The Case Study (NatureCARE Pharmacies) Let's assume that NatureCARE Pharmacies is an independent network of pharmacies in the province of Ontario, Canada. The business was established as an entrepreneurial venture in 2005 (when the first pharmacy was opened) and by 2010 revenue reached $58.0 million. NatureCARE Pharmacies has a unique focus-it specializes in homeopathic medicine (accounting for about 75 percent of the company's revenue), vitamins (10 percent of revenue), and dietary supplements (15 percent); the remaining 10 percent of revenue comes from a wide range of other products. The firm sources products from leading international suppliers such as Heel (Germany), Boiron (France), Genestra Brands (USA), and Swiss Herbal (Switzerland). The pharmaceutical sector for alternative medicine in Ontario is highly fragmented and is just beginning to consolidate. Only a few pharmacy chains have focused on this unique product offering, and NatureCARE Pharmacies is a clear market leader with 18 pharmacies in the province. Management's projections assume that NatureCARE Pharmacies is expected to make three investments in fixed assets to expand its operation, this was to occur in 2011. This effort was expected to further solidify the firm's position in Ontario and serve as a springboard for further expansion into neighboring provinces (Manitoba and Quebec). Tables 1 and 2 on the following pages present the income statement and a balance sheet for NatureCARE Pharmacies. The statements present the historical financial numbers (2007 to 2010) and the projected financial forecasts (2011 to 2015). Table 3 provides averages betas for different industries. Table 4 includes selected industry averages. Please assume that the market risk premium is equal to 15% and that the 60-day Treasury bill rate is equal to 5.5%. Table 1 - The balance sheet for NatureCARE Pharmacies, 2010 - 2015 (year end results) Hisi 2012 Ils ) 2011 2012 2013 2014 2015 I Accounts receivable Ilimentary cursets I . weddin Hid e real 1 9:15,124.13339 5,538 6 .5911,08 2,51 13.919 19.292.652.2025.29,320 32.863 26.45120,523 3.15132.100 IR IRWIN 1 16 1245 120x 10670 4,1415.213,34611,409 9.573 73 13,57045.692,907 7 95 ,175 Liabilities and Shareholders' Equity Current while II A b le Intal current hilities Long tem deb Total liabilities 2 12,150 16,47422.25725,85519 327283 1 47422.252 25. 29.32232 wal 16,991|11.991 1991 6,991 6991 6,991 29,1246429.24122.87131839.853 Shareholder uity mer II Re m ings 10 Sonic 500 10.900 1764717004 medicine in Ontario is highly fragmented and is just beginning to consolidate. Only a few pharmacy chains have focused on this unique product offering, and NatureCARE Pharmacies is a clear market leader with 18 pharmacies in the province. Management's projections assume that NatureCARE Pharmacies is expected to make three investments in fixed assets to expand its operation; this was to occur in 2011. This effort was expected to further solidify the firm's position in Ontario and serve as a springboard for further expansion into neighboring provinces (Manitoba and Quebec). Tables 1 and 2 on the following pages present the income statement and a balance sheet for NatureCARE Pharmacies. The statements present the historical financial numbers (2007 to 2010) and the projected financial forecasts (2011 to 2015). Table 3 provides averages betas for different industries. Table 4 includes selected industry averages. Please assume that the market risk premium is equal to 15% and that the 60-day Treasury bill rate is equal to 5.5%. Table 1 - The balance sheet for NatureCARE Pharmacies, 2010 - 2015 (year end results) Listorical 2010 Forecast 2011 2012 2013 2014 2015 S00) Touch A rwahl inventary Total current assets Fixed assets, ross Luss: Accumuland depreciation Fixed Tal Assis LOIN 1. 1 4 wlis 1711:4.13333 1. 540141107231213 19.20121.56512425.8522932232 al 26,451 0.32339,131132.10.0.97290.641 8,360 36608 lis 261836 is cal 1. 3.283 5.120 60sd .310. 6,919 15.08213.246 11.40 9.573 3.534 33,370 15.609526 3,510 29,5508837 Llabilities and Shareholders' Equity Cuis Accounts payable Tumbil 1 12.130 16. 122253. 8 232232.960 2140116.4741759 3231563 16991 1990 5.90 6.99160911 5201 29111 1 9 Total Share 'Eury Il me shares Il Red ings Tutacholders oquity Tu labi shoboken' paty Seasodis dissolo sod is 12.50 20.125 .933 8. 13. 12.1452692333 324 0.3715.10 2.9 .50 Income Statement Table 2 - The income statement for NatureCARE Pharmacies, 2007-2013 (pear end results) is '000) Til Hiccio 2007 2008 2009 2010 2011 2012 2013 2014 2015 Revue Cost of ads sold Cross profit 1.487.21623.734 7.99484,991119,472 134,73 152,2 169.34 2.4715. 11,72845.757 .0 40.204114, 118,98 133,275 181,04 3,008 12.237 18.0 25.000 29,923 33,35. 36,071 Selling cos! Kiesteral and administrative expers 262 36111,780 1451 IN 47 50 1021121 9860271 7879 2 402110 222 9.43 4 2.420 10,200 4 ,4 2,8 11,346 4,57 3,099 Fornings for res, de damuntinlun (FRITDA dades als 14 15 91412055 D I 1. 14 XL 15 Cipro ERT Intere expense Earnings becoce axes (EBT Taxese Vui vui (en) N 1421 1. 2 2 10 12 90 4 01 -115295 2.1584845249381 11,2 1 o 22 LOA |-11: Moi 1,5- 2014 2.4 6.4 7.5 14LSIS 5.225 8904 9.2 | Table 3 - Average betas for specific industries for the period between 2000 and 2010 2002 2003 2004 2005 2006 2007 2008 2009 2010 Avon devi Apparel Aulumul Baikling materials 0. 80.90 07 . 11.99 0. 1.14 1.300 100 0 1. 01 .23 2 .51 1.2 1.53 Soos 0 54.96 098 109 110 145132 1.0 104 1.14 1.19 1.20 1.59 1.9 1.7 1.7 1.1 1.11 0.od .11 .09 1.0 1.09 10 .30 0.0 0 Ilectric services In emas 1.10 1.0 1.10 1.64 0.4 0.8 1.01 10 1.2 1.2 .10 2750 14.1 21 2631 278 2 79 1411 104 110 Medical services 11. 044 x 11.94 1. Oxx 022 Precis metals 095 14 11 18 Railroad 0.81 ose 0.0 0. 0 103 4041 66 1.7 od 0. 6 s 1.00 osales 19 123 124 1220 LOI 135 134 9 4 Telecamere 11 This 0. as a dos Od samog 02 Table 4 - Selected industry averages in the pharmacy services industry FRUIT Net profit margin 7.2 percent h uity ratio 5 percent TIL 4.5 ROE 10. perveni Quin 1.2 Problems 2 (10 marks) the case study. Calculate the net market value of common equity for NatureCARE Pharmacies. Let's assume that for valuation purposes, we are at the beginning of January, 2011. Hint: a starting point of the valuation is calculation of free cash flows. Use tables 1 4 for your analysis. The Case Study (NatureCARE Pharmacies) Let's assume that NatureCARE Pharmacies is an independent network of pharmacies in the province of Ontario, Canada. The business was established as an entrepreneurial venture in 2005 (when the first pharmacy was opened) and by 2010 revenue reached $58.0 million. NatureCARE Pharmacies has a unique focus-it specializes in homeopathic medicine (accounting for about 75 percent of the company's revenue), vitamins (10 percent of revenue), and dietary supplements (15 percent); the remaining 10 percent of revenue comes from a wide range of other products. The firm sources products from leading international suppliers such as Heel (Germany), Boiron (France), Genestra Brands (USA), and Swiss Herbal (Switzerland). The pharmaceutical sector for alternative medicine in Ontario is highly fragmented and is just beginning to consolidate. Only a few pharmacy chains have focused on this unique product offering, and NatureCARE Pharmacies is a clear market leader with 18 pharmacies in the province. Management's projections assume that NatureCARE Pharmacies is expected to make three investments in fixed assets to expand its operation, this was to occur in 2011. This effort was expected to further solidify the firm's position in Ontario and serve as a springboard for further expansion into neighboring provinces (Manitoba and Quebec). Tables 1 and 2 on the following pages present the income statement and a balance sheet for NatureCARE Pharmacies. The statements present the historical financial numbers (2007 to 2010) and the projected financial forecasts (2011 to 2015). Table 3 provides averages betas for different industries. Table 4 includes selected industry averages. Please assume that the market risk premium is equal to 15% and that the 60-day Treasury bill rate is equal to 5.5%. Table 1 - The balance sheet for NatureCARE Pharmacies, 2010 - 2015 (year end results) Hisi 2012 Ils ) 2011 2012 2013 2014 2015 I Accounts receivable Ilimentary cursets I . weddin Hid e real 1 9:15,124.13339 5,538 6 .5911,08 2,51 13.919 19.292.652.2025.29,320 32.863 26.45120,523 3.15132.100 IR IRWIN 1 16 1245 120x 10670 4,1415.213,34611,409 9.573 73 13,57045.692,907 7 95 ,175 Liabilities and Shareholders' Equity Current while II A b le Intal current hilities Long tem deb Total liabilities 2 12,150 16,47422.25725,85519 327283 1 47422.252 25. 29.32232 wal 16,991|11.991 1991 6,991 6991 6,991 29,1246429.24122.87131839.853 Shareholder uity mer II Re m ings 10 Sonic 500 10.900 1764717004 medicine in Ontario is highly fragmented and is just beginning to consolidate. Only a few pharmacy chains have focused on this unique product offering, and NatureCARE Pharmacies is a clear market leader with 18 pharmacies in the province. Management's projections assume that NatureCARE Pharmacies is expected to make three investments in fixed assets to expand its operation; this was to occur in 2011. This effort was expected to further solidify the firm's position in Ontario and serve as a springboard for further expansion into neighboring provinces (Manitoba and Quebec). Tables 1 and 2 on the following pages present the income statement and a balance sheet for NatureCARE Pharmacies. The statements present the historical financial numbers (2007 to 2010) and the projected financial forecasts (2011 to 2015). Table 3 provides averages betas for different industries. Table 4 includes selected industry averages. Please assume that the market risk premium is equal to 15% and that the 60-day Treasury bill rate is equal to 5.5%. Table 1 - The balance sheet for NatureCARE Pharmacies, 2010 - 2015 (year end results) Listorical 2010 Forecast 2011 2012 2013 2014 2015 S00) Touch A rwahl inventary Total current assets Fixed assets, ross Luss: Accumuland depreciation Fixed Tal Assis LOIN 1. 1 4 wlis 1711:4.13333 1. 540141107231213 19.20121.56512425.8522932232 al 26,451 0.32339,131132.10.0.97290.641 8,360 36608 lis 261836 is cal 1. 3.283 5.120 60sd .310. 6,919 15.08213.246 11.40 9.573 3.534 33,370 15.609526 3,510 29,5508837 Llabilities and Shareholders' Equity Cuis Accounts payable Tumbil 1 12.130 16. 122253. 8 232232.960 2140116.4741759 3231563 16991 1990 5.90 6.99160911 5201 29111 1 9 Total Share 'Eury Il me shares Il Red ings Tutacholders oquity Tu labi shoboken' paty Seasodis dissolo sod is 12.50 20.125 .933 8. 13. 12.1452692333 324 0.3715.10 2.9 .50 Income Statement Table 2 - The income statement for NatureCARE Pharmacies, 2007-2013 (pear end results) is '000) Til Hiccio 2007 2008 2009 2010 2011 2012 2013 2014 2015 Revue Cost of ads sold Cross profit 1.487.21623.734 7.99484,991119,472 134,73 152,2 169.34 2.4715. 11,72845.757 .0 40.204114, 118,98 133,275 181,04 3,008 12.237 18.0 25.000 29,923 33,35. 36,071 Selling cos! Kiesteral and administrative expers 262 36111,780 1451 IN 47 50 1021121 9860271 7879 2 402110 222 9.43 4 2.420 10,200 4 ,4 2,8 11,346 4,57 3,099 Fornings for res, de damuntinlun (FRITDA dades als 14 15 91412055 D I 1. 14 XL 15 Cipro ERT Intere expense Earnings becoce axes (EBT Taxese Vui vui (en) N 1421 1. 2 2 10 12 90 4 01 -115295 2.1584845249381 11,2 1 o 22 LOA |-11: Moi 1,5- 2014 2.4 6.4 7.5 14LSIS 5.225 8904 9.2 | Table 3 - Average betas for specific industries for the period between 2000 and 2010 2002 2003 2004 2005 2006 2007 2008 2009 2010 Avon devi Apparel Aulumul Baikling materials 0. 80.90 07 . 11.99 0. 1.14 1.300 100 0 1. 01 .23 2 .51 1.2 1.53 Soos 0 54.96 098 109 110 145132 1.0 104 1.14 1.19 1.20 1.59 1.9 1.7 1.7 1.1 1.11 0.od .11 .09 1.0 1.09 10 .30 0.0 0 Ilectric services In emas 1.10 1.0 1.10 1.64 0.4 0.8 1.01 10 1.2 1.2 .10 2750 14.1 21 2631 278 2 79 1411 104 110 Medical services 11. 044 x 11.94 1. Oxx 022 Precis metals 095 14 11 18 Railroad 0.81 ose 0.0 0. 0 103 4041 66 1.7 od 0. 6 s 1.00 osales 19 123 124 1220 LOI 135 134 9 4 Telecamere 11 This 0. as a dos Od samog 02 Table 4 - Selected industry averages in the pharmacy services industry FRUIT Net profit margin 7.2 percent h uity ratio 5 percent TIL 4.5 ROE 10. perveni Quin 1.2 Problems 2 (10 marks) the case study. Calculate the net market value of common equity for NatureCARE Pharmacies. Let's assume that for valuation purposes, we are at the beginning of January, 2011. Hint: a starting point of the valuation is calculation of free cash flows. Use tables 1 4 for your analysis