Suppose you are deciding whether to invest in Boston Beer IPO. The investment bankers will announce what value they are setting for the company to start with, what percentage of the company they are selling, and how many shares will represent that portion of the company. To make a decision, you would have to decide the highest market capitalization at which you would be willing to invest. In other words, if you think the true value of the company is such that the shares are worth $X, you wouldn't want to invest if the bankers announce the sale at above $X. For these questions, I won't ask you to find X, but to think about what information you would need to find it.

There are two primary ways to value a company's stock before it is on the market. Choose one. Neither is necessarily better or worse, so you can choose either

• One is through "comparables." For this technique you would find public companies that you think are comparable and use their performance as a benchmark. You might figure out the ratio of the value of all of their outstanding stock to their accounting assets (market-to-book ratio) and interpret that as indicative of how much more investors feel like the company is worth than the sum of its parts. If you think a company is twice as good as the comparable, you might argue that they should have double the market-to-book ratio, and then figure out what you think the market capitalization should be by multiplying ratio by the company's assets, which you know before they go public.
• The other way is to start from the premise that a company's market cap should be the net present value of 20 years of free cash flow. You can then start from basic assumptions about price, cost, assumptions about growth, and other fundamentals of the business and build up from there.

Without knowing what happened later: Suppose you were going to use the 20 years of free cash flow method to come up with your personal value for Boston Beer. What information would you use to figure out how much your max price per share would be? (3-4 sentences)

Hints:

Remember that these questions are an opportunity to practice applying the tools you have learned in class.

Remember that in Strategy, your products price and cost are the outcomes of your decisions.

Now suppose that you were going to use the comparables method and Pete's and Red Hook are your best comparables to start with. Are there important ways in which Boston Beer is different from, or similar to Red Hook and Petes that would be important to your decision process? Do those facts make you think that Boston Beer should trade at a higher or lower market to book than Red Hook? Peets? (3-4 sentences)

The same hints from above apply

The tools from the class should have helped you decide what to do in this case. The lessons you learn should be applicable in other setting where the fundamental strategic forces are similar. What industries, in the last couple of years, are similar enough to how the craft beer industry was at the time of the case that you could use lessons from this case to make predictions about what would happen to those industries? What features of those industries make the lessons from the case applicable? (3-4 sentences)

\begin{tabular}{|c|c|c|c|c|c|} \hline & 1992 & 1993 & 1994 & 1994 & 1995 \\ \hline & & & & \multicolumn{2}{|c|}{ (Unaudited) } \\ \hline Sales & $53,343 & $85,758 & $128,077 & $91,098 & $121,895 \\ \hline Less excise taxes & 5,165 & 8,607 & 13,244 & 9,478 & 12,990 \\ \hline Net sales & 48,178 & 77,151 & 114,833 & 81,620 & 108,905 \\ \hline Cost of goods sold & 22,028 & 35,481 & 52,851 & 37,546 & 51,615 \\ \hline Gross profit & 26,150 & 41,670 & 61,982 & 44,074 & 56,290 \\ \hline \begin{tabular}{l} Advertising, promotional and selling \\ expenses \end{tabular} & 21,075 & 32,669 & 46,303 & 31,734 & 43,408 \\ \hline General and administrative expenses & 3,306 & 4,105 & 6,793 & 4,316 & 5,455 \\ \hline Total operating expenses & 24,381 & 36,774 & 53,096 & 36,050 & 48,863 \\ \hline Operating income & 1,769 & 4,896 & 8,886 & 8,024 & 7,427 \\ \hline \multicolumn{6}{|l|}{ Other income (expense): } \\ \hline Interest income & 221 & 230 & 429 & 269 & 203 \\ \hline Interest expense & (243) & (239) & (233) & (177) & (173) \\ \hline Other, net & (102) & 7 & 3 & (7) & 804 \\ \hline Total other income & (124) & (2) & 199 & 85 & 834 \\ \hline Net income & $1,645 & $4,894 & $9,085 & $8,109 & $8,261 \\ \hline \multicolumn{6}{|l|}{ Pro forma data (Unaudited): } \\ \hline Income before pro forma income taxes & $1,645 & $4,894 & $9,085 & $8,109 & $8,261 \\ \hline Pro forma net income tax expense & 691 & 2,040 & 3,765 & 3,360 & 3,559 \\ \hline Pro forma net income & $954 & $2,854 & $5,320 & $4,749 & $4,702 \\ \hline Pro forma earnings per share & & & $.29 & & $.26 \\ \hline \begin{tabular}{l} Pro forma weighted average \\ number of shares outstanding \end{tabular} & & & 18,267,705 & & 18,272,741 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|} \hline \multicolumn{3}{|c|}{ Pete's Brewing Company } & \multicolumn{3}{|c|}{ Redhook Ale Brewery } \\ \hline \multicolumn{2}{|c|}{ Year Ended } & \multirow{2}{*}{30Sep-959MonthsEnding} & \multicolumn{2}{|c|}{ Year Ended } & \multirow{2}{*}{30Sep-959MonthsEnding} \\ \hline 31-Dec-93 & 31-Dec-94 & & 31-Dec-93 & 31-Dec-94 & \\ \hline 1.07% & 1.67% & 3.50% & 27.80% & 22.20% & 18.00% \\ \hline 5.70 & 6.83 & 4.44 & 0.77 & 0.55 & 0.30 \\ \hline 6.74 & 6.21 & 6.24 & 1.50 & 1.29 & 1.19 \\ \hline 41.11% & 70.83% & 96.97% & 31.97% & 15.62% & 6.44% \\ \hline 46.85% & 45.20% & 49.65% & 46.34% & 41.82% & 34.35% \\ \hline 45.50% & 43.20% & 42.80% & 17.42% & 18.76% & 17.59% \\ \hline 1.36% & 1.96% & 3.85% & 28.92% & 23.06% & 16.76% \\ \hline 0.30% & 0.30% & 0.40% & 1.38% & 0.87% & N/A \\ \hline 4.99 & 10.69 & 6.54 & 23.62 & 15.02 & 10.32 \\ \hline 11.90 & 11.20 & 39.40 & 29.60 & 28.00 & 32.90 \\ \hline 58.50 & 43.70 & 41.90 & 78.60 & 85.02 & 99.10 \\ \hline 12,236 & 30,837 & 41,988 & 11,484 & 14,929 & 17,929 \\ \hline 69 & 180 & 246 & 74 & 94 & 111 \\ \hline 3,118 & 5,918 & 12,983 & 20,044 & 34,689 & 84,553 \\ \hline 400 & 1,040 & 1,987 & 15,000 & 26,059 & 74,372 \\ \hline N/A & N/A & 76 & N/A & N/A & 138 \\ \hline N/A & N/A & 56 & N/A & N/A & 16 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|} \hline & \multicolumn{3}{|c|}{ Years Ended December 31, } & \multicolumn{2}{|c|}{\begin{tabular}{l} Nine Months Ended \\ September 30, \end{tabular}} \\ \hline & 1992 & 1993 & 1994 & 1994 & 1995 \\ \hline & & & & \multicolumn{2}{|c|}{ (Unaudited) } \\ \hline Cash flows from operating activities & & & & & \\ \hline Net income & $1,645 & $4,894 & $9,085 & $8,109 & $8,261 \\ \hline \multicolumn{6}{|l|}{\begin{tabular}{l} Adjustments to reconcile net income to net \\ cash provided by operating activities: \end{tabular}} \\ \hline Depreciation and amortization & 341 & 476 & 925 & 525 & 1,086 \\ \hline (Gain) loss on disposal of fixed asset & 69 & (3) & 21 & 21 & (19) \\ \hline Stock option compensation expense & 330 & & 280 & --- & 188 \\ \hline \multicolumn{6}{|l|}{ Changes in assets and liabilities: } \\ \hline Accounts receivable & (1,393) & (3,689) & (1,948) & (7,217) & (5,013) \\ \hline Inventory & (919) & (1,847) & (4,049) & (1,255) & (730) \\ \hline Prepaid expenses & (135) & 2 & (285) & (393) & (406) \\ \hline Other current assets & (308) & 3 & (593) & (190) & (598) \\ \hline Other assets & 28 & (34) & (172) & (178) & (703) \\ \hline Accounts payable & 908 & 728 & 6,353 & 5,129 & (2,731) \\ \hline Accrued expenses & 2,361 & 5,079 & 3,673 & 3,520 & 1,508 \\ \hline Total adjustments & 1,282 & 715 & 4,205 & (38) & (7,418) \\ \hline Net cash provided by (used for) operating activities & 2,927 & 5,609 & 13,290 & 8,071 & 843 \\ \hline \multicolumn{6}{|l|}{ Cash flows from investing activities: } \\ \hline Additions to fixed assets & (749) & (893) & (2,621) & (1,830) & (1,535) \\ \hline Proceeds on disposal of fixed assets & 12 & & -.. & & 45 \\ \hline Purchases of restricted investments & (18) & (209) & (1,171) & (815) & (612) \\ \hline Maturities of restricted investments & = & 297 & 1,145 & 799 & 615 \\ \hline Net cash used in investing activities & (755) & (805) & (2,647) & (1,846) & (1,487) \\ \hline \end{tabular} Cash flows from financing activities Principal payments on long-term debt Proceeds from revolving line of credit Repayments of revolving line of credit Partners' distributions Net cash used in financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosure of cash flow information: Interest paid \begin{tabular}{|c|c|c|c|c|} \hline (50) & (50) & (50) & (50) & (50) \\ \hline --- & --- & --- & --- & 700 \\ \hline --- & --- & --- & --- & (700) \\ \hline(1,493) & (2,477) & (11,669) & (5,610) & (5,555) \\ \hline(1,543) & (2,527) & (11,669) & (5,660) & (5,605) \\ \hline 629 & 2,277 & (1,026) & 565 & (6,249) \\ \hline5,921 & 6,550 & 8,827 & 8,827 & 7,801 \\ \hline$6,550 & $8,827 & $7,801 & $9,392 & $1,552 \\ \hline \end{tabular} $247 $242 $236 $236 $230 \begin{tabular}{|c|c|c|c|c|} \hline & \multicolumn{2}{|c|}{ December 31, } & \multirow{2}{*}{1995September30,} & \multirow{2}{*}{1995} \\ \hline & 1993 & 1994 & & \\ \hline Assets & & & \multicolumn{2}{|c|}{ (Unaudited) } \\ \hline Cash and cash equivalents & $8,827 & $7,801 & $1,552 & ---- \\ \hline Accounts receivable & 8,112 & 10,060 & 15,073 & $15,073 \\ \hline Inventory & 3,706 & 7,755 & 8,485 & 8,485 \\ \hline Prepaid expenses & 216 & 501 & 907 & 907 \\ \hline Other current assets & 512 & 1,105 & 1,703 & 1,703 \\ \hline Total current assets & 21,373 & 27,222 & 27,270 & 26,168 \\ \hline Restricted investments & 579 & 605 & 602 & 602 \\ \hline \begin{tabular}{l} Equipment and leasehold improvements, \\ net \end{tabular} & 1,864 & 3,539 & 3,963 & 3,963 \\ \hline Other assets & 238 & 410 & 1,113 & 1,113 \\ \hline Total assets & $24,054 & $31,776 & $33,398 & $31,846 \\ \hline \multicolumn{5}{|l|}{ Liabilities and Partners' Equity } \\ \hline Accounts payable & 2,917 & 9,270 & 6,539 & 6,539 \\ \hline Accrued expenses & 10,233 & 13,906 & 11,680 & 11,680 \\ \hline Current maturities of long-term debt & 50 & 50 & 50 & 50 \\ \hline Total current liabilities & 13,200 & 23,226 & 18,269 & 18,269 \\ \hline Long-term debt, less current maturities & 2,000 & 1,950 & 1,900 & 12,848 \\ \hline \multicolumn{5}{|l|}{ Commitments and contingencies (Note H ) } \\ \hline Partners' equity & 8,854 & 6,600 & 13,229 & 729 \\ \hline Total liabilities and partners' equity & $24,054 & $31,776 & $33,398 & $31,846 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|} \hline & 1992 & 1993 & 1994 & 1994 & 1995 \\ \hline & & & & \multicolumn{2}{|c|}{ (Unaudited) } \\ \hline Sales & $53,343 & $85,758 & $128,077 & $91,098 & $121,895 \\ \hline Less excise taxes & 5,165 & 8,607 & 13,244 & 9,478 & 12,990 \\ \hline Net sales & 48,178 & 77,151 & 114,833 & 81,620 & 108,905 \\ \hline Cost of goods sold & 22,028 & 35,481 & 52,851 & 37,546 & 51,615 \\ \hline Gross profit & 26,150 & 41,670 & 61,982 & 44,074 & 56,290 \\ \hline \begin{tabular}{l} Advertising, promotional and selling \\ expenses \end{tabular} & 21,075 & 32,669 & 46,303 & 31,734 & 43,408 \\ \hline General and administrative expenses & 3,306 & 4,105 & 6,793 & 4,316 & 5,455 \\ \hline Total operating expenses & 24,381 & 36,774 & 53,096 & 36,050 & 48,863 \\ \hline Operating income & 1,769 & 4,896 & 8,886 & 8,024 & 7,427 \\ \hline \multicolumn{6}{|l|}{ Other income (expense): } \\ \hline Interest income & 221 & 230 & 429 & 269 & 203 \\ \hline Interest expense & (243) & (239) & (233) & (177) & (173) \\ \hline Other, net & (102) & 7 & 3 & (7) & 804 \\ \hline Total other income & (124) & (2) & 199 & 85 & 834 \\ \hline Net income & $1,645 & $4,894 & $9,085 & $8,109 & $8,261 \\ \hline \multicolumn{6}{|l|}{ Pro forma data (Unaudited): } \\ \hline Income before pro forma income taxes & $1,645 & $4,894 & $9,085 & $8,109 & $8,261 \\ \hline Pro forma net income tax expense & 691 & 2,040 & 3,765 & 3,360 & 3,559 \\ \hline Pro forma net income & $954 & $2,854 & $5,320 & $4,749 & $4,702 \\ \hline Pro forma earnings per share & & & $.29 & & $.26 \\ \hline \begin{tabular}{l} Pro forma weighted average \\ number of shares outstanding \end{tabular} & & & 18,267,705 & & 18,272,741 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|} \hline \multicolumn{3}{|c|}{ Pete's Brewing Company } & \multicolumn{3}{|c|}{ Redhook Ale Brewery } \\ \hline \multicolumn{2}{|c|}{ Year Ended } & \multirow{2}{*}{30Sep-959MonthsEnding} & \multicolumn{2}{|c|}{ Year Ended } & \multirow{2}{*}{30Sep-959MonthsEnding} \\ \hline 31-Dec-93 & 31-Dec-94 & & 31-Dec-93 & 31-Dec-94 & \\ \hline 1.07% & 1.67% & 3.50% & 27.80% & 22.20% & 18.00% \\ \hline 5.70 & 6.83 & 4.44 & 0.77 & 0.55 & 0.30 \\ \hline 6.74 & 6.21 & 6.24 & 1.50 & 1.29 & 1.19 \\ \hline 41.11% & 70.83% & 96.97% & 31.97% & 15.62% & 6.44% \\ \hline 46.85% & 45.20% & 49.65% & 46.34% & 41.82% & 34.35% \\ \hline 45.50% & 43.20% & 42.80% & 17.42% & 18.76% & 17.59% \\ \hline 1.36% & 1.96% & 3.85% & 28.92% & 23.06% & 16.76% \\ \hline 0.30% & 0.30% & 0.40% & 1.38% & 0.87% & N/A \\ \hline 4.99 & 10.69 & 6.54 & 23.62 & 15.02 & 10.32 \\ \hline 11.90 & 11.20 & 39.40 & 29.60 & 28.00 & 32.90 \\ \hline 58.50 & 43.70 & 41.90 & 78.60 & 85.02 & 99.10 \\ \hline 12,236 & 30,837 & 41,988 & 11,484 & 14,929 & 17,929 \\ \hline 69 & 180 & 246 & 74 & 94 & 111 \\ \hline 3,118 & 5,918 & 12,983 & 20,044 & 34,689 & 84,553 \\ \hline 400 & 1,040 & 1,987 & 15,000 & 26,059 & 74,372 \\ \hline N/A & N/A & 76 & N/A & N/A & 138 \\ \hline N/A & N/A & 56 & N/A & N/A & 16 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|} \hline & \multicolumn{3}{|c|}{ Years Ended December 31, } & \multicolumn{2}{|c|}{\begin{tabular}{l} Nine Months Ended \\ September 30, \end{tabular}} \\ \hline & 1992 & 1993 & 1994 & 1994 & 1995 \\ \hline & & & & \multicolumn{2}{|c|}{ (Unaudited) } \\ \hline Cash flows from operating activities & & & & & \\ \hline Net income & $1,645 & $4,894 & $9,085 & $8,109 & $8,261 \\ \hline \multicolumn{6}{|l|}{\begin{tabular}{l} Adjustments to reconcile net income to net \\ cash provided by operating activities: \end{tabular}} \\ \hline Depreciation and amortization & 341 & 476 & 925 & 525 & 1,086 \\ \hline (Gain) loss on disposal of fixed asset & 69 & (3) & 21 & 21 & (19) \\ \hline Stock option compensation expense & 330 & & 280 & --- & 188 \\ \hline \multicolumn{6}{|l|}{ Changes in assets and liabilities: } \\ \hline Accounts receivable & (1,393) & (3,689) & (1,948) & (7,217) & (5,013) \\ \hline Inventory & (919) & (1,847) & (4,049) & (1,255) & (730) \\ \hline Prepaid expenses & (135) & 2 & (285) & (393) & (406) \\ \hline Other current assets & (308) & 3 & (593) & (190) & (598) \\ \hline Other assets & 28 & (34) & (172) & (178) & (703) \\ \hline Accounts payable & 908 & 728 & 6,353 & 5,129 & (2,731) \\ \hline Accrued expenses & 2,361 & 5,079 & 3,673 & 3,520 & 1,508 \\ \hline Total adjustments & 1,282 & 715 & 4,205 & (38) & (7,418) \\ \hline Net cash provided by (used for) operating activities & 2,927 & 5,609 & 13,290 & 8,071 & 843 \\ \hline \multicolumn{6}{|l|}{ Cash flows from investing activities: } \\ \hline Additions to fixed assets & (749) & (893) & (2,621) & (1,830) & (1,535) \\ \hline Proceeds on disposal of fixed assets & 12 & & -.. & & 45 \\ \hline Purchases of restricted investments & (18) & (209) & (1,171) & (815) & (612) \\ \hline Maturities of restricted investments & = & 297 & 1,145 & 799 & 615 \\ \hline Net cash used in investing activities & (755) & (805) & (2,647) & (1,846) & (1,487) \\ \hline \end{tabular} Cash flows from financing activities Principal payments on long-term debt Proceeds from revolving line of credit Repayments of revolving line of credit Partners' distributions Net cash used in financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosure of cash flow information: Interest paid \begin{tabular}{|c|c|c|c|c|} \hline (50) & (50) & (50) & (50) & (50) \\ \hline --- & --- & --- & --- & 700 \\ \hline --- & --- & --- & --- & (700) \\ \hline(1,493) & (2,477) & (11,669) & (5,610) & (5,555) \\ \hline(1,543) & (2,527) & (11,669) & (5,660) & (5,605) \\ \hline 629 & 2,277 & (1,026) & 565 & (6,249) \\ \hline5,921 & 6,550 & 8,827 & 8,827 & 7,801 \\ \hline$6,550 & $8,827 & $7,801 & $9,392 & $1,552 \\ \hline \end{tabular} $247 $242 $236 $236 $230 \begin{tabular}{|c|c|c|c|c|} \hline & \multicolumn{2}{|c|}{ December 31, } & \multirow{2}{*}{1995September30,} & \multirow{2}{*}{1995} \\ \hline & 1993 & 1994 & & \\ \hline Assets & & & \multicolumn{2}{|c|}{ (Unaudited) } \\ \hline Cash and cash equivalents & $8,827 & $7,801 & $1,552 & ---- \\ \hline Accounts receivable & 8,112 & 10,060 & 15,073 & $15,073 \\ \hline Inventory & 3,706 & 7,755 & 8,485 & 8,485 \\ \hline Prepaid expenses & 216 & 501 & 907 & 907 \\ \hline Other current assets & 512 & 1,105 & 1,703 & 1,703 \\ \hline Total current assets & 21,373 & 27,222 & 27,270 & 26,168 \\ \hline Restricted investments & 579 & 605 & 602 & 602 \\ \hline \begin{tabular}{l} Equipment and leasehold improvements, \\ net \end{tabular} & 1,864 & 3,539 & 3,963 & 3,963 \\ \hline Other assets & 238 & 410 & 1,113 & 1,113 \\ \hline Total assets & $24,054 & $31,776 & $33,398 & $31,846 \\ \hline \multicolumn{5}{|l|}{ Liabilities and Partners' Equity } \\ \hline Accounts payable & 2,917 & 9,270 & 6,539 & 6,539 \\ \hline Accrued expenses & 10,233 & 13,906 & 11,680 & 11,680 \\ \hline Current maturities of long-term debt & 50 & 50 & 50 & 50 \\ \hline Total current liabilities & 13,200 & 23,226 & 18,269 & 18,269 \\ \hline Long-term debt, less current maturities & 2,000 & 1,950 & 1,900 & 12,848 \\ \hline \multicolumn{5}{|l|}{ Commitments and contingencies (Note H ) } \\ \hline Partners' equity & 8,854 & 6,600 & 13,229 & 729 \\ \hline Total liabilities and partners' equity & $24,054 & $31,776 & $33,398 & $31,846 \\ \hline \end{tabular}