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Solved Darden Case Study Solution: This Bud’s for Who? The Battle for Anheuser-Busch By Luke Wilm (Download Now)

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Solution Pages: 7

Word (.docx) & Excel (.xlsx)

Questions Covered in the Solution

1. Exhibit 3A from the case illustrates Anheuser-Busch’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 Anheuser-Busch (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 Anheuser-Busch and for the overall market to compute the beta for AB’s equity.
2. 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 kE, 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 kD, 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 Anheuser-Busch’s projected free cash flows from 2008 through 2012. Explain your assumptions.

Use the constant growth formula to estimate AB’s terminal value as of the end of 2012.

1. 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.
2. Using your answers from questions 2 through 4, what is your (initial) estimate of AB’s equity value as a stand-alone company?  Express your answer both in terms of the value of all equity and on a per share basis.
3. If you use your answer to question 5 to compute AB’s terminal value in 2012, what is AB’s value as a stand-alone company? Express your answer both in terms of the value of all equity and on a per share basis.
4. How do your values compare to ImBev’s offer for AB? Based on your initial estimate, is ImBev over-paying or under-paying at their initial offer-price (assuming no synergies)?  What if you use the analysts’ WACC?
5. The forecasts in Exhibit 4 were produced by Anheuser-Busch, 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?
6. 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).
7. Where might those synergies come from? That is, what are the main sources of cost savings in this deal?
8. Adding these cost-saving synergies to AB’s forecasts from your previous analyses, what is Anheuser’s Busch value to ImBev? Please show your calculations.
9. 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?

1. 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?
2. The case discusses how ImBev might spin-off one or more of AnheuserBusch’s divisions, such as its entertainment division.  Anheuser-Busch Entertainment operates theme parks such a SeaWorld.

Assume that Cedar Fair (NYSE: FUN) is a pure-play comparable firm to Anheuser-Busch’s entertainment division.  Using Cedar Fair’s information provided in Exhibit 7, compute the divisional WACC for Anheuser-Busch’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.)

1. Briefly summarize the assumptions and pros and cons of using comparable firms to compute division WACCs for a multi-division firm

Sample of Solution

Question # 01

1. Refer to Sheet Q1 in excel file
2. 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
• Risk-free rate which is considered comparable is the return on Treasury Bonds which is 4.3% (long-term)
• 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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