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Module 8: Valuation Using Abnormal Enterprise Income Growth Patrick Noonan

Module 8: Valuation Using Abnormal Enterprise Income Growth Patrick Noonan. About Green Mountain Coffee Roasters. Started as a small café in Waitsfield, VT in 1981 Grew into the public company that it is today Operates two business units: Specialty Coffee Business Keurig Business.

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Module 8: Valuation Using Abnormal Enterprise Income Growth Patrick Noonan

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  1. Module 8: Valuation Using Abnormal Enterprise Income Growth Patrick Noonan

  2. About Green Mountain Coffee Roasters • Started as a small café in Waitsfield, VT in 1981 • Grew into the public company that it is today • Operates two business units: • Specialty Coffee Business • Keurig Business Source: Green Mountain Annual Report

  3. Valuation Using Abnormal Enterprise Income Growth Green Mountain Coffee Roasters

  4. Assumptions for GMCR Based on an analysis of GMCR’s financial statements in Module 4, we arrived at the following assumptions for the foreseeable future: • Sales growth rate 9.05% • Enterprise profit margin (EPM) 10% EPM = EPAT / Sales • Enterprise asset turnover (EATO) 1.65 EATO = Sales / NEA

  5. In Module 5, equation 5.6 recognized that value equals: • The abnormal enterprise income growth model is mathematically equivalent to the free cash flow model. • To arrive at it, we utilize the fact that in equation 5.7:

  6. To the free cash flow model we add the following equation which equals zero: after having re-written it as equation 8.1: • This yields:

  7. serves as the starting point; it anchors our valuation • Abnormal enterprise income growth explains the premium of market value over capitalized EPAT

  8. Understanding Abnormal Enterprise Income Growth • Cum-FCF EPAT is compared to last year’s EPAT grown at the cost of capital • The amount of earnings expected given the EPAT earned last year serves as a theoretically expected earnings; the earnings if earnings grows at the cost of capital

  9. Accounting Considerations • Change in depreciation = no effect • Income shifted between periods = no effect • If accounting differences did cause a change in the value estimate, then this model would not be feasible.

  10. Steady State Steady state is reached when: • Sales are growing constantly • EPAT per dollar of sales is constant • NEA required for each dollar of sales is constant

  11. Questions? 16

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