Description
Solution Pages: 7
Files that you will download:
Word (.docx) & Excel (.xlsx)
Questions Covered in the Solution
 Exhibit 3A from the case illustrates AnheuserBusch’s stock price changes from 1998 through early June 2008. Exhibit 3B provides monthly stock prices from July 2003 through early June 2008. Exhibit 3B also contains information on the adjusted closing monthly prices and monthly rates of return for a proxy for the market, the SPY ETF, and the yields to maturity for U.S. Treasury bonds of varying maturities. (The SPY ETF is a proxy for the overall stock market.)
 Use the information in Exhibit 3B to compute monthly rates of return for AnheuserBusch (AB). You can use the market return computed in blue font as your formula guide for the AB stock returns.
 Use the monthly rates of return for AnheuserBusch and for the overall market to compute the beta for AB’s equity.
 A note in Exhibit 4 of the case mentions that analysts estimated AnheuserBusch’s WACC to be 8.4%.
Use the information provided in the case to compute your independent estimate of AB’s WACC. To compute k_{E}, you will need to use your answer from question 1. The case provides no information on the current yield to maturity on AB’s debt. So to compute k_{D}, use the information on AB’s recent interest expense and book value of debt. Make sure to clearly state your assumptions and show your calculations.

 If your WACC is different from the analysts’ WACC reported in the case (8.4%), explain the potential sources of discrepancy. If your WACC is similar to the analysts’ WACC, discuss the quality of the assumptions made to get this WACC, i.e., are these assumptions realistic, and why or why not?
3. Use the information in Exhibit 4, plus any other relevant information in the case, to compute AnheuserBusch’s projected free cash flows from 2008 through 2012. Explain your assumptions.
 What is your estimate of AB’s long term average growth rate (g) for free cash flows beyond 2012? Explain your analysis.
Use the constant growth formula to estimate AB’s terminal value as of the end of 2012.
 Using data provided in the case, use a multiples approach to estimate AB’s terminal value as of the end of 2012. Explain any assumptions you make.
 Using your answers from questions 2 through 4, what is your (initial) estimate of AB’s equity value as a standalone company? Express your answer both in terms of the value of all equity and on a per share basis.
 If you use your answer to question 5 to compute AB’s terminal value in 2012, what is AB’s value as a standalone company? Express your answer both in terms of the value of all equity and on a per share basis.
 How do your values compare to ImBev’s offer for AB? Based on your initial estimate, is ImBev overpaying or underpaying at their initial offerprice (assuming no synergies)? What if you use the analysts’ WACC?
 The forecasts in Exhibit 4 were produced by AnheuserBusch, and therefore reflect AB’s managers’ assumptions. Identify at least three assumptions that have substantial impact on the firm’s projected cash flows that you find questionable. What alternative assumptions would be more reasonable?
 ImBev’s motivation for acquiring AB is to expand its market in North America and to do so while cutting costs. Suppose that ImBev expects eventually to generate synergies of 2 billion euros per year – or approximately $3.0 billion at the 2008 exchange rate – when the merger is fully implemented. However, it will take five years to completely realize these synergies. Synergies will begin at $600 million in 2008 and increase by $600 million in each of the next four years until the full $3.0 billion in cost savings are realized in 2012 (and beyond).
 Where might those synergies come from? That is, what are the main sources of cost savings in this deal?
 Adding these costsaving synergies to AB’s forecasts from your previous analyses, what is Anheuser’s Busch value to ImBev? Please show your calculations.
 Given your cash flow forecasts from Question 8 (that is, including synergies), what is the maximum WACC that would make this acquisition have zero NPV to
ImBev at the initial offer price of $65 per share?
 In the end, ImBev increased its offer price to $65 per share, and AB agreed to the merger at that price. At a price of $65 per share, in your judgment, did ImBev make a good deal? Given your analysis, what was ImBev’s expected NPV from acquiring AB at $65 per share?
 The case discusses how ImBev might spinoff one or more of AnheuserBusch’s divisions, such as its entertainment division. AnheuserBusch Entertainment operates theme parks such a SeaWorld.
Assume that Cedar Fair (NYSE: FUN) is a pureplay comparable firm to AnheuserBusch’s entertainment division. Using Cedar Fair’s information provided in Exhibit 7, compute the divisional WACC for AnheuserBusch’s entertainment division. (As a limited partnership, Cedar Fair pays no income tax. For purposes of this question, however, assume that Cedar Fair has a tax rate that equals the average ratio of its provision for taxes divided by taxable income for 2006 and 2007.)
 Briefly summarize the assumptions and pros and cons of using comparable firms to compute division WACCs for a multidivision firm
Sample of Solution
Question # 01
 Refer to Sheet Q1 in excel file
 Refer to Sheet Q1 in excel file
Question # 02
Assumptions
 Cost of Debt is calculated using Book values of Interest Expense and Total Debt Outstanding, for the year 2007
 Riskfree rate which is considered comparable is the return on Treasury Bonds which is 4.3% (longterm)
 Tax Rate is considered as 40% based on the year 2007 tax provision data
 Return of SPY ETF is considered as Market Return
2007  
Interest Expense  500,000,000 
Total Debt Outstanding  9,140,300,000 
Kd  5.47028% 
Rf  4.30% 
Rm  0.759% 
Beta  0.422123358 
Ke  2.81% 
Total Assets  17,155,000,000 
Total Debt  9,140,300,000 
Total Equity  8,014,700,000 
Wd  53.3% 
We  46.7% 
Tc  40% 
WACC  3.059% 
………
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