1.A Compelling and Preemptive Offer for the Boston Beer Co.

1A. (See Problem 1A Excel Worksheet)

Anheuser Busch Inbev (AB Inbev), the largest beer company in the world, is considering acquiring Boston Beer Co. In order to determine the discounted cash flow valuation, the investment bankers need to determine the correct discount rate, or cost of capital, to use to discount their forecasted unlevered free cash flows. Use the data in the Problem 1A Data worksheet in the posted Excel workbook.

The Problem 1A Data tab provides capital market data and equity betas for potentially comparable firms:

Anheuser Busch Inbev, a beer manufacturer that uses 50% debt financing

Molson Coors Brewing, a beer manufacturer that uses 50% debt financing

Intel, a computer semiconductor manufacturer that uses 10% debt financing

Estimate the after-tax weighted-average cost of capital for Boston Beer Co. assuming that they use 20% debt financing. Assume that Boston Beer Co. has an A bond rating and that the tax rate is 40%. Use the CAPM to calculate the cost of equity. (3 points)

(Show your work in the Excel worksheet or below. Write your final answer below.)

1B. (See Problem 1B Excel Worksheet)

[A]Standalone Valuation. (4 points)

Forecast pro-forma unlevered income statements for the next 3 years (2015-2017) using percent of sales forecasting (assume it is the beginning of 2015). You dont need to forecast the balance sheet.

Use the following assumptions:

Sales will grow by 5% each year

All items except taxes are a percent of sales based on 2014 levels.

The tax rate is 40%.

Find the value per share by discounting the unlevered free cash flows assuming that, after year 3 of the forecast, free cash flow will grow by 2.5%. Assume that working capital is a constant percent of sales based on 2014 levels and capital spending equals depreciation each year. Use the WACC from problem 1A above. There are 20 million shares outstanding.

(Show work on the Problem 1B Data tab; write your final answer below.)

[B] Construct a two-way data table which calculates the value per share in your model in part [A] that varies the terminal growth rate and WACC. (1 point)

(Show your work on the Excel worksheet Problem 1B Data.)

[C]Your managing director is concerned that calculating the terminal value as a growing perpetuity is unrealistic. Based on the implied EV/EBITDA multiple of your terminal value, explain whether your estimate seems reasonable. (1 point)

[D] The Excel worksheet has 2014 data for barrels sold for the Beer Market (TAM), the Craft Beer Segment (SAM), and the Boston Beer Co. (SOM). Assuming that the TAM and price per barrel do not change, and the SAM grows to 20% of the TAM in 2017, what will Boston Beer Co.s market share in the craft beer market be in 2017 based on the forecast in part A? (2 points)

Problem 1A Data Problem 1B Data (In thousands of barrels) Total Beer Market Craft Beer Market 2014 200,000 15,000 7.5% 4,000 Boston Beer Co. Sales Price per Barrel Sales 250 1.000.000 (In thousands of dollars) Income Statement Sales 1 2015 INCOME STATEMENTS 2 3 2016 2017 2014 1,000,000 Cost of goods sold 300.000 Gross profit SG&A 700.000 350,000 Research and development 50.000 EBITDA Depreciation 300.000 20.000 EBT Taxes 280.000 112.000 Net income 168,000 2014 You don't need to forecast the balance sheet Balance Sheet Assets Cash and cash equivalents Accounts receivable Inventory Total current assets Fixed assets Accumulated Depreciation Net Fixed Assets Total assets 10,000 40,000 50,000 100,000 330,000 30.000 300,000 400,000 Liabilities and Equity Accounts payable Accrued expenses Total current liabilities Long-term debt Equity Retained earnings Total equity Total Liabilities & equity 30,000 20.000 50,000 250,000 20,000 80,000 100,000 400,000 Problem 1A Data Problem 1B Data (In thousands of barrels) Total Beer Market Craft Beer Market 2014 200,000 15,000 7.5% 4,000 Boston Beer Co. Sales Price per Barrel Sales 250 1.000.000 (In thousands of dollars) Income Statement Sales 1 2015 INCOME STATEMENTS 2 3 2016 2017 2014 1,000,000 Cost of goods sold 300.000 Gross profit SG&A 700.000 350,000 Research and development 50.000 EBITDA Depreciation 300.000 20.000 EBT Taxes 280.000 112.000 Net income 168,000 2014 You don't need to forecast the balance sheet Balance Sheet Assets Cash and cash equivalents Accounts receivable Inventory Total current assets Fixed assets Accumulated Depreciation Net Fixed Assets Total assets 10,000 40,000 50,000 100,000 330,000 30.000 300,000 400,000 Liabilities and Equity Accounts payable Accrued expenses Total current liabilities Long-term debt Equity Retained earnings Total equity Total Liabilities & equity 30,000 20.000 50,000 250,000 20,000 80,000 100,000 400,000