HANSSON PRIVATE LABEL, INC.:

EVALUATING AN INVESTMENT IN EXPANSION

This case focuses on the potential expansion opportunity of Hansson Private Label (HPL), a mid-size producer of private label personal care products.Tucker Hansson is trying to decide whether it makes sense for him to invest $50 million to expand production capacity for his firm.The expansion has significant risk associated with it, but also significant potential return on investment.Mr. Hansson is looking for guidance with respect to whether or not he should incur significant debt and make the $50 million capacity expansion.You are being asked to provide some objective quantitative analysis to Mr. Hansson to assist in his decision.

Student Assignment:

1.How would you describe HPL and its position within the private label personal care industry?Consider HPL?s size, growth, profitability and capital structure relative to its ?peer? group.

2.Using the assumptions made by the Executive VP of Manufacturing, Robert Gates, estimate the projects potential free-cash-flows (FCFs).Are Gates? projections realistic?If not, what changes might you suggest be incorporated?

3.Using CFO Sheila Dowling?s projected weighted-average-cost of capital (WACC) schedule, what discount rate would you choose?What flaws, if any, might be inherent in using the WACC as the discount rate?

4.Estimate the project?s net present value.Would you recommend that Tucker Hansson proceed with the investment?If yes, why?If no, why not?

Please show your supporting calculations utilizing Excel spreadsheets.Make sure you clearly identify the question that you are addressing on the spreadsheet.I need to clearly see the quantitative logic supporting any recommendations that you make.

Note ? An Excel spreadsheet is available in the HBP Coursepack containing much of the information contained in the exhibits in order to alleviate you having to recreate much of the data in Excel.

HANSSON PRIVATE LABEL Operating Results: Revenue Less: Cost of Goods Sold Gross Profit Less: Selling, General & Administrative EBITDA Less: Depreciation EBIT Less: Interest Expense EBT Less: Taxes Net Income Revenue Growth Gross Margin Selling, General & Administrative/Revenue EBITDA Margin EBIT Margin Net Income Margin Effective Tax Rate Income Statement 2003 $503.4 405.2 98.2 37.8 60.4 6.8 53.6 5.5 48.1 19.2 $28.9 2004 $543.7 432.3 111.4 44.6 66.8 6.2 60.6 5.8 54.8 22.0 $32.8 2005 $587.2 496.2 91.0 45.8 45.2 6.0 39.2 5.9 33.3 13.3 $20.0 2006 $636.1 513.4 122.7 51.5 71.2 5.9 65.3 5.3 60.0 24.0 $36.0 2007 $680.7 558.2 122.5 49.0 73.5 6.1 67.4 3.3 64.1 25.6 $38.5 Margins: NA 19.5% 7.5% 12.0% 10.6% 5.7% 39.9% 8.0% 20.5% 8.2% 12.3% 11.1% 6.0% 40.1% 8.0% 15.5% 7.8% 7.7% 6.7% 3.4% 39.9% 8.3% 19.3% 8.1% 11.2% 10.3% 5.7% 40.0% 7.0% 18.0% 7.2% 10.8% 9.9% 5.7% 39.9% Harvard Business Publishing HANSSON PRIVATE LABEL Assets: Cash & Cash Equivalents Accounts Receivable Inventory Total Current Assets Balance Sheet 2003 $4.3 62.1 57.7 124.1 2004 $5.1 70.1 58.0 133.2 2005 $4.8 78.8 61.2 144.8 2006 $7.8 87.1 61.9 156.8 2007 $5.0 93.3 67.3 165.6 201.4 12.3 $337.8 202.9 12.1 $348.2 203.1 11.8 $359.7 202.3 12.5 $371.6 204.4 10.8 $380.8 $42.2 $45.0 $51.6 $53.4 $58.1 91.6 82.8 73.8 65.8 54.8 204.0 $337.8 220.4 $348.2 234.3 $359.7 252.4 $371.6 267.9 $380.8 62.1 57.7 42.2 77.6 70.1 58.0 45.0 83.1 78.8 61.2 51.6 88.4 87.1 61.9 53.4 95.6 93.3 67.3 58.1 102.5 Net Working Capital/Revenue 15.4% 15.3% 15.1% 15.0% 15.1% Days Sales Outstanding Days Sales Inventory Days Payable Outstanding (1) Cash-to-Cash 44.4x 41.3x 34.3x 51.4x 46.4x 38.4x 34.0x 50.8x 48.3x 37.5x 34.3x 51.6x 49.3x 35.0x 34.0x 50.3x 49.3x 35.6x 34.4x 50.5x Property, Plant & Equipment Other Non-Current Assets Total Assets Liabilities & Owners' Equity: Accounts Payable & Accrued Liabilities Long-Term Debt Owners' Equity Total Liabilities & Owners' Equity Net Working Capital: Accounts Receivable Plus: Inventory Less: Accounts Payable & Accrued Expenses Net Working Capital (1) Based on total operating expenses excluding depreciation. Harvard Business Publishing HANSSON PRIVATE LABEL Cash From Operations: Net Income Plus: Depreciation Less: Increase in Accounts Receivable Less: Increase in Inventory Plus: Increase in Accounts Payable Total Cash From Operations Cash From Investing: Capital Expenditures Plus: Increases in Other Non-Current Assets Total Cash Used in Investing Cash From Financing: Repayment of Debt Plus: Dividend Payments Cash Used in Financing Total Cash Generated Cash Flow 2003 $28.9 6.8 3.1 0.5 0.3 $32.4 2004 $32.8 6.2 8.0 0.3 2.8 $33.5 2005 $20.0 6.0 8.7 3.2 6.6 $20.7 2006 $36.0 5.9 8.3 0.7 1.8 $34.7 2007 $38.5 6.1 6.2 5.4 4.7 $37.7 $7.3 0.5 $7.8 $7.7 (0.2) $7.5 $6.2 (0.3) $5.9 $5.1 0.7 $5.8 $8.2 (1.7) $6.5 $8.0 14.4 $22.4 $8.8 16.4 $25.2 $9.0 6.1 $15.1 $8.0 17.9 $25.9 $11.0 23.0 $34.0 $2.2 $0.8 ($0.3) $3.0 ($2.8) Harvard Business Publishing HANSSON PRIVATE LABEL Comparable Companies ho Company: Cathleen Sinclair General Health & Bea Women's Care Compa Skin Care Enterprises Company: Cathleen Sinclair General Health & Beauty Women's Care Company Skin Care Enterprises Average Market Value 298.9 319.3 498.6 1,204.2 NetEnterprise Debt Value 1,329.6 1,628.5 63.1 382.4 55.3 553.9 371.9 1,576.1 EBITDA 19.0% 13.9% 13.3% 12.5% 14.6% Equity Beta Revenue EBITDA 2.22 1,346.8 255.3 1.95 446.1 61.9 1.14 397.3 52.7 1.35 1,247.6 155.8 EBIT 163.4 51.9 49.3 125.4 Net Income 21.5 23.8 77.0 65.3 Book Value (1,112.8) 204.2 43.7 316.2 EBIT Earnings Revenue EBITDA 12.1% 1.6% 1.2x 6.4x 11.6% 5.3% 0.9x 6.2x 12.4% 19.4% 1.4x 10.5x 10.1% 5.2% 1.3x 10.1x 11.6% 7.9% 1.2x 8.3x EBIT 10.0x 7.4x 11.2x 12.6x 10.3x P/E 13.9x 13.4x 6.5x 18.4x 13.1x P/B NM 1.6x 11.4x 3.8x 5.6x Harvard Business Publishing HANSSON PRIVATE LABEL Company: Cathleen Sinclair General Health & Beauty Women's Care Company Skin Care Enterprises Average Dbet/ Value 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Debt/ Equity 0.0% 5.3% 11.1% 17.6% 25.0% 33.3% Weighted Average Cost of Capital Debt/ Value 81.6% 16.5% 10.0% 23.6% 32.9% Debt/ Equity 444.9% 19.8% 11.1% 30.9% 49.1% Equity Beta 2.22 1.95 1.14 1.35 1.67 Debt Beta 0.25 0.00 0.00 0.00 0.06 Asset Beta 0.79 1.74 1.07 1.14 1.18 Asset Beta 1.18 1.18 1.18 1.18 1.18 1.18 Equity Beta 1.18 1.22 1.26 1.31 1.36 1.42 Cost of Equity 9.67% 9.86% 10.07% 10.30% 10.56% 10.86% Cost of Debt 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% WACC 9.67% 9.60% 9.53% 9.45% 9.38% 9.31% Assumptions: 10-Year Treasury Market Risk Premium 3.75% 5.00% Tax Rate 40.0% Est. Hansson EBITDA Multiple Est. Hansson Enterprise Value 7.0x 514.5 Existing Net Debt Plus: New Expansion Debt Total Estimated Debt 49.8 57.8 107.6 Existing D/V Estimated New D/V 9.7% 20.9% Assumed Debt Beta Estimated Cost of Debt 0.00 7.75% Harvard Business Publishing HANSSON PRIVATE LABEL Cost Components: Facility Expansion Manufacturing Equipment Packaging Equipment Working Capital (1) Total Investment Amount $10,000 20,000 15,000 12,817 57,817 Investment Est. Life 20yrs. 10yrs. 10yrs. Percent Cost of Depr' Maintenance Maintenance 500 5.0% 500 2,000 5.0% 1,000 1,500 5.0% 750 0 0.0% 0 4,000 2,250 (1) The increase in working capital is not expected to ocurr upfront at the time of the initial investment. It is assumed to take place throughout the year, and should be considered as part of the 2009 cash flows. Note: working capital is defined as accounts receivable plus inventory less accounts payable and accrued expenses. At the end of the project, working capital will be returned in an amount equal to accounts receivable less accounts payable. Harvard Business Publishing HANSSON PRIVATE LABEL Operating Assumptions Operating Assumptions Revenue Projection: Total Capacity (000's) Capacity Utilization Unit Volume Selling Price Per Unit - Growing at Revenue 2009 80,000 60.0% 48,000 1.77 84,960 2010 80,000 65.0% 52,000 1.81 93,881 2011 80,000 70.0% 56,000 1.84 103,124 2012 80,000 75.0% 60,000 1.88 112,700 2013 80,000 80.0% 64,000 1.92 122,618 2014 80,000 85.0% 68,000 1.95 132,887 2015 80,000 85.0% 68,000 1.99 135,545 2016 80,000 85.0% 68,000 2.03 138,256 2017 80,000 85.0% 68,000 2.07 141,021 2018 80,000 85.0% 68,000 2.12 143,841 1.0% 3.0% 3.0% 0.94 3,600 2,250 0.95 3,708 2,318 0.96 3,819 2,387 0.97 3,934 2,459 0.98 4,052 2,532 0.99 4,173 2,608 1.00 4,299 2,687 1.01 4,428 2,767 1.02 4,560 2,850 1.03 4,697 2,936 3.5% 4 160.0 640.0 4 165.6 662.4 6 171.4 1,028.4 6 177.4 1,064.4 8 183.6 1,468.8 8 190.0 1,520.2 8 196.7 1,573.4 8 203.6 1,628.5 8 210.7 1,685.5 8 218.1 1,744.5 20.00 2,000 40,000 450 18,000.0 20.70 2,000 41,400 473 19,570.9 21.42 2,000 42,849 509 21,814.0 22.17 2,000 44,349 545 24,190.2 22.95 2,000 45,901 582 26,706.0 23.75 2,000 47,507 618 29,368.2 24.59 2,000 49,170 618 30,396.1 25.45 2,000 50,891 618 31,460.0 26.34 2,000 52,672 618 32,561.1 27.26 2,000 54,516 618 33,700.7 18,640.0 20,233.3 22,842.4 25,254.6 28,174.8 30,888.5 31,969.6 33,088.5 34,246.6 35,445.2 Selling, General & Administrative/Revenue 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% Working Capital Assumptions (1): Days Sales Outstanding Days Sales Inventory Days Payable Outstanding 47.6x 37.6x 34.2x 47.6x 37.6x 34.2x 47.6x 37.6x 34.2x 47.6x 37.6x 34.2x 47.6x 37.6x 34.2x 47.6x 37.6x 34.2x 47.6x 37.6x 34.2x 47.6x 37.6x 34.2x 47.6x 37.6x 34.2x 47.6x 37.6x 34.2x Hourly Labor Cost Per Unit 0.38 0.38 0.39 0.40 0.42 0.43 0.45 0.46 0.48 0.50 Units Per Total Labor Hours 0.05 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 Production Costs: Raw Materials Per Unit Growing at Manufacturing Overhead Growing at Maintenance Expense Growing at Salaried Labor Cost: Managers Average Annual Fully Loaded Cost Total Salaried Labor Cost Hourly Labor Cost: Average Fully Loaded Hourly Cost Hours Per Year Cost Per Hourly Employee Number of Hourly Workers Total Hourly Labor Cost (000's) Total Labor Cost 2.0% 3.5% (1) Based on historical averages. Harvard Business Publishing HANSSON PRIVATE LABEL, INC.: EVALUATING AN INVESTMENT IN EXPANSION This case focuses on the potential expansion opportunity of Hansson Private Label (HPL), a mid-size producer of private label personal care products. Tucker Hansson is trying to decide whether it makes sense for him to invest $50 million to expand production capacity for his firm. The expansion has significant risk associated with it, but also significant potential return on investment. Mr. Hansson is looking for guidance with respect to whether or not he should incur significant debt and make the $50 million capacity expansion. You are being asked to provide some objective quantitative analysis to Mr. Hansson to assist in his decision. Student Assignment: 1. How would you describe HPL and its position within the private label personal care industry? Consider HPL's size, growth, profitability and capital structure relative to its \"peer\" group. 2. Using the assumptions made by the Executive VP of Manufacturing, Robert Gates, estimate the projects potential free-cash-flows (FCFs). Are Gates' projections realistic? If not, what changes might you suggest be incorporated? 3. Using CFO Sheila Dowling's projected weighted-average-cost of capital (WACC) schedule, what discount rate would you choose? What flaws, if any, might be inherent in using the WACC as the discount rate? 4. Estimate the project's net present value. Would you recommend that Tucker Hansson proceed with the investment? If yes, why? If no, why not? Please show your supporting calculations utilizing Excel spreadsheets. Make sure you clearly identify the question that you are addressing on the spreadsheet. I need to clearly see the quantitative logic supporting any recommendations that you make. Note - An Excel spreadsheet is available in the HBP Coursepack containing much of the information contained in the exhibits in order to alleviate you having to recreate much of the data in Excel