Boston Beer Essay

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Two potential methods can be used to value the possible IPO price of Boston Beer Company; namely the Discounted Cash Flow (DCF) method and the Relative Valuation method. Both will be considered in this paper. Discounted Cash Flow When all the values for a DCF valuation can be accurately obtained, the exact intrinsic value of a stock’s price can be found. However, finding accurate values for all DCF inputs is no easy task, often requiring assumptions and educated guesswork. Hence, if inputs are inaccurate, the result of a DCF valuation will not be reliable. A great number of assumptions have to be made in order to come up with the inputs for our DCF valuation, which we believe make relative valuation a more attractive alternative in terms of gaining a meaningful IPO valuation. Appendix Assumptions Used in the DCF Valuation: 1. The tax rate has been determined by dividing the pro forma income tax expenses of previous years by their income before income taxes for that year. Values between 41% and 43% obtained and hence the average of 42% was used. 2. The risk free rate is taken from the Government 30 Year Treasury note rate. 3. The beta for Boston Beer Company cannot be calculated as it has not been listed before. The pure play method cannot be used because their competitors have only recently listed and there are no historical betas for them yet. The beta for Boston Beer has hence been arbitrarily calculated by taking Anheuser-Busch’s beta of 1 and incorporating greater risk. 4. The market risk premium was not given in the case study and has been taken as the spread between stock and bond annual returns over the period 1926 – 1997 to be 7.2% 5. All figures relating to income and expense are obtained by taking the 3rd quarter figures and annualising them by multiplying the figures by 365/273 6. A historic growth rate of 57% was obtained

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