FIN 466 Case 4 Assignment PDF

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Case #4 Multiples and Multiple Valuation and the Discounted Cash Flow Methodology 1. Starbucks

Hawaiian Holdings

Smart Sand

EBIT

$3,896.8

$465.0

$18.7

Depreciation and Amortization

$1,067.1

$101.6

$7.4

Sales

$22,386.8

$2,675.1

$137.2

Capital Expenditures

$1,519.4

$341.5

$51.2

$96.5

$23.1

$0.3

Annual Rent Expenses

$1,312.7

$254.5

$10.2

Price per Share at year end

$54.5

$41

$8.59

# Shares Outstanding

1,431.6

51.2

40.4

Long Term Debt

$3,932.6

$511.2

$0.0

Interest Expenses

2. a. SBUX: EV* / EBITDAR = 14.1x b. HA: EV* / EBITDAR = 4.8x c. SND: EV / EBITDA = 12.0x 3. Starbucks Effective Tax Rate: 33.2 % Hawaiian Holdings Effective Tax Rate: 11.3% Smart Sand Effective Tax Rate: -15% This information can be found on the 10K in Note 5: Income Taxes 4. "Market" implied growth in EBITDA for Smart Sand = 17.7% Smart Sand Share Price 12 Months later: $2.22 The price per share a year later considerably decreased which we did not expect according to the implied growth rate. "Market" implied growth in EBITDAR for Hawaiian Holdings = -7.4% Hawaiian Holdings Share Price 12 Months later: $26.41 The price per share for Hawaiian Holdings a year later decreased by $14.59. This decrease was expected by the simplified DCF model. "Market" implied growth in EBITDAR for Starbucks = 22% Starbucks Sand Share Price 12 Months later: $58.27 The price per share for Starbucks increased by $3.77 which was expected according to the implied growth rate. 5. SBUX: EBIT growth = (3,896.8 - 3853.7) / 3853.7 = 1.12% When analyzing if Starbucks common stock is fairly priced from a going concern basis, we can tell Starbucks is overvalued at its current price because when analyzing the growth rate in operating income: ($3,896.8 / $3,853.7) - 1 = 1.12% annual growth rate in 2017. In the growth rate prior, 21.7% is drastically high from an operations standpoint. Therefore, Starbucks is overpriced at $53.8 on a going concern basis. As for Hawaiin Holdings, the actual growth rate in operating income experienced in 2016 is 43.3% based on this calculation: (524.7 / 366.2) -1 = 43.3%. In the growth rate prior, -3.1% is lower than what Hawaiian has seen

previously, making a -3.1% growth rate very achievable. This suggests that Hawaiian is undervalued at $39.9 and not overpriced. For Smart Sands, the growth of operating income has varied over the years with tax reform playing a roll in earnings. Operating income for the past couple of years are as follows: 2015: $16.6, 2016: $20.4, 2017: $18.7. Despite variance in growth rate, earnings from operations have been on the incline starting with $5.0 - $10.4 - $21.5. 6. If growth in EBITDA (SND), EBITDAR (HA,SBUX) were assumed to be only 15% per year for the next five years, the fair price for the stocks in a public market would be: Starbucks: $40.28 Hawaiian Holdings: $182.87 Smart Sand: $7.61 7. a. M_d (the debt multiple) measures the income available to pay down debt before paying interest, taxes, depreciation, and amortization expenses M_d = Debt / EBITDA b. em (the EBITDA / EBITDAR margin) measures a company's operating profit as a function of sales. em = EBITDA / Sales c. . j (the D&A margin) measures a company's depreciation and amortization as a function of sales. j = D&A / Sales d. r_d (the weighted average interest on all debt) shows the percentage of interest as a function of long term debt a company has to pay. r_d = Interest / Long Term Debt

Starbucks

Hawaiian Holdings

Smart Sand

M_d (the debt multiple)

2.09x

2.79x

0x

Em (the EBITDA / EBITDAR margin)

28.0%

30.7%

19.0%

J (the D&A margin)

4.8%

3.8%

5.4%

R_d (the weighted average interest on all debt)

2.35%

4.52%

0.0%

8. For Starbucks, when the growth rate reflects the “market” expectation EV/EBITDAR the effect of leverage does not have a particularly influential impact on the price of Starbucks assets from a pure going concern basis. This is shown through the total multiple 13.9x, where 0.7x can be traced to leverage. From a percentage standpoint, 0.7 / 13.9 = 5.04% of the multiple can be attributed to leverage. As for Hawaiian Holdings, the effect of leverage on the EV/EBITDAR proved to be only 0.28x the total multiple of 4.4x. From a percentage standpoint, that means, (0.28 /4.4) = 6.4% of the total multiple accounts for leverage. Whereas Smart Sands is has a tax credit causing the leverage to be swayed based on the tax rate. If the tax rate was positive, the leverage would vary to try and reduce the multiple and vice versa. 9. Starbucks

Hawaiian Holdings

Smart Sand

Pure Going Concern

$52.62

$32.01

$7.74

Resource Conversion

$1.88

$8.99

$0.86

10. It would not be possible to do such an analysis in real time. In fact, it would not be feasible to use correct prices for analysis looking forward as the financial statements haven’t been released yet. The dates for the correct prices would be the end of the fiscal year of the company. For instance, for Hawaiian, the correct date for a 2019 analysis would be the stock price on December 31st, 2019.

11. a. Using the financial data provided for SBUX and the template for analyzing the historical record of total wealth creation, we can say that the average rate of growth in book value per share plus dividends equals to -3% which is close to the rate of growth in operating income for the same period which is 1.12% . B. Starbucks is not fairly priced because it has a negative average rate of growth in book value per share plus dividends which means that the company is destroying wealth. C. The going concern wealth that was distributed in the form of dividends in percentage terms to going concern wealth created is 41.6% $ 6,042.5 / $14,512= 41.6% d. In total, Starbucks spent $8,228 million in share repurchase which represents 20.5% of the total going concern wealth created

E. In total, Starbucks spent $6,504.7 million in dividend which represents 16.2% of the total going concern wealth created

f. According to the answers in d and e, it is clear that between 2009 and 2017, Starbucks spent a higher amount of the wealth it created to repurchase shares rather than paying dividends. However, Starbucks is still giving consistent dividends to its shareholders. 12. When Starbucks decides to use an important amount of the wealth they create to repurchase shares, their stock price will rise. With management compensation incentive programs, managers and encouraged to act in a way that will increase the stock price. Thus, share repurchase programs are in the interest of managers....