Disadvantages of an PIP The company will face underwriting costs associated with the PIP. A failed PIP could be costly both in financial assets and in firm reputation. Complying with regulatory reporting standards will create additional costs that are not present in a private company. Incorporating the company may have negative tax implications for the current owners. Current shareholders who do not exit during the PIP will face severe dilution. Management control will decrease because of fiduciary duties to shareholders. This could conflict with the company’s product quality processes and result in a shift toward a short-term earnings focus.
Conclusion Although their contract brewing model reduces expected capital expenditures, their labor and marketing intensive sales strategy will require substantial spending to expand into new markets. To meet projected growth, external funds will be needed. Raising these funds entirely from debt would create an unacceptable level of debt for a still growing company; thus equity funding is the preferred option. The company has reached a maturity point where equity can more easily and cheaply raised in public capital markets rather than through venture or private equity firms.
Additionally, publicity room the PIP will help with brand recognition in new markets. Given the recent success of competitor Ipso and Boston Beer’s profit margin and growth potential, the risk of a failed PIP is minimal, and most current shareholders intend to sell shares in the PIP reducing dilution concerns. Boston Beer should proceed with the PIP. Question 3-5 (Exhibit 3)– – 1995 Pro Formal Net Sales: All pro formal sales rely upon the assumption that net sales as of September 30, 1 995 represent 75% of expected year-end revenue.
Because the firm’s PIP will most likely have a more positive impact on Q sales than his estimate projects, if anything, the prices generated by our models are underestimated, not overestimated. Cost of Debt: BBC explains in its prospectus intent to extinguish outstanding debt carrying interest rates upwards of 1 1 . 5%. Based upon the firm’s low target leverage of 5%, low degree of operating leverage, and favorable credit history and financial outlook, the model assumes a cost of debt in line with AAA corporate debt at 7. 2%. This estimate seems reasonable and sensitivity analysis shows a 1% decrease in the forecasted share price requires at least a 2. % increase in the cost of debt. Risk Free Rate: The six-month and 30-year treasury rates given imply a fairly flat yield curve. Due to the relatively short forecast period and the short-term risk characteristics of this industry, the model uses the six- month rate as the risk free rate in calculating the cost of equity. 995 Net Working Capital Requirement: In order to calculate the change in NC over 1 996, the model assumes sass’s year-end NC is composed of the existing September 30, 1 995 balance plus Of fourth quarter net sales due to the firm’s rationalization strategy. CAP: Historical analysis shows an average 3. 3% capital intensity ratio. Based on a likely decrease in efficiency due to rapid expansion, the model forecasts a 3% capital intensity ratio–this includes restricted investments (Exhibit 1).
Depreciation: Depreciation was not included in the calculation of free cash flows because net CAP was used. 1995 Value of Debt: Boston Beer’s debt is private, so the market value will be very similar to, if not exactly the same as, its book value. – –Question The underwriting prospectus for the PIP suggests a share price of $12. 50 per hare, which is the starting point for analyzing the different scenarios. In order to determine the scenario that was most realistic, we attempted to rule out the ones that were not and a summary of our analysis is found in Exhibit 4. 1) First we analyzed the information asymmetry in the PIP. The offering presents information about almost 1. 5 million shares offered in the PIP from current stockholders. It is unlikely that management are willing to offer shares at $12. 50 if the fair market value really is $29 per share, thus weakening the belief in the second scenario. 2) Analysts’ expectations and comparable metrics. Analysts are generally very positive in regards to the Craft Brewing Segment, expecting continued growth in 1995.
A conservative market share estimate of 5% of the total domestic beer market by 2000 compared to only 1. 4% in 1994. In addition, both Pet?s Brewing Company and Redbook Ale Brewery have recently completed successful Pip’s resulting in growing share prices. These factors both build up expectations for Bib’s upcoming PIP and are likely to be incorporated in Bib’s PIP price. This might mean that BBC will be trading at a slight expectation premium above what the fair value of the company is, thus strengthening the reliability of the first scenario with a stock price of $12. 3. In addition, by comparing PIE ratios of Pet’s Brewing Company, 1 00, and Redbook Ale Brewery, 36, with BBC for the three different scenarios weakens the third scenario because of an implied PIE ratio of 17. 9, which is below both of the two comparable companies. The first scenario giving an implied P/E ratio of 41. 9 and the second scenario showing an implied PIE ratio of 99. 9 are tooth around the two competitors’ PIE ratios, strengthening the plausibility of these scenarios when looking at the P/E ratio isolated. 3) We also used industry growth trends to compare the expected sales of BBC in 2000, considering a constant market share, to the 2000 sales forecasted in each scenario. The results allowed us to rule out the third scenario because the sales forecasted in 2000 are less than half of what we would expect with conservative assumptions of the craft industry growth. The other two scenarios were fairly close to the expected revenues in 2000. 4) The second scenario was ruled out when analyzing the growth trends of BBC in recent years.
BBC has already undergone rapid growth and we expect that high growth phase to taper Off sooner rather than later. Ten more years Of high growth is unreasonable and unrealistic. Lastly, the second scenario can be ruled out again when looking at revenues projected for 2006. If the craft brewing industry grew to ten percent of the total domestic beer market by 2006, which is an aggressive assumption, then BBC would have to double its current percentage of market share in the craft industry. We also find that assumption fairly unreasonable due to the competitive nature of the craft industry now and into the future.
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