Calavera Vineyards Case

Ans 1)

We have calculated the value of Calaveras Vineyards using DCF analysis (3 scenarios), multiples based

valuation (PE and MB ratios) and asset based valuation. The valuation summary is presented in Exhibit‐1.

For the purpose of DCF analysis we assumed the projections given in the case to represent the best‐case

estimate and used those for the purpose of valuation. However, in Anne Clemens’ estimation the

Calaveras would require an investment of 350,000$ in fixed assets in the late years of the forecast

period and not 250,000$ as is assumed in the base case. We adjusted the BS, IS and cash‐flows to

accommodate this assumption and also calculated Calaveras’ adjusted value. The lower end of the DCF

valuation range in each case in Exhibit‐1 reflects the values calculated after adjusting the cash‐flows.

Exhibit‐2 shows the NPV range in each case.

Since Calaveras is a well‐established business with good business vintage, established products and

experienced management and not a start‐up, expecting a return typically required by venture capital

firms from start‐ups is not a reasonable proposition. Also, while an argument can be made that

Calaveras does have presence in all three lines of business, justifying the use of WACC calculated using

weighted‐average asset betas of comparables, we think that given it’s long‐term strategic goal to focus

mostly on the premium and super‐premium category, using weighted average beta would underestimate

our estimate of its forward‐looking WACC

In our opinion thus the fair value Calaveras Vineyards is reflected by the value implied by using the

valuation parameters for Finn and Sawyer due to Calaveras’ long term strategic goal of focusing towards

premium and super‐premium category of wines. We think that the valuation range calculated using DCF

and the PE multiple is appropriate. This valuation places the value of Calaveras in the range of $5‐6

million, a little less than what its assets are currently estimated by its management.

The purchase price of $4.122 million represents a significant discount to what Calaveras’ managements

expects