal year
Income elasticity (0.498) incorporated into model as a lever of GDP Growth ( proxy for beer growth potential)
This is multiplied with assumed increase of 3x in per capita beer intake to arrive at a macro economic proxy of 7.49%
We subtract the given value with CPI Index ( inflation metric) factoring in assumed 5% price growth in beer * Negetive Price Elasticity( -1.676) arriving at net macro economic proxy= 6.89%

CASH FLOW GROWTH RATE-II
Cash flow growth taken as function of both fast growing macro economic factors + company specific performance

Company Specific Growth Rate
Historic EBITDA growth rate given in case =52.4% ( 50.4 mn USD(02) 31.69 mn USD(01) The rate is normalized and reduced gradually with power of 5% decrease to arrive at terminal value growth rate of 2.39%

( To account for rising estimated competition locally and South American Brewery industry and unfavourable govt policy)
Terminal Value Growth Rate = Function of long term Peru growth rate* Industry Beta Cash flow growth rate arrived for first 10 years
6.89%( Macro-economic proxy)+ 21.6% ( Company specific revenue growth) The arrived growth rate is accounted for a inflation of 2.5% assumed. Final cash flow growth rate used in DCF Model= 25.5%

DISCOUNTED CASH FLOW MODEL
( All figures in USD Mln)

QUESTION 1(b)
Can you think of an alternative way to value Backus based on the information of the case?
Explain how you would do it, what the value would be and how it would differ from the DCF results.

RELATIVE VALUATION -I
( Data Source-Exhibit 16)- All figures in USD Mln
Approach-1 > Price/Sales Method


First we get the comparable south
American targets and compute the
average P/Sales multiple. ( 2.12)



We multiply average P/S multiple
with Company Sales (137.19) to...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Stock Market Essay
  • Stock Market Essay
  • Financialization: Stock Market and Share Buy-back Strategy Essay
  • Stock Market and Paramount Essay
  • Stock and Market Value Essay
  • Stock Market Essay
  • Stock Market Essay
  • stock market Essay

Become a StudyMode Member

Sign Up - It's Free