Discounted Cash Flow Valuation

1. Construct a pro forma income statement from 2013 to 2019 and a pro forma balance

sheet from 2013 to 2018 containing projections for Teuer’s financials. Use the

forecasting parameters provided in Exhibit 10 of the case. Templates are provided to you

in the supplementary case material (see spreadsheets “Teuer IS Pro Forma” and “Teuer

BS Pro Forma”).

2. Value the firm using the discounted cash flow (DCF) method. Forecast Teuer’s cash

flows for the next six years (from 2013 to 2018). Your value should not include the 2012

cash flows. You need to include a terminal value in your valuation. Use the forecasting

parameters provided in Exhibit 10 of the case. A template is provided to you in the

supplementary case material (see spreadsheet “Teuer CFA Pro Forma”).

3. The value of Teuer that you calculated depends on the assumptions made by Teuer’s

finance team (see Exhibit 10). Evaluate some of these valuation assumptions, especially

the ones that are crucial. An assumption is considered crucial when it is both empirically

relevant (i.e., changing the assumption has a non-trivial effect on the valuation) and

cannot be measured precisely.

Hints/Suggestions

1. Teuer finance team uses a bottom-up approach to forecast the company’s future

financials. That is, you first need to forecast financials at the store-level (by store age and

opening year) and then sum up these estimates to produce the corresponding firm-level

figures. Therefore, you first need to fill in the store-level income statement with forecasts

up to 2019 (see spreadsheet “Exh 5 Stores IS”) and the store-level balance sheet with

forecasts up to 2018 (see spreadsheet “Exh 6 Stores BS”) and then construct the firmlevel

income statement and balance sheet (see spreadsheets “Teuer IS Pro Forma” and

“Teuer BS Pro Forma” respectively).

2. To forecast sales for each cohort, Teuer team uses the average adjusted sales growth rates

for each cohort age (see Panel A of “Exh 8 Sales forecasting”), along with the projected

growth of aggregate furniture sales (see “Exh 2 Econ Indicators”). Consider the following

example: All stores that opened in 2011 had sales revenues of $3,354K in 2012 (see Exhibit

5). Because i) 2013 will be the second year these stores are open and the average growth