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Module 7: Valuation Using Residual Enterprise Income Patrick Noonan

Module 7: Valuation Using Residual Enterprise Income 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 7: Valuation Using Residual Enterprise Income Patrick Noonan

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  1. Module 7: Valuation Using Residual Enterprise Income 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 Residual Enterprise Income 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. Free Cash Flow Model • In Module 5, equation 5.6 recognized that value equals: • The residual enterprise income model is mathematically equivalent to the free cash flow model. • To derive this model, we utilize the fact that:

  6. Anchoring on NEA – Zero Sum Equation • Free Cash Flow valuation: • Zero sum equation: • Sum the LHSs and RHSs yields:

  7. Anchoring on NEA – Simplifying

  8. Anchoring on NEA – Simplifying

  9. Anchoring on NEA – Simplifying

  10. Anchoring on NEA • NEA, which is currently known, serves as the starting point; it anchors our valuation • Accounting information, residual enterprise income, explains the premium of market value over book value (V0 – NEA0)

  11. Understanding Residual Enterprise Income • EPAT is compared to beginning NEA times cost of capital • The amount of earnings expected given the NEA we have in place serves as a theoretically expected earnings; the earnings if book value earned at the cost of capital

  12. Questions? 14

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