Teuer Furniture a Case Analysis
Autor: belleshuyi • December 8, 2015 • Case Study • 992 Words (4 Pages) • 7,407 Views
Teuer Furniture A
Memorandum
Teuer Furniture’s valuation per share based on our discounted forecast cash flow methodology is $31.03. The discounted cash flow methodology is based on forecasting the free cash flows for two time periods (2013-2018) and thereafter in perpetuity.
Estimating free cash flow involves forecasting variables across the three main financial statements (Income statement, Balance Sheet and Cash flow statement). The variables are segregated by the treatment and ordered in priority of its impact on the final forecast. Sales growth at an individual cohort level (i.e – break sales by new store sales by year and old store sales by year), the rate of new store openings, and inventory assumptions have a disproportionate impact on the forecast methodology.
In particular, high inventory levels mean that higher sales growth actually hurts the Company’s free cash flow in the short run, due to the increase in net working capital, and opening too many stores too quickly can eat up all the Company’s free cash flow through the projection period.
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For the following parameters we made no change to the assumptions made by Teuer’s finance team | |
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Our share price calculation process is described below:
- Calculate individual store cohort P&Ls using above assumptions
- Calculate individual store cohort balance sheets using above assumptions
- Consolidate 1 and 2
- Derive a net income figure from the consolidated IS: NI = Sales – CGS – SG&A – Depreciation - Advertising – Tax Rate x Pretax Profit
- Derive non-cash items and cash outflows from the consolidated balance sheet and total capex from individual store cohort balance sheets
- Calculate the FCF as follows: FCF = NI – capex – ΔNWC + Depreciation
- Use the FV of the final FCF in 2019 to calculate a perpetuity value for the business assuming 12.1% cost of capital and 3.5% growth rate
- Add the perpetuity value to the FV of the final FCF
- Discount all FCFs to present value using 12.1% cost of capital
- Add all discounted values together to get value of businesses operating assets through the NPV of their future cash flows
- Subtract debt and add cash to get equity value of business. In this case, both were zero as the firm did not raise capital since 2008 and the firm’s cash flow in excess of its investments always returns to the shareholders each year in the form of dividends. so they did not impact our analysis
- Divide equity value by number of shares outstanding to get final value of $31.03 per share
Note: Sales projection is one of the most critical activities in valuing the company. We understand that given the nature of the industry, (high end furniture) it is highly sensitive to GDP growth. In an ideal scenario given resources, we would like to build a co-relation model, which would derive an elasticity metric w.r.t GDP. This would in turn give us an indexed sales number that would be more realistic. However, given our limitations, we have segmented the Sales numbers by new store sales by year (Eg: rate of growth of a new store in year 1, year 2 and so on) and used that to project for future sales.
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