• Constructtheproformafinancials.TovalueTeuerFurniture,thefirststepistoconstructaproformaincomestatementandaproformabalancesheet.Usetheassumptionsanddatafromthecase.Templateshavebeenprovidedforyou.Verifythatyourbalancesheetbalances.

Value the firm using the discounted cash flow method. Value TF by constructing the cash flow from assets for the next 6 years (2013-2018). Your value should NOT include the 2012 cash flows. You will need to include a terminal value in your valuation. Initially, assume that the long-term growth rate of TFs cash flows is 3.5% and the cost of capital is 12.1% . What is the companys value on a per share basis.Evaluate the key assumptions. These spreadsheet exhibits relate to the case Teuer Furniture (A): Discounted Cash Flow Valuation, Case #KEL778. 2015 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Mitchell A. Petersen. Teuer Furniture is a fictional company whose profile was created based on data from real industry leaders. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwisewithout the permission of Kellogg Case Publishing. Exhibit 1: Teuer Furnitures Showrooms and Square Footage Stores Opened 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total Stores 1 3 4 5 6 2 1 2 2 3 2 2 2 1 4 8 13 19 21 22 24 26 29 31 33 35 SQ FT Opened 17,200 17,600 18,500 21,100 22,100 15,500 14,500 14,700 15,400 16,300 16,000 16,000 15,000 Total SQ FT 17,200 70,000 144,000 249,500 382,100 413,100 427,600 457,000 487,800 536,700 568,700 600,700 630,700 40 35 30 25 20 15 10 5 0 2003 2005 2007 200 Number of Showro 005 700,000 600,000 500,000 400,000 300,000 200,000 100,000 2007 2009 Number of Showrooms 2011 2013 Total Square Feet 0 2015 Exhibit 2: Economic Indicators: GDP and Furniture Sales Growth CPI index Inflation (CPI) GDP (T$) GDP growth Furniture sales ($B) Furniture sales growth 2002 180.9 10,642 94.44 2003 184.3 1.9% 11,142 4.7% 96.7 2.4% 2004 190.3 3.3% 11,853 6.4% 103.8 7.3% 2005 196.8 3.4% 12,623 6.5% 109.1 5.2% 2006 201.8 2.5% 13,377 6.0% 112.8 3.4% 2007 210.0 4.1% 14,029 4.9% 111.1 -1.5% 2008 210.2 0.1% 14,292 1.9% 99.6 -10.4% 2009 215.9 2.7% 13,974 -2.2% 86.3 -13.4% 2010 219.2 1.5% 14,499 3.8% 87.3 1.2% 2011 225.7 3.0% 15,076 4.0% 90.1 3.2% 2012 229.6 1.7% 15,685 4.0% 93.1 3.4% 10.0% 5.0% 0.0% 2003 2005 2007 2009 2011 2013 -5.0% -10.0% -15.0% GDP Growth Furniture Sales Growth Inflation (CPI) 2015 2017 2013 233.5 1.7% 16,238 3.5% 95.9 3.0% 2014 237.7 1.8% 17,049 5.0% 98.6 2.8% 2015 242.3 1.9% 18,012 5.6% 101.2 2.6% 2016 247.4 2.1% 19,021 5.6% 103.6 2.4% 2017 252.1 1.9% 20,078 5.6% 105.9 2.2% 2018 256.6 1.8% 21,101 5.1% 108.0 2.0% 2019 261.3 1.8% 110.2 2.0% Exhibit 3: Teuer Furniture Income Statement 2003 Sales Cost of goods sold Selling, general and admin Advertising Depreciation Lease Corporate expense Taxes Net income Parameters: Corporate tax rate 40% 2004 2,057 -1,463 -410 -203 -72 -250 -185 0 -526 2005 10,415 -7,057 -1,812 -1,019 -307 -1,080 -729 0 -1,588 2006 26,701 -17,424 -4,958 -2,411 -669 -2,330 -1,602 0 -2,693 2007 51,540 -30,730 -9,230 -4,588 -1,264 -4,240 -3,092 0 -1,604 2008 79,191 -43,834 -13,576 -6,585 -2,075 -6,770 -4,751 0 1,600 2009 90,680 -47,290 -14,679 -7,532 -2,188 -7,380 -5,441 -543 5,626 2010 111,451 -49,068 -16,471 -8,367 -2,032 -7,712 -5,573 -8,892 13,337 2011 134,093 -55,487 -18,698 -9,545 -1,820 -8,450 -6,705 -13,356 20,033 2012 148,218 -61,955 -21,253 -10,744 -1,450 -9,320 -7,411 -14,434 21,651 Exhibit 4: Teuer Furniture Balance Sheet 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Accounts Receivable Inventory Total Current Assets PPE Total Assets 0 671 671 358 1,029 751 3,151 3,902 1,461 5,364 3,479 8,216 11,695 2,969 14,663 8,675 15,125 23,800 5,270 29,070 16,946 20,908 37,853 8,065 45,918 25,272 21,715 46,987 6,914 53,900 29,059 24,868 53,927 5,119 59,046 36,625 26,808 63,433 3,839 67,272 42,421 29,216 71,637 3,142 74,779 48,200 33,343 81,543 3,920 85,463 Liabilities and Equity Accounts Payable Accrued Expenses Total Current Liabilities Debt Equity Total Liabilities and Equity 236 29 265 0 764 1,029 1,158 145 1,303 0 4,061 5,364 2,781 358 3,139 0 11,525 14,663 5,119 658 5,777 0 23,293 29,070 7,228 958 8,186 0 37,732 45,918 7,767 1,055 8,822 0 45,079 53,900 8,277 1,203 9,480 0 49,565 59,046 9,133 1,359 10,493 0 56,779 67,272 9,986 1,519 11,505 0 63,274 74,779 11,364 1,682 13,046 0 72,417 85,463 Assets Balance sheet check Exhibit 5: Teuer Furniture Income Statement for Individual Showrooms 2012 2013 2014 2015 2016 2017 2018 2019 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Sales 2,057 3,754 5,224 6,148 6,341 5,503 5,636 5,871 6,034 CGS # 1,463 2,309 3,018 2,394 2,753 2,311 2,194 2,150 2,416 SGA 410 640 857 856 815 765 767 687 791 203 334 399 434 422 423 391 401 457 72 72 72 72 72 0 0 0 65 250 250 250 250 250 250 302 302 302 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Sales 6,661 11,907 15,158 16,488 15,446 16,187 17,279 17,869 CGS 4,748 7,428 7,894 7,216 6,031 6,675 6,691 7,176 SGA 8 9 10 11 12 13 14 7 8 9 10 11 12 13 6 7 8 9 10 11 12 5 6 7 8 9 10 11 4 5 6 7 8 9 10 3 4 5 6 7 8 9 2 3 4 5 6 7 8 1 2 3 4 5 6 7 1 2 3 4 5 6 1 2 3 4 5 1 2 3 4 2003 Avg Size 1 17,200 Advertising Depreciation Lease 2004 3 17,600 2004 2005 2006 2007 2008 2009 2010 2011 1,171 2,148 2,631 2,323 2,239 2,224 2,395 2,319 Advertising 685 971 1,266 1,213 1,235 1,241 1,245 1,287 Depreciation 235 235 235 235 235 0 0 0 830 830 830 830 830 830 1,003 1,003 1 2 3 4 5 6 7 Sales 9,570 16,651 19,785 20,951 22,847 24,451 24,499 CGS 6,978 10,917 11,430 8,499 9,387 9,857 9,042 SGA 1,953 2,977 3,371 3,039 3,021 3,228 3,693 1,041 1,488 1,587 1,598 1,605 1,645 1,793 Lease 2005 4 18,500 Advertising Depreciation 363 363 363 363 363 0 0 1,250 1,250 1,250 1,250 1,250 1,250 1,510 1 2 3 4 5 6 Sales 13,583 21,142 23,592 29,702 34,105 34,824 CGS 9,526 11,229 13,594 9,902 13,259 13,932 SGA 2,767 4,016 4,237 3,780 4,895 4,946 1,400 1,784 1,964 2,014 2,327 2,287 594 594 594 594 594 1,910 1,910 1,910 1,910 1,910 Lease 2006 5 21,100 Advertising Depreciation Lease 2007 6 22,100 0 1,910 1 2 3 4 5 Sales 15,435 22,001 30,466 39,628 43,541 CGS 11,205 14,801 16,422 15,232 17,856 SGA 3,050 3,878 5,471 5,166 5,917 1,578 1,986 2,458 2,748 3,109 812 812 812 812 812 2,530 2,530 2,530 2,530 2,530 1 2 3 4 Sales 3,187 5,176 7,244 9,257 CGS 2,053 3,467 4,421 3,764 SGA Advertising Depreciation Lease 2008 2 15,500 522 951 1,225 1,243 Advertising 326 499 598 675 Depreciation 185 185 185 185 610 610 610 1 2 3 Sales 1,437 2,507 3,540 CGS 1,021 1,652 1,887 SGA 257 480 615 158 227 303 Lease 2009 1 14,500 Advertising Depreciation Lease 2010 2 14,700 610 79 79 79 280 280 280 1 2 Sales 3,008 5,300 CGS 2,226 3,526 SGA 623 1,028 353 473 150 150 Advertising Depreciation Lease 2011 565 2 15,400 565 1 Sales 3,354 CGS 2,357 SGA 701 Advertising 358 Depreciation 160 Lease 2012 610 3 16,300 Sales 5,379 CGS SGA Advertising Depreciation Lease 2013 1,000 2 16,000 Sales 3,622 CGS SGA Advertising Depreciation Lease 2014 668 2 16,000 Sales 3,731 CGS SGA Advertising Depreciation Lease 2015 682 2 15,000 Sales 3,597 CGS SGA Advertising Depreciation Lease Parameters: Lease rate (2013) Lease inflation 652 20.88 2.0% Exhibit 6: Teuer Furniture Balance Sheet for Individual Showrooms # 2003 Avg Size 1 17,200 Cap expenditure 2003 2004 2005 2006 2007 2008 2009 2010 0 1 2 3 4 5 6 7 358 Accts receivable 2011 2012 2013 2014 2015 2016 2017 2018 8 9 10 11 12 13 14 15 9 10 11 12 13 14 8 9 10 11 12 13 7 8 9 10 11 12 6 7 8 9 10 11 324 751 1,187 1,665 1,975 2,040 1,700 1,745 1,742 1,902 Inventory 671 1,090 1,330 1,206 1,167 980 972 1,082 1,027 1,090 Accts payable 236 396 448 405 403 350 345 370 369 390 Accr expenses 29 49 62 61 61 53 54 57 58 58 0 1 2 3 4 5 6 7 2004 3 17,600 Cap expenditure 1,175 Accts receivable Inventory 8 936 2,292 3,870 5,029 5,526 5,276 5,599 5,612 5,691 2,061 3,590 4,304 3,352 2,851 3,042 3,248 3,397 3,619 Accts payable 762 1,255 1,421 1,124 1,025 1,090 1,124 1,139 1,153 Accr expenses 95 158 193 173 162 162 175 177 179 0 1 2 3 4 5 6 7 3,140 5,508 6,296 6,231 7,149 7,751 7,950 2005 4 18,500 Cap expenditure 1,814 Accts receivable Inventory 3,296 5,271 4,640 3,975 4,075 4,427 4,354 5,114 Accts payable 1,078 1,760 1,742 1,381 1,523 1,572 1,565 1,631 Accr expenses 138 212 240 203 240 244 251 259 0 1 2 3 4 5 6 4,433 6,593 7,974 10,040 10,908 11,761 2006 5 21,100 Cap expenditure 2,971 Accts receivable Inventory 4,344 6,518 6,635 5,870 6,689 6,854 6,348 Accts payable 1,533 2,227 2,181 1,889 2,165 2,325 2,377 Accr expenses 193 272 300 291 337 343 362 0 1 2 3 4 5 4,817 6,829 9,849 12,400 13,920 2007 6 Cap expenditure 22,100 4,058 Accts receivable Inventory 5,232 6,246 8,710 7,320 8,121 9,022 Accts payable 1,732 2,480 2,712 2,631 2,712 2,919 Accr expenses 213 293 362 381 436 435 2008 2 15,500 Cap expenditure 0 1 2 3 4 1,048 1,758 2,212 2,905 1,028 1,711 2,147 1,727 1,911 Accts payable 349 547 662 586 690 Accr expenses 43 72 88 94 101 0 1 2 3 Inventory 1 14,500 Cap expenditure 484 840 1,191 Inventory 488 882 881 823 Accts payable 171 261 327 281 Accr expenses 21 34 43 44 0 1 2 2 14,700 Cap expenditure 956 1,787 1,013 1,787 1,913 Accts payable 348 577 683 Accr expenses 44 71 91 0 1 Inventory 2 15,400 Cap expenditure 1,067 1,795 Accts payable 387 623 Accr expenses 47 76 3 16,300 0 1,293 Accts receivable Inventory 10 4 5 6 7 8 9 3 4 5 6 7 8 2 3 4 5 6 7 1 2 3 4 5 6 1,093 Inventory Cap expenditure 9 798 Accts receivable 2012 8 752 Accts receivable 2011 7 394 Accts receivable 2010 6 924 Accts receivable 2009 5 1,708 Accts payable 617 Accr expenses 79 2013 2 16,000 Cap expenditure 0 1 2 3 4 5 0 1 2 3 4 0 1 2 3 860 Accts receivable Inventory Accts payable Accr expenses 2014 2 16,000 Cap expenditure 876 Accts receivable Inventory Accts payable Accr expenses 2015 2 Cap expenditure Accts receivable Inventory Accts payable Accr expenses 15,000 837 Exhibit 7: Teuer Furniture Cash Flow Assets 2003 Sales - Costs - Taxes Net income - Capital expenditure + Depreciation - Increase in NWC Cash flow to assets 0 -358 0 -406 -764 2004 2,057 -2,582 0 -526 -1,175 72 -2,193 -3,823 2005 10,415 -12,003 0 -1,588 -1,814 307 -5,957 -9,052 2006 26,701 -29,394 0 -2,693 -2,971 669 -9,467 -14,461 2007 51,540 -53,144 0 -1,604 -4,058 1,264 -11,645 -16,043 2008 79,191 -77,591 0 1,600 -924 2,075 -8,498 -5,747 2009 90,680 -84,510 -543 5,626 -394 2,188 -6,281 1,139 2010 111,451 -89,222 -8,892 13,337 -752 2,032 -8,494 6,123 2011 134,093 -100,704 -13,356 20,033 -1,122 1,820 -7,192 13,539 2012 148,218 -112,132 -14,434 21,651 -2,229 1,450 -8,365 12,508 Exhibit 8: Forecasting Sales Revenue and Costs Sales growth CGS SGA Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average 1 2 73.6% 72.9% 76.6% 73.8% 64.5% 60.5% 69.0% 70.4% 3 34.6% 29.2% 32.6% 28.8% 36.8% 35.6% 36.6% 4 19.5% 21.4% 22.2% 24.4% 26.1% 23.6% 5 15.1% 8.1% 7.8% 11.3% 6.3% 6 0.2% 3.6% 3.7% -1.3% 7 1.2% 3.4% -3.1% Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average Year 2003 2004 2005 2006 2007 2008 2009 8 1.0% 0.0% 9 -0.6% 70.2% 33.5% 22.9% 9.7% 1.5% 0.3% 1 71.1% 71.3% 72.9% 70.1% 72.6% 64.4% 71.0% 74.0% 70.3% 70.9% 2 61.5% 62.4% 65.6% 53.1% 67.3% 67.0% 65.9% 66.5% 3 57.8% 52.1% 57.8% 57.6% 53.9% 61.0% 53.3% 4 38.9% 43.8% 40.6% 33.3% 38.4% 40.7% 5 43.4% 39.0% 41.1% 38.9% 41.0% 6 42.0% 41.2% 40.3% 40.0% 7 38.9% 38.7% 36.9% 8 36.6% 40.2% 9 40.0% 63.7% 56.2% 39.7% 1 19.9% 17.6% 20.4% 20.4% 19.8% 16.4% 17.9% 2 17.1% 18.0% 17.9% 19.0% 17.6% 18.4% 19.2% 3 16.4% 17.4% 17.0% 18.0% 18.0% 16.9% 17.4% 4 13.9% 14.1% 14.5% 12.7% 13.0% 13.4% 5 12.9% 14.5% 13.2% 14.4% 13.6% 6 13.9% 13.7% 13.2% 14.2% 7 13.6% 13.9% 15.1% 8 11.7% 13.0% 9 13.1% Advertising 2010 2011 Average 20.7% 20.9% 19.3% 19.4% 18.3% 17.3% 13.6% Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average 1 9.9% 10.3% 10.9% 10.3% 10.2% 10.2% 11.0% 11.7% 10.7% 10.6% 2 8.9% 8.2% 8.9% 8.4% 9.0% 9.6% 9.1% 8.9% 3 7.6% 8.3% 8.0% 8.3% 8.1% 8.3% 8.6% 4 7.1% 7.4% 7.6% 6.8% 6.9% 7.3% 8.9% 8.2% 7.2% 5 6.7% 8.0% 7.0% 6.8% 7.1% 6 7.7% 7.7% 6.7% 6.6% 7 6.9% 7.2% 7.3% 8 6.8% 7.2% 9 7.6% Exhibit 9: Forecasting Investment Accounts Receivable Inventory Accounts Payable Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average 1 36.5% 34.4% 32.8% 32.6% 31.2% 32.9% 33.7% 31.8% 32.6% 32.4% 2 31.6% 32.5% 33.1% 31.2% 31.0% 34.0% 33.5% 33.7% 3 31.9% 33.2% 31.8% 33.8% 32.3% 30.5% 33.6% 4 32.1% 33.5% 29.7% 33.8% 31.3% 31.4% 5 32.2% 34.2% 31.3% 32.0% 32.0% 6 30.9% 34.6% 31.7% 33.8% 7 31.0% 32.5% 32.4% 8 29.7% 31.9% 9 31.5% Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average 1 45.9% 43.4% 47.2% 45.6% 46.7% 50.1% 47.8% 45.5% 45.3% 47.6% 2 47.2% 48.3% 48.3% 58.0% 42.2% 49.4% 53.4% 50.7% 3 44.0% 54.5% 40.6% 48.8% 53.0% 48.6% 46.7% 4 50.4% 46.4% 46.8% 59.3% 48.1% 45.9% 5 42.4% 47.3% 43.4% 50.4% 45.5% 6 42.4% 45.6% 44.9% 49.2% 7 44.3% 48.5% 48.2% 8 50.3% 47.3% 9 42.5% Year 2003 2004 2005 2006 2007 2008 2009 1 16.1% 16.1% 15.4% 16.1% 15.5% 17.0% 16.8% 2 17.2% 16.9% 16.1% 19.8% 16.8% 15.8% 15.8% 3 14.8% 18.0% 15.2% 16.0% 16.5% 15.0% 17.3% 4 16.9% 15.6% 16.2% 19.1% 17.3% 15.6% 5 14.6% 17.0% 16.2% 16.3% 15.2% 6 15.2% 16.3% 15.9% 16.7% 7 15.7% 16.8% 17.3% 8 17.2% 15.9% 9 15.3% Accrued Expenses Construction costs 2010 2011 Average 15.6% 16.4% 16.3% 16.4% Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average 1 4.7% 5.1% 4.6% 4.6% 4.6% 5.1% 5.2% 4.5% 4.4% 4.8% 2 5.1% 5.1% 4.7% 4.7% 5.0% 5.0% 4.8% 4.7% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Nominal 20.8 22.3 24.5 28.2 30.6 29.8 27.2 25.6 25.9 26.4 26.9 27.4 27.9 Real 25.9 26.8 28.6 32.0 33.5 32.6 28.9 26.8 26.4 26.4 26.4 26.4 26.4 Nominal Real 3 4.9% 4.9% 4.8% 4.8% 4.6% 4.8% 4.7% 4 4.7% 4.9% 4.4% 5.0% 4.8% 4.9% 5 4.9% 4.7% 5.2% 4.7% 4.8% 6 4.5% 4.7% 5.0% 4.7% 7 4.6% 4.8% 4.6% 8 5.2% 4.9% 9 4.7% Refresh cost 2003 2004 Average 90.6% 79.6% 74.0% 66.0% 70.0% Exhibit 10: Forecasting Parameters 1 Sales growth CGS (% sales) SGA (% sales, excluding dep & advertising) Advertising (% sales) Accounts Receivable (% sales) Inventory (% next year's CGS) Accounts Payable (% next year's CGS) Accrued expenses (next year's SGA adv) Depreciation (years) Refresh cost Corporate tax rate Corporate expenses Discount rate Long-term growth rate Shares outstanding (K) 70.9% 19.3% 10.6% 32.4% 47.6% 16.3% 4.8% 5 70.0% 40.0% 5.0% 12.1% 3.5% 9,945 2 70.2% 63.7% 18.3% 8.9% 3 33.5% 56.2% 17.3% 8.2% 4 22.9% 39.7% 13.6% 7.2% 5 9.7% 39.7% 13.6% 7.2% 6 1.5% 39.7% 13.6% 7.2% 7 0.3% 39.7% 13.6% 7.2% Teuer Furniture Pro Forma Income Statement Sales CGS SGA (exc adv & dep) Advertising Depreciation Lease (stores) Corp Expense (inc lease/adv) Taxes Net income Parameters: Corporate tax rate Corporate expenses 2012 148,218 -61,955 -21,253 -10,744 -1,450 -9,320 -7,411 -14,434 21,651 40% 5% 2013 2014 2015 2016 2017 2018 2019 Teuer Furniture Pro Forma Balance Sheet 2012 Assets Accounts Receivable Inventory Total Current Assets PPE Total Assets 48,200 33,343 81,543 3,920 85,463 Liabilities and Equity Accounts Payable Accrued Expenses Total Current Liabilities Debt Equity Total Liabilities and Equity 11,364 1,682 13,046 0 72,417 85,463 Balance sheet check (A=L+E) 2013 2014 2015 2016 2017 2018 Teuer Furniture Pro Forma Cash Flow Assets Sales - Costs - Taxes Net income - Capital expenditure + Depreciation - Increase in NWC Cash flow assets Terminal value 2012 148,218 -112,132 -14,434 21,651 -2,229 1,450 -8,365 12,508 Asset value Share value Parameters: Asset discount rate Long-term growth rate Shareholders (#) Shares outstanding (K) 12.1% 3.5% 187 9,945 2013 2014 2015 2016 2017 2018