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Drug Stores

Drug Stores. Trevor Yerrick Section 2. Agenda. Quick Background Drug Stores Industry Walgreen Co. Weighted Average Cost of Capital Re-estimate Value of WAG – 3 Separate Models Issues Discounted Cash Flow Model Residual Enterprise Income Model

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Drug Stores

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  1. Drug Stores Trevor Yerrick Section 2

  2. Agenda • Quick Background • Drug Stores Industry • Walgreen Co. • Weighted Average Cost of Capital • Re-estimate Value of WAG – 3 Separate Models • Issues • Discounted Cash Flow Model • Residual Enterprise Income Model • Abnormal Enterprise Income Growth Model

  3. Quick Background • Drug Store Industry • Traditional vs. In-store • Pharmacy Benefit Managers (PBMs) • “Nation’s largest drugstore chain” • 8,582 locations, including 8,116 drug stores • 2013: $72.2 B in sales, $45.5 B in prescription sales • Recent trend of expansion through acquisitions • Alliance Boots (45%) acquisition in 2012, option to purchase remaining 55% in 2015

  4. Weighted Average Cost of Capital • For WAG: • VD = $4,385 million (book value of NFL) • VEq = $54,578 million (stock price of $57.44 at December 31, 2013 * 950,170,000 common shares outstanding) • Implied VEnt = $58,963 million ($4,385 + $54,578)

  5. Issues with Re-estimation First pass at re-estimation with calculated WACC Changing growth rates

  6. Issues with Re-estimation First pass at re-estimation with calculated WACC Changing growth rates

  7. Issues with Re-estimation First correction of re-estimation (for last Monday) Changed growth rates to be the same

  8. Issues with Re-estimation First correction of re-estimation (for last Monday) Changed growth rates to be the same

  9. Issues with Re-estimation Final Discounted Cash Flow Model Extended forecasts out to 2020 (3 more years)

  10. Issues with Re-estimation Final Residual Enterprise Income Model Extended forecasts out to 2020 (3 more years)

  11. Abnormal Enterprise Income Growth Model Abnormal Enterprise Income Growth (agr) is equal to the change in Residual Enterprise Income

  12. Abnormal Enterprise Income Growth Model

  13. Abnormal Enterprise Income Growth Model

  14. Recap – All 3 Models DCF REI AGR

  15. Questions?

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