Management at American Greetings desires to buyback its shares if they are undervalued. Comparing the share price of $12.51 in the case at the end of 2011 to the share price obtained using the EV/Multiple industry average of 7.8x at the end of 2011, are the Companys shares undervalued?

Yes

No

To perform a discounted cash flow (DCF) valuation you need the discount rate. Calculate American Greetings discount rate as the weighted average cost of capital (WACC). For cost of equity, use the CAPM formula [Risk Free Rate+(Market Risk Premium * Company Beta)]. Use the 10-Year Treasury Bond Yield for the Risk Free Rate. The 10-Year Treasury Bond Yield, Historical Market Risk Premium and the American Greetings Beta provided in the case Exhibits. Using CAPM, American Greetings cost of equity is _____.

9.1%

11.8%

5.8%

5.5%

To calculate American Greetings WACC, use the formula [((D/EV)*Cost of Debt*(1-tax rate)) + ((E/EV)*Cost of Equity))]. Use a 39% tax rate. For cost of equity use the CAPM model. For cost of debt, use the 10-Year Corporate Bond Yield of Industrial Companies with the same rating as American Greetings (reference Exhibit 9 and bond rating in Exhibit 6). D/EV data is available in Exhibit 6. Using this information, WACC is _____.

9.1%

5.5%

11.8%

5.8%

Use the bullish case assumptions for this DCF question. First, estimate the net operating profit after tax (NOPAT) forecast for 2012, 2013, 2014, and 2015. Revenue Growth and Operating Margin are provided in Exhibit 8. Use a tax rate of 39%. The NOPAT is $93 in 2012, $94 in 2013, __________ in 2014 and ____________ in 2015.

$96 in 2014 and $99 in 2015

$94 in 2014 and $95 in 2015

$83 in 2014 and $86 in 2015

None of these

Use the bullish case assumptions for this DCF question. Next, estimate the Free Cash Flow (defined as NOPAT minus the change in working capital minus the change in net assets) for 2012, 2013, 2014, and 2015. Calculate Net Working Capital (NWC) using the projected NWC turnover ratios in the case (where NWC turnover = Revenue/NWC). Calculate depreciation and capital expenditures as the change in Net Fixed Assets. Fixed Assets can be projected using the Fixed Asset Turnover ratios provided in the case (where FA turnover = Revenue/Assets). The Free Cash flow is $136 in 2012, $________ in 2013, $________ in 2014, and $_______ in 2015.

$94 in 2013, $95 in 2014, and $96 in 2015

$99 in 2013, $93 in 2014, and $87 in 2015

$87 in 2013, $79 in 2014, and $82 in 2015

None of these