Homework Assignment # 1:
Tulane University
A.B. Freeman School of Business
Finance Exam
Pabst Blue Ri
on Bee
Pabst Brewing Company was established in 1844 in Milwaukee, WI.
The company emphasized premium quality, and entered its product regularly in regional and national tasting competitions. In 1882, as a marketing ploy, the company began tying a blue silk ri
on around the neck of each bottle of its
ew to identify the beer as “award winning.” In 1893, Pabst’s “Select” beer (by then colloquially called Blue Ri
on by customers), did win the title of America’s Best Beer at the World’s Columbian Exposition in Chicago, beating out archrival Budweiser. The beer proved so popular that in 1902, Pabst had to order ten million yards of blue ri
on to satisfy demand.
Despite its illustrious beginning, Pabst began to languish in the 1960s, losing ground to larger competitors. In the early 1980’s, Pabst sought to boost its sales volume by discounting the price of its flagship beer. Unfortunately, the market interpreted the price cut as evidence of lowered quality, and sales volume did not increase as expected. Pabst was financially weakened as a result. Pabst came under additional pressure as the
ewing industry consolidated its assets into the hands of a few large players. In an effort to adapt to this trend, Pabst bought Olympia Brewing of Tumwater, WA in XXXXXXXXXXBy 1984, Pabst’s share price had been beaten down to $6.31, and the company became the target of a takeover battle.
Pabst management faced a grim choice. They could continue to run Pabst under the existing strategy, or they could sell out to one of two bidders:
1. Heileman Brewing Company proposed to purchase Pabst and reinvigorate the
and.
2. Paul Kalmanowitz, through his company S&P, proposed to purchase Pabst, spend almost no money on advertising expenses or other marketing, and “harvest” the company by letting sales volume decline.
These contrasting strategies lead to different forecasts of free cash flow and possibly different values for Pabst’s assets. In the workbook associated with this exam, I have provided you with templates for valuing Pabst under each of the three scenarios. The worksheets ta
ed “Pabst,” “Heileman,” and “S&P” present pro-forma templates and assumptions associated with each of the three strategies. Your assignment is to complete the spreadsheets based on the assumptions given and a
ive at a value per share for Pabst’s common stock under each of the three scenarios. Specifically,
(1) Assuming a WACC of 13%, what is Pabst’s value under each of the three scenarios?
(2) How do these values change if the WACC is 17% instead?
(3) Interpret your results.
Here’s a couple of “hints”:
1. Don’t change the green shaded cells on the spreadsheets. You only need to complete the yellow shaded portions. Don’t hard code numbers in the yellow areas; use only formulas.
2. In computing free cash flow, notice that the change in net fixed assets equals to CAPEX minus Depreciation, so subtracting the change in net fixed assets is the same thing as adding Depreciation and subtracting CAPEX.
3. GS & A expense means “General, Selling, and Administrative” expense. Mostly marketing and advertising and corporate overhead costs.
4. EBIAT is EBIT times (1 – tax rate). That is, net operating profit after taxes on EBIT.
5. To compute terminal value as a cash flow appearing in 1994, multiply free cash flow in 1994 by one plus the terminal growth rate and divide that by the discount rate minus the terminal growth rate. You will need to discount this value back to the present to get the present value of the terminal value.
� At that time, the company was called Best Brewery after its founder, Jacob Best.