Autumn 2021 FIN 350 Capital Budgeting / Valuation Case Due Thursday, Dec 2 This year has been a hot market for IPOs, including Airbnb and recently Dutch Brothers. Valuing a company is basically a big capital budgeting exercise. Instead of forecasting the cash flows from a single project, you forecast the cash flows for the whole company. Instead of calculating the NPV of a new product, you calculate the NPV of the cash flows of the whole company. One complicating factor is that while a product will come to an end, in principle a company will not (we hope). So, we have to make an assumption at some point about how the cash flows of the company grow in the long-run (more on this below). The typical approach to valuing a company is to start by specifically forecasting the cash flows for the next 5 to 10 years and then make a simplifying assumption beyond that. 1. Start with DutchBrothers. xlsx from Canvas. 2. The sheet lists some assumptions about the Year-Over-Year (YOY) growth of revenues and certain expenses for 2021-2030. These assumptions are derived from current analyst reports and management statements about Dutch Brothers. Most analysts expect initially rapid growth over the next few years, followed by slower growth as they run out of places for expansion. We are using the Percent of Sales forecasting method where we forecast the growth of sales (revenues) and some other items explicitly, but we assume that many items will be a certain percentage of sales (they grow with sales). Use the base case assumptions to build a forecast of net income learnings) and then free cash flows of Dutch Brothers for the years 2021 to 2030. Specifically, start with forecasting revenues for each year and then cost of revenues, etc. like we did in capital budgeting until you eventually get to Free Cash Flows. Assume a tax rate of 21% To simplify the analysis. Jenore tax-loss carrytowards and assume that any year with negative taxable income has a tax of zero 3. Beyond 2030, you will need to make an assumption to handle the mature part of Dutch Brothers lifecycle. a. Taking the free cash flows you forecast for 2030, assume that they will grow by 3% to 2031 and continue growing at 3% thereafter b. Assume that the opportunity cost of capital for Dutch Brothers is 10%. You can treat all cash flows starting in 2031 and continuing onward as a growing perpetuity with a growth rate of 3%. By doing this, you will have what is called a "terminal value or continuation value for Dutch Brothers as of the end of 2030 (one year before the first cash flow in the growing perpetuity). 4. To avoid timing complexities, we will assume that it is now the end of 2021/ beginning of 2022 and that the first cash flows (the 2021 FCF) are generated at time zero, so 2022 FCF will be generated exactly one-year from now, at the end of 2022. Discount all cash flows back to the end of 2021/beginning of 2022 using a 10% cost of capital and the NPV function in Excel (and then add the 2021 cash flows to that total) Because you are subtracting expected interest payments along the way, you are using FCF to equity and so you arrive at the estimated total equity value of Dutch Brothers at the end of 2021. s. To arrive at the price per lequity share, you must divide by the number of shares outstanding. Dutch Brothers has 50 million shares outstanding Autumn 2021 FIN 350 Capital Budgeting / Valuation Case Due Thursday, Dec 200 6. Next, perform some sensitivity analysis using the Upside and Downside scenarios to compute Upside and Downside stock prices. a. Use the Upside and Downside Revenue Growth assumptions to compute the stock price under each scenario. b. Reset your revenue growth assumptions to the Base Case and check the sensitivity of the valuation to the assumptions about Dutch Brothers' margins. By assuming Cost of Revenue of 65%, the model assumes that Dutch Brothers' overall gross margins will be 35%. Competition, or increased labor and coffee prices could reduce this margin Calculate Dutch Brothers stock price if Cost of Revenue is 70% as in the "High Cost of Revenue" row in the spreadsheet. 7. As of the writing of this case, Dutch Brothers (BROS) stock price was $68. Consider what it would take for your forecast to produce a valuation that equates to a $68 stock price. Specifically, by changing your revenue growth assumptions and/or your perpetuity growth rate. find a set of Yoy growth assumptions that would produce a stock price of approximately 568 You should comment about the reasonableness of these prowth assumptions in your writeup. 8. An alternative way to value a stock is by use of multiples. NOTE: There is no reason to expect the multiples-based valuation to agree with your DCF-based valuation 1) There is no perfect comparison company, and 2) Dutch Brothers may command a premium growth valuation (which may be justified or not). . Multiples valuation should be forward looking, so start with Dutch Brothers 2022 projected Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA, a standard cash flow measure and compute its total Equity value to EBITDA ratio Compare this with the ratio of the following group: Starbucks (19.2), Chipotle (365). Shake Shack (384) and Winstop (480). Be sure to comment on whether Dutch Brothers' multiple seems reasonable given where it is in its growth cycle If you were to apply the average multiple from the comparison group to Dutch Brothers 2022 EBITDA, what share price would that imply? (Take 2022 EBITDA XAve Multiple as your new total Equity value and divide by shares outstanding) Overall, what is your estimate of what Dutch Brothers' stock price should be and what range of valuations do you think are reasonable? Defend your conclusion by discussing and referencing the outcomes of the valuations in steps to B. You will have arrived at a range of prices and you will need to take a stand on how to interpret this range and which prices and assumptions to weight more heavily Your answer should take the form of a writeup (maximum 2 single-spaced pages that references spreadsheet exhibits the exhibits do not count toward the 2-page limit). Do NOT write a chronological history of what you did to solve the case and do NOT write it as answer, ) answer, etc. You are supposed to explain the highlights of your approach, synthesive what you found, draw a conclusion and defendit. This is ou cate Submission has electronic tand MUST at clude your bacel e ending in l. 2021 2022 2023 2024 2025 2026 2022 2020 2029 2030 35% 55.0 28 Assumptions in Model YOY Rev Growth Total Cost of Revenue of Rev SGSA (YOY Growth Depreciation of Rev Capts of Rev Interest Expense Long Run Growth Discount Rate 44% 65.0% 20.0% 4.50% 25% 20% 4.50% 30% 65.0% 9% 4.50% 20% 2 65.0 9% 4. SON 18N 9 25% 65.ON 7 4.50% 15% 11 21% 65.0% SX 4.50% 125 23 16% 65.0% 33 450W 9% 14 12% 65.ON 2% 4.SON 6% 15 8% 65.0% 2% 4.SON AN 65.ON 2 400N 4 15 25% 5 15 10% 45 Sensitivity Base Case YOY Revenue Growth Upside YOY Revenue Growth Downside YOY Revue Growth 44% 44% 4% 35% 40% 33 10x 28 35N 30 25 2546 20 21 21% 25 16 16 2014 12% 12 15N IN TON 4% 28 434 65 ON Base Case Cost of Revenue High Cost of Revenue 65.0 70.0 65.0% 70. GSON 200N 18.0 70.0 65.0 2003 65 ON 70.0% 650 700N 65.0 70.ON 70.0% 700 All figures are in millions 2020 included lase Your for growth 2022 2023 2021 2035 2024 2026 2020 2029 2070 2010 Total Rev 3274 IMO Total cost of huren SOLA EBITDA 1130 26.4 Depreciation Interest Expense Tawat income Taves Net Income 68 -1/4 Autumn 2021 FIN 350 Capital Budgeting / Valuation Case Due Thursday, Dec 2 This year has been a hot market for IPOs, including Airbnb and recently Dutch Brothers. Valuing a company is basically a big capital budgeting exercise. Instead of forecasting the cash flows from a single project, you forecast the cash flows for the whole company. Instead of calculating the NPV of a new product, you calculate the NPV of the cash flows of the whole company. One complicating factor is that while a product will come to an end, in principle a company will not (we hope). So, we have to make an assumption at some point about how the cash flows of the company grow in the long-run (more on this below). The typical approach to valuing a company is to start by specifically forecasting the cash flows for the next 5 to 10 years and then make a simplifying assumption beyond that. 1. Start with DutchBrothers. xlsx from Canvas. 2. The sheet lists some assumptions about the Year-Over-Year (YOY) growth of revenues and certain expenses for 2021-2030. These assumptions are derived from current analyst reports and management statements about Dutch Brothers. Most analysts expect initially rapid growth over the next few years, followed by slower growth as they run out of places for expansion. We are using the Percent of Sales forecasting method where we forecast the growth of sales (revenues) and some other items explicitly, but we assume that many items will be a certain percentage of sales (they grow with sales). Use the base case assumptions to build a forecast of net income learnings) and then free cash flows of Dutch Brothers for the years 2021 to 2030. Specifically, start with forecasting revenues for each year and then cost of revenues, etc. like we did in capital budgeting until you eventually get to Free Cash Flows. Assume a tax rate of 21% To simplify the analysis. Jenore tax-loss carrytowards and assume that any year with negative taxable income has a tax of zero 3. Beyond 2030, you will need to make an assumption to handle the mature part of Dutch Brothers lifecycle. a. Taking the free cash flows you forecast for 2030, assume that they will grow by 3% to 2031 and continue growing at 3% thereafter b. Assume that the opportunity cost of capital for Dutch Brothers is 10%. You can treat all cash flows starting in 2031 and continuing onward as a growing perpetuity with a growth rate of 3%. By doing this, you will have what is called a "terminal value or continuation value for Dutch Brothers as of the end of 2030 (one year before the first cash flow in the growing perpetuity). 4. To avoid timing complexities, we will assume that it is now the end of 2021/ beginning of 2022 and that the first cash flows (the 2021 FCF) are generated at time zero, so 2022 FCF will be generated exactly one-year from now, at the end of 2022. Discount all cash flows back to the end of 2021/beginning of 2022 using a 10% cost of capital and the NPV function in Excel (and then add the 2021 cash flows to that total) Because you are subtracting expected interest payments along the way, you are using FCF to equity and so you arrive at the estimated total equity value of Dutch Brothers at the end of 2021. s. To arrive at the price per lequity share, you must divide by the number of shares outstanding. Dutch Brothers has 50 million shares outstanding Autumn 2021 FIN 350 Capital Budgeting / Valuation Case Due Thursday, Dec 200 6. Next, perform some sensitivity analysis using the Upside and Downside scenarios to compute Upside and Downside stock prices. a. Use the Upside and Downside Revenue Growth assumptions to compute the stock price under each scenario. b. Reset your revenue growth assumptions to the Base Case and check the sensitivity of the valuation to the assumptions about Dutch Brothers' margins. By assuming Cost of Revenue of 65%, the model assumes that Dutch Brothers' overall gross margins will be 35%. Competition, or increased labor and coffee prices could reduce this margin Calculate Dutch Brothers stock price if Cost of Revenue is 70% as in the "High Cost of Revenue" row in the spreadsheet. 7. As of the writing of this case, Dutch Brothers (BROS) stock price was $68. Consider what it would take for your forecast to produce a valuation that equates to a $68 stock price. Specifically, by changing your revenue growth assumptions and/or your perpetuity growth rate. find a set of Yoy growth assumptions that would produce a stock price of approximately 568 You should comment about the reasonableness of these prowth assumptions in your writeup. 8. An alternative way to value a stock is by use of multiples. NOTE: There is no reason to expect the multiples-based valuation to agree with your DCF-based valuation 1) There is no perfect comparison company, and 2) Dutch Brothers may command a premium growth valuation (which may be justified or not). . Multiples valuation should be forward looking, so start with Dutch Brothers 2022 projected Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA, a standard cash flow measure and compute its total Equity value to EBITDA ratio Compare this with the ratio of the following group: Starbucks (19.2), Chipotle (365). Shake Shack (384) and Winstop (480). Be sure to comment on whether Dutch Brothers' multiple seems reasonable given where it is in its growth cycle If you were to apply the average multiple from the comparison group to Dutch Brothers 2022 EBITDA, what share price would that imply? (Take 2022 EBITDA XAve Multiple as your new total Equity value and divide by shares outstanding) Overall, what is your estimate of what Dutch Brothers' stock price should be and what range of valuations do you think are reasonable? Defend your conclusion by discussing and referencing the outcomes of the valuations in steps to B. You will have arrived at a range of prices and you will need to take a stand on how to interpret this range and which prices and assumptions to weight more heavily Your answer should take the form of a writeup (maximum 2 single-spaced pages that references spreadsheet exhibits the exhibits do not count toward the 2-page limit). Do NOT write a chronological history of what you did to solve the case and do NOT write it as answer, ) answer, etc. You are supposed to explain the highlights of your approach, synthesive what you found, draw a conclusion and defendit. This is ou cate Submission has electronic tand MUST at clude your bacel e ending in l. 2021 2022 2023 2024 2025 2026 2022 2020 2029 2030 35% 55.0 28 Assumptions in Model YOY Rev Growth Total Cost of Revenue of Rev SGSA (YOY Growth Depreciation of Rev Capts of Rev Interest Expense Long Run Growth Discount Rate 44% 65.0% 20.0% 4.50% 25% 20% 4.50% 30% 65.0% 9% 4.50% 20% 2 65.0 9% 4. SON 18N 9 25% 65.ON 7 4.50% 15% 11 21% 65.0% SX 4.50% 125 23 16% 65.0% 33 450W 9% 14 12% 65.ON 2% 4.SON 6% 15 8% 65.0% 2% 4.SON AN 65.ON 2 400N 4 15 25% 5 15 10% 45 Sensitivity Base Case YOY Revenue Growth Upside YOY Revenue Growth Downside YOY Revue Growth 44% 44% 4% 35% 40% 33 10x 28 35N 30 25 2546 20 21 21% 25 16 16 2014 12% 12 15N IN TON 4% 28 434 65 ON Base Case Cost of Revenue High Cost of Revenue 65.0 70.0 65.0% 70. GSON 200N 18.0 70.0 65.0 2003 65 ON 70.0% 650 700N 65.0 70.ON 70.0% 700 All figures are in millions 2020 included lase Your for growth 2022 2023 2021 2035 2024 2026 2020 2029 2070 2010 Total Rev 3274 IMO Total cost of huren SOLA EBITDA 1130 26.4 Depreciation Interest Expense Tawat income Taves Net Income 68 -1/4