Case 45 American Greetings Corporate Finance

1. Exhibit 45.8 provides some guidance on two scenarios: bullish and bearish cash flow forecasts. Based on the two scenarios, model cash flows for American Greetings for fiscal years 2012 through 2015 and estimate its terminal value. Based on the discounted cash flows associated with the forecast, what is the implied enterprise value of American Greetings and the corresponding share price?

WACC/Discount Rate Used : 8.43%

Marginal Tax Rate: 39%

21 ST ' Aa A v A.B.A. AQ al Styles Styles Pane Dictate FINA 6340 Advanced Corporate Finance + American Greetings Valuation Model: Bearish Scenario (in millions of dollars) 2011 2012 2013 2014 2015 Steady State 5.3% 0.0% 0.0% 0.0% 0.0% 0.0% Revenue Growth Operating Margin 9.4% 8.0% 7.0% 6.0% 5.0% 5.0% NWC Turnover 5.02 6.00 6.50 7.00 7.50 Bearish view (Exhibit 45.8) Bearish view (Exhibit 45.8) Bearish view (Exhibit 45.8) Bearish view (Exhibit 45.8) 7.50 Fixed Assets Tumover 1.95 1.95 1.95 1.95 1.95 1.95 Revenue EBIT 1,677 157 Exhibit 45.2 Exhibit 45.2 NWC Fixed Assets 334 859 Exhibit 453 Exhibit 45.3 NOPAT - Increases in NWC - Increases in Net Fixed Assets Free Cash Flow Terminal Value I Bearish View Bullish View Enterprise Value Long-Term Debt 235 Value of Equity Number of Shares Outstanding 38 3 million Implied Share Price 235 383 million English (United States) O Focus 13 tv A W MacBook Pro Review View Tell me Aa A v ' 21 , V W A v V Styles Styles Pane Dictate 5.37 3. Exhibit 45.8 provides some guidance on two scenarios: bullish and bearish cash flow forecasts. Based on the two scenarios, model cash flows for American Greetings for fiscal years 2012 through 2015 and estimate its terminal value. Based on the discounted cash flows associated with the forecast, what is the implied enterprise value of American Greetings and the corresponding share price? American Greetings Valuation Model: Bullish Scenario (in millions of dollars) 2011 2012 2013 2014 2015 Steady State Revenue Growth 5.3% 1.0% 1.5% 2.0% 2.5% 3.0% Bullish view (Exhibit 45.8) Operating Margin 9.4% 9.0% 9.0% 9.0% 9.0% 9.0% Bullish View (Exhibit 45.8) NWC Turnover 5.02 6.00 6.50 7.00 7.50 Bullish view (Exhibit 45.8) Fixed Assets Tumover 1.95 1.95 1.95 1.95 1.95 1.95 Bullish view (Exhibit 45.8) 7.50 Revenue EBIT 1,677 157 Exhibit 45.2 Exhibit 45.2 NWC Fixed Assets 334 859 Exhibit 453 Exhibit 453 NOPAT - Increases in NWC - Increases in Net Fixed Assets Free Cash Flow Terminal Value nglish (United States) Focus 13 tv A 9 W EXHIBIT 45.8 | Financial Forecast Assumptions Forecast Actual 2011 2012 2013 2014 2015 Bullish Scenario Revenue Growth Operating Margin Net Working Capital Turnover Fixed Asset Turnover 5.3% 9.4% 5.02 1.0% 9.0% 1.5% 9.0% 6.50 1.95 2.0% 9.0% 7.00 1.95 2.5% 9.0% 7.50 6.00 1.95 1.95 1.95 5.3% 0.0% Bearish Scenario Revenue Growth Operating Margin Net Working Capital Turnover Fixed Asset Turnover 0.0% 5.0% 9.4% 5.02 1.95 0.0% 8.0% 6.00 1.95 0.0% 7.0% 6.50 6.0% 7.00 1.95 7.50 1.95 1.95 Note: The ratios are defined in the following manner: Revenue Growth is the annual percentage change in total revenue, Operating Margin is operating income divided by total revenue, Net Working Capital Turnover is total revenue divided by net working capital where net working capital is current assets less current liabilities, Fixed Asset Turnover is total revenue divided by net PP&E and other assets. Data source: Case writer estimates. EXHIBIT 45.2 | American Greetings Income Statement, December 2011 (in millions of dollars) 2008 (Feb 2009) 2009 (Feb 2010) 2010 (Feb 2011) 2011E (Feb 2012) 1,691 810 1,636 713 1,593 682 478 261 1,677 743 526 258 619 226 508 276 0 0 290 0 Total American Greetings Figures Total Revenue Material, Labor, and Other Pruduction Costs Selling, Distribution, and Marketing Expenses Administrative and General Expenses Goodwill and Other Intangible Asset Impairments Other Operating Expenses Operating Income Net Interest and Other Nonoperating Expenses Income Before Income Tax Expense Income Tax Expense Net Income 0 3 175 139 18 (253) 22 (275) (47) (228) (6) 157 28 129 47 82 19 156 69 87 121 39 82 Earnings Per Share (Basic) Dividends per Share (4.89) 0.60 2.07 0.36 2.18 0.56 2.22 0.60 1.215 By Business Unit Operating Segment Net Sales North American Social Expression Products International Social Expression Products Retail Operations AG Interactive 1,235 254 12 1,191 262 1,095 271 179 83 344 80 78 68 218 148 Operating Segment Earnings North American Social Expression Products International Social Expression Products Retail Operations AG Interactive 20 20 70 (78) (19) (162) 236 17 (35) 11 14. 14 704 357 Total Revenue by Product Category Everyday Greeting Cards Seasonal Greeting Cards Gift Packaging Other Revenue All Other Products 240 764 369 221 38 244 753 377 223 32 207 823 408 239 32 176 44 345 Data sources: Company accounts; management and case writer estimates. Fiscal year ends February of subsequent year. EXHIBIT 45.3 | American Greetings Balance Sheet' (in millions of dollars) 2009 (Feb 2010) 2010 (Feb 2011) 2011E (Feb 2012) Cash and Cash Equivalents Trade Accounts Receivable Inventories Prepaid Expenses Other Current Assets Total Current Assets 138 136 164 148 216 120 180 128 72 716 172 130 190 131 54 677 94 679 Net Property, Plant, and Equipment and Other Assets Total Assets 859 850 1,529 832 1,547 1.536 1 87 Debt Due within One Year Accounts Payable Other Current Liabilities Current Liabilities 95 272 369 245 332 87 255 343 329 233 Long-Term Debt Other Liabilities Shareholders' Equity Total Liabilities and Shareholders' Equity Data sources: Company accounts; management and case writer estimates. "Fiscal year ends February of subsequent year. 196 636 1,529 235 206 752 1,536 219 763 1,547 EXHIBIT 45.4 | Total U.S. Greeting Cards Sales (Actual and Forecast) Sales at current prices in millions of dollars % annual change 2005 -1.8 -2.1 2006 2007 2008 2009 6,537 6,420 6,285 6,266 6,149 -0.3 -1.9 -3.5 2010 2011 (est.) 2012 (est.) 2013 (est.) 2014 (est.) 2015 (est.) 5,935 5,838 5,711 5,596 5,478 5,359 -1.6 -2.2 -2.0 -2.1 -2.2 ur rensus Bureau, Economic Census. past few quarters, [AG] rolled out several complementary interactive products (i.e., mobile partnerships, and sell-diversified portfolio ought to drive customer interest in its goods. Technological enhancements will likely remain key to its long-term approach. Over the It was clear that there was substantial disagreement regarding the future growth trajectory and operating margins for the company. Over the past several years, revenue rt Eight Valuing the Enterprise: Acquisitions and apps) and should continue to bolster its digital position.* anticipated pro- growth had been near to below zero. In 2011, however, revenue growth was to be more than 7% (Exhibit 45.7). Similarly, operating margins, which had been abnor. mally low two to five years previously, had improved to 9% recently. The marginal tax rate for AG income was 39%. A bullish view held that AG would be able to maintain operating margins at 9% and achieve long-term ongoing revenue growth of 3%. A bearish view held that AG's spective revenue growth would be near zero into the future and that margins would continue to erode to a long-term rate of 5%. The expectation was that recent investments and ongoing electronic product substitution would generate some future working capital efficiency for AG, but there was little evidence that fixed asset turnover would improve. Exhibit 45.8 details the specific assumptions for the two scenarios. Management understood that returns and growth were challenging to achieve in early 2012. Yields on U.S. Treasury bills and bonds were at historic lows of 0.1% and 2.8%, respectively (Exhibit 45.9). In such an environment, investors would richly re- ward returns of even small magnitudes. EXHIBIT 45.6 | Comparable Firms, End of 2011 (in millions of dollars except share price) Share Price Case 45 American Crocs Total American Greetings Shares Outstanding Cash 38.3 86 8.2 182 10.2 Total Debt Blyth Enterprise Value Consolidated Graphics Revenue EBITDA CSS Industries 12.51 56.80 48.28 19.92 22.76 NA 69.34 32.65 29.97 235 101 197 Deluxe 7 10 204 714 568 692 194 1,901 Hallmark 0 9.7 50.9 NA 27.3 44.8 31.1 742 Lancaster Colony Meredith Scholastic 31 NA 162 26 114 NA 0 250 215 1560 984 1.050 453 1420 4,100 1.090 1,350 1.950 48 122 30 359 NA NA 1,890 1,712 1,145 ROA 156 240 189 ROE Beta Bond Rating** American Greetings 7% 11% 1.63 Blyth 4% 9% BB+ 1.60 5% B 10% 4% BB 13% Consolidated Graphics CSS Industries Deluxe Hallmark Lancaster Colony Meredith 2% 55% 1.45 1.36 1.85 NA B NA NA 14% 19% 0.42 7% 15% 1.75 BB Scholastic 6% 8% 1.04 BB- ata sources: Yahoo! Finance, Standard & Poor's, Mergent. BITDA miltiple is defined as Enterprise Value divided by EBITDA The ratings for Cons. Graphics and Meredith are estimated by case writer. EXHIBIT 45.9 1 Capital Market Data Case 45 American Greetings 5 30-Day Treasury Bill 10-Year Treasury Bond Yield 10-Year Corporate Bonds of Industrial Companies AAA 0.1% 2.8% AA A+ A A- BBB+ BBB BBB- BB+ BB 2.8% 2.9% 3.2% 3.3% 3.5% 3.8% 4.1% 4.6% 5.8% 6.5% 6.5% 6.8% 8.4% 9.0% BB- B+ B. B- Historical Market Risk Premium Equity Market Index Less Government Debt 5.5% 5-Year Forecast U.S. Real GDP Annual Growth Rate U.S. GDP Annual Deflator Rate Consumer Price Index Annual Rate 3.3% 1.8% 2.2% mi ortimoto Forecast Actual 2011 2012 2013 2014 2015 1.0% 1.5% Bullish Scenario Revenue Growth Operating Margin Net Working Capital Turnover Fixed Asset Turnover 5.3% 9.4% 5.02 9.0% 9.0% 6.50 2.0% 9.0% 7.00 6.00 1.95 2.5% 9.0% 7.50 1.95 1.95 1.95 1.95 0.0% Bearish Scenario Revenue Growth Operating Margin Net Working Capital Turnover Fixed Asset Turnover 5.3% 9.4% 5.02 0.0% 7.0% 6.0% 0.0% 8.0% 6.00 1.95 0.0% 5.0% 7.50 6.50 1.95 7.00 1.95 1.95 1.95 Note: The ratios are defined in the following manner: Revenue Growth is the annual percentage change in total revenue, Operating Margin is operating income divided by total revenue, Net Working Capital Turnover is total revenue divided by net working capital where net working capital is current assets less current liabilities, Fixed Asset Turnover is total revenue divided by net PP&E and other assets. Data source: Case writer estimates. 21 ST ' Aa A v A.B.A. AQ al Styles Styles Pane Dictate FINA 6340 Advanced Corporate Finance + American Greetings Valuation Model: Bearish Scenario (in millions of dollars) 2011 2012 2013 2014 2015 Steady State 5.3% 0.0% 0.0% 0.0% 0.0% 0.0% Revenue Growth Operating Margin 9.4% 8.0% 7.0% 6.0% 5.0% 5.0% NWC Turnover 5.02 6.00 6.50 7.00 7.50 Bearish view (Exhibit 45.8) Bearish view (Exhibit 45.8) Bearish view (Exhibit 45.8) Bearish view (Exhibit 45.8) 7.50 Fixed Assets Tumover 1.95 1.95 1.95 1.95 1.95 1.95 Revenue EBIT 1,677 157 Exhibit 45.2 Exhibit 45.2 NWC Fixed Assets 334 859 Exhibit 453 Exhibit 45.3 NOPAT - Increases in NWC - Increases in Net Fixed Assets Free Cash Flow Terminal Value I Bearish View Bullish View Enterprise Value Long-Term Debt 235 Value of Equity Number of Shares Outstanding 38 3 million Implied Share Price 235 383 million English (United States) O Focus 13 tv A W MacBook Pro Review View Tell me Aa A v ' 21 , V W A v V Styles Styles Pane Dictate 5.37 3. Exhibit 45.8 provides some guidance on two scenarios: bullish and bearish cash flow forecasts. Based on the two scenarios, model cash flows for American Greetings for fiscal years 2012 through 2015 and estimate its terminal value. Based on the discounted cash flows associated with the forecast, what is the implied enterprise value of American Greetings and the corresponding share price? American Greetings Valuation Model: Bullish Scenario (in millions of dollars) 2011 2012 2013 2014 2015 Steady State Revenue Growth 5.3% 1.0% 1.5% 2.0% 2.5% 3.0% Bullish view (Exhibit 45.8) Operating Margin 9.4% 9.0% 9.0% 9.0% 9.0% 9.0% Bullish View (Exhibit 45.8) NWC Turnover 5.02 6.00 6.50 7.00 7.50 Bullish view (Exhibit 45.8) Fixed Assets Tumover 1.95 1.95 1.95 1.95 1.95 1.95 Bullish view (Exhibit 45.8) 7.50 Revenue EBIT 1,677 157 Exhibit 45.2 Exhibit 45.2 NWC Fixed Assets 334 859 Exhibit 453 Exhibit 453 NOPAT - Increases in NWC - Increases in Net Fixed Assets Free Cash Flow Terminal Value nglish (United States) Focus 13 tv A 9 W EXHIBIT 45.8 | Financial Forecast Assumptions Forecast Actual 2011 2012 2013 2014 2015 Bullish Scenario Revenue Growth Operating Margin Net Working Capital Turnover Fixed Asset Turnover 5.3% 9.4% 5.02 1.0% 9.0% 1.5% 9.0% 6.50 1.95 2.0% 9.0% 7.00 1.95 2.5% 9.0% 7.50 6.00 1.95 1.95 1.95 5.3% 0.0% Bearish Scenario Revenue Growth Operating Margin Net Working Capital Turnover Fixed Asset Turnover 0.0% 5.0% 9.4% 5.02 1.95 0.0% 8.0% 6.00 1.95 0.0% 7.0% 6.50 6.0% 7.00 1.95 7.50 1.95 1.95 Note: The ratios are defined in the following manner: Revenue Growth is the annual percentage change in total revenue, Operating Margin is operating income divided by total revenue, Net Working Capital Turnover is total revenue divided by net working capital where net working capital is current assets less current liabilities, Fixed Asset Turnover is total revenue divided by net PP&E and other assets. Data source: Case writer estimates. EXHIBIT 45.2 | American Greetings Income Statement, December 2011 (in millions of dollars) 2008 (Feb 2009) 2009 (Feb 2010) 2010 (Feb 2011) 2011E (Feb 2012) 1,691 810 1,636 713 1,593 682 478 261 1,677 743 526 258 619 226 508 276 0 0 290 0 Total American Greetings Figures Total Revenue Material, Labor, and Other Pruduction Costs Selling, Distribution, and Marketing Expenses Administrative and General Expenses Goodwill and Other Intangible Asset Impairments Other Operating Expenses Operating Income Net Interest and Other Nonoperating Expenses Income Before Income Tax Expense Income Tax Expense Net Income 0 3 175 139 18 (253) 22 (275) (47) (228) (6) 157 28 129 47 82 19 156 69 87 121 39 82 Earnings Per Share (Basic) Dividends per Share (4.89) 0.60 2.07 0.36 2.18 0.56 2.22 0.60 1.215 By Business Unit Operating Segment Net Sales North American Social Expression Products International Social Expression Products Retail Operations AG Interactive 1,235 254 12 1,191 262 1,095 271 179 83 344 80 78 68 218 148 Operating Segment Earnings North American Social Expression Products International Social Expression Products Retail Operations AG Interactive 20 20 70 (78) (19) (162) 236 17 (35) 11 14. 14 704 357 Total Revenue by Product Category Everyday Greeting Cards Seasonal Greeting Cards Gift Packaging Other Revenue All Other Products 240 764 369 221 38 244 753 377 223 32 207 823 408 239 32 176 44 345 Data sources: Company accounts; management and case writer estimates. Fiscal year ends February of subsequent year. EXHIBIT 45.3 | American Greetings Balance Sheet' (in millions of dollars) 2009 (Feb 2010) 2010 (Feb 2011) 2011E (Feb 2012) Cash and Cash Equivalents Trade Accounts Receivable Inventories Prepaid Expenses Other Current Assets Total Current Assets 138 136 164 148 216 120 180 128 72 716 172 130 190 131 54 677 94 679 Net Property, Plant, and Equipment and Other Assets Total Assets 859 850 1,529 832 1,547 1.536 1 87 Debt Due within One Year Accounts Payable Other Current Liabilities Current Liabilities 95 272 369 245 332 87 255 343 329 233 Long-Term Debt Other Liabilities Shareholders' Equity Total Liabilities and Shareholders' Equity Data sources: Company accounts; management and case writer estimates. "Fiscal year ends February of subsequent year. 196 636 1,529 235 206 752 1,536 219 763 1,547 EXHIBIT 45.4 | Total U.S. Greeting Cards Sales (Actual and Forecast) Sales at current prices in millions of dollars % annual change 2005 -1.8 -2.1 2006 2007 2008 2009 6,537 6,420 6,285 6,266 6,149 -0.3 -1.9 -3.5 2010 2011 (est.) 2012 (est.) 2013 (est.) 2014 (est.) 2015 (est.) 5,935 5,838 5,711 5,596 5,478 5,359 -1.6 -2.2 -2.0 -2.1 -2.2 ur rensus Bureau, Economic Census. past few quarters, [AG] rolled out several complementary interactive products (i.e., mobile partnerships, and sell-diversified portfolio ought to drive customer interest in its goods. Technological enhancements will likely remain key to its long-term approach. Over the It was clear that there was substantial disagreement regarding the future growth trajectory and operating margins for the company. Over the past several years, revenue rt Eight Valuing the Enterprise: Acquisitions and apps) and should continue to bolster its digital position.* anticipated pro- growth had been near to below zero. In 2011, however, revenue growth was to be more than 7% (Exhibit 45.7). Similarly, operating margins, which had been abnor. mally low two to five years previously, had improved to 9% recently. The marginal tax rate for AG income was 39%. A bullish view held that AG would be able to maintain operating margins at 9% and achieve long-term ongoing revenue growth of 3%. A bearish view held that AG's spective revenue growth would be near zero into the future and that margins would continue to erode to a long-term rate of 5%. The expectation was that recent investments and ongoing electronic product substitution would generate some future working capital efficiency for AG, but there was little evidence that fixed asset turnover would improve. Exhibit 45.8 details the specific assumptions for the two scenarios. Management understood that returns and growth were challenging to achieve in early 2012. Yields on U.S. Treasury bills and bonds were at historic lows of 0.1% and 2.8%, respectively (Exhibit 45.9). In such an environment, investors would richly re- ward returns of even small magnitudes. EXHIBIT 45.6 | Comparable Firms, End of 2011 (in millions of dollars except share price) Share Price Case 45 American Crocs Total American Greetings Shares Outstanding Cash 38.3 86 8.2 182 10.2 Total Debt Blyth Enterprise Value Consolidated Graphics Revenue EBITDA CSS Industries 12.51 56.80 48.28 19.92 22.76 NA 69.34 32.65 29.97 235 101 197 Deluxe 7 10 204 714 568 692 194 1,901 Hallmark 0 9.7 50.9 NA 27.3 44.8 31.1 742 Lancaster Colony Meredith Scholastic 31 NA 162 26 114 NA 0 250 215 1560 984 1.050 453 1420 4,100 1.090 1,350 1.950 48 122 30 359 NA NA 1,890 1,712 1,145 ROA 156 240 189 ROE Beta Bond Rating** American Greetings 7% 11% 1.63 Blyth 4% 9% BB+ 1.60 5% B 10% 4% BB 13% Consolidated Graphics CSS Industries Deluxe Hallmark Lancaster Colony Meredith 2% 55% 1.45 1.36 1.85 NA B NA NA 14% 19% 0.42 7% 15% 1.75 BB Scholastic 6% 8% 1.04 BB- ata sources: Yahoo! Finance, Standard & Poor's, Mergent. BITDA miltiple is defined as Enterprise Value divided by EBITDA The ratings for Cons. Graphics and Meredith are estimated by case writer. EXHIBIT 45.9 1 Capital Market Data Case 45 American Greetings 5 30-Day Treasury Bill 10-Year Treasury Bond Yield 10-Year Corporate Bonds of Industrial Companies AAA 0.1% 2.8% AA A+ A A- BBB+ BBB BBB- BB+ BB 2.8% 2.9% 3.2% 3.3% 3.5% 3.8% 4.1% 4.6% 5.8% 6.5% 6.5% 6.8% 8.4% 9.0% BB- B+ B. B- Historical Market Risk Premium Equity Market Index Less Government Debt 5.5% 5-Year Forecast U.S. Real GDP Annual Growth Rate U.S. GDP Annual Deflator Rate Consumer Price Index Annual Rate 3.3% 1.8% 2.2% mi ortimoto Forecast Actual 2011 2012 2013 2014 2015 1.0% 1.5% Bullish Scenario Revenue Growth Operating Margin Net Working Capital Turnover Fixed Asset Turnover 5.3% 9.4% 5.02 9.0% 9.0% 6.50 2.0% 9.0% 7.00 6.00 1.95 2.5% 9.0% 7.50 1.95 1.95 1.95 1.95 0.0% Bearish Scenario Revenue Growth Operating Margin Net Working Capital Turnover Fixed Asset Turnover 5.3% 9.4% 5.02 0.0% 7.0% 6.0% 0.0% 8.0% 6.00 1.95 0.0% 5.0% 7.50 6.50 1.95 7.00 1.95 1.95 1.95 Note: The ratios are defined in the following manner: Revenue Growth is the annual percentage change in total revenue, Operating Margin is operating income divided by total revenue, Net Working Capital Turnover is total revenue divided by net working capital where net working capital is current assets less current liabilities, Fixed Asset Turnover is total revenue divided by net PP&E and other assets. Data source: Case writer estimates