BROWN$-$FORMAN DISTILLERS CORPORATION

In early July $1978,$ W$.$ L$.$ Lyons Brown, Jr$.,$ president and chief executive officer of BrownForman Distillers Corporation, faced an important acquisition decision. The principal owners of Southern Comfort Corporation had approached Brown in May with an offer to sell the company at a price of $$94\mathrm{.}6$ million. In preparing his response, Brown was evaluating the feasibility of the asking price and the likely effects of the acquisition on Brown$-$Forman$$s share price. As a leading producer, marketer, and importer of wines and distilled spirits $($including the well$-$known Jack Daniel$$s brand$),$ Brown$-$Forman $($$$457$ million net sales$)$ was the fifth$-$largest distiller in the United States, after National Distillers $($$$586$ million$),$ Seagram $($$$2,018$ million$),$ Heublein $($$$839$ million$),$ and Hiram Walker $($$$875$ million$)\mathrm{.}1$ How Brown had chosen to position Brown$-$Forman among its competitors would affect the appraisal of Southern Comfort.

Question :Using the information contained in Exhibit $9,$ calculate the sales revenue forecasts for Southern Comfort for the years $1979$ through $1988.$ Also, using any information available in the case, estimate the long$-$term sales growth rate to be earned beyond $1988.($State your assumptions clearly.$)$

Question : Using the information primarily contained in the text and Exhibits $6,7$ and $9,$ forecast all the parameters that you will need to build a sales$-$driven, pro forma financial model of Southern Comfort. For example, forecast COGS as a percentage of Sales Revenue and so forth. Clearly list all of your assumptions necessary for the pro forma modeling. Justify your assumptions in a brief, but meaningful manner.

Question : Using the information contained in the text and in Exhibit $1,$ estimate Brown and Forman$$s WACC and verify if their hurdle rate of $14\%$ is approximately correct. State any assumptions you make on the way. Using the information in Exhibit $1,$ and using the comparable firms approach, estimate $($ra$)$ for Southern Comfort Corporation.

Question : Derive the Free Cash Flows that you will use to value the entire Southern Comfort Corporation.

Question : Provide an estimate of the value of the entire Southern Comfort Corporation as of December $31,1978.$ Lastly, what is the NPV of this acquisition from Brown$-$Forman$$s point of view using the price suggested by Southern Comfort$$s owners?

Exhibit $1$

BROWN$-$FORMAN DISTILLERS CORPORATION

Comparative Financial Data, $1978$

American

Distilling

Brown$-$

Forman

National

Dis

Exhibit $6$

BROWN$-$FORMAN DISTILLERS CORPORATION

Southern Comfort Corporation and Subsidiary

Income Statement

$($For the years end

Exhibit $7$

BROWN$-$FORMAN DISTILLERS CORPORATION

Southern Comfort Corporation and Subsidiary

Consolidated Balance Sheets, Decemb

Exhibit $9$

BROWN$-$FORMAN DISTILLERS CORPORATION

Assumptions Used in Southern Comfort Cash$-$Flow Forecast

In dollars except for c