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Analysis & Valuation Using Financial Statements Specialty Eateries – Einstein Noah Dennis Dai

Analysis & Valuation Using Financial Statements Specialty Eateries – Einstein Noah Dennis Dai. Agenda. Company Background Valuing a firm Cost of equity capital Regression Beta Price over time CAPM Cost of debt capital Debt rating Cost of enterprise capital (WACC) Valuation.

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Analysis & Valuation Using Financial Statements Specialty Eateries – Einstein Noah Dennis Dai

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  1. Analysis & Valuation Using Financial Statements Specialty Eateries – Einstein Noah Dennis Dai

  2. Agenda • Company Background • Valuing a firm • Cost of equity capital • Regression • Beta • Price over time • CAPM • Cost of debt capital • Debt rating • Cost of enterprise capital (WACC) • Valuation

  3. Company Background • Einstein Noah Restaurant Inc. • largest owner/operator, franchisor and licensor of bagel specialty restaurants in the United States. • Business presence • it had 817 restaurants in 40 states and in the District of Columbia. • Business Emphasize • high-quality foods for breakfast, lunch and afternoon snacks in a bakery-café atmosphere • Brands • Einstein Bros. restaurants, • Noah’s restaurants in California • Manhattan Bagel restaurants

  4. Valuing A Firm • When valuing firms or shares of companies, we are considering: • Cost of capital for the enterprise operations • Cost of capital for equity • Cost of capital for debt

  5. Cost of Equity Capital CAPM model by utilizing β β is estimated using historical values via the following relation: Issues include choice of rrf and rMkt as well as determining appropriate time period for historical data

  6. Cost of Equity Capital • Find req and rmkt of each month duing the past five years • S&P 500 as a benchmark for rmkt • Run regression of req and rmkt • Beta of 1.54

  7. Regression Result

  8. Beta Summary • Wide range of beta from 0.43-1.51 • 95% confident that beta is between 0.67-2.41. Extremely large gap • Restaurant industry • Volatile in nature • Consolidation in recent years • Highly Competitive

  9. Price Over Time • Pretty volatile relative to market • Less volatile recently • Bloomberg beta may underestimate • Final beta to use: • 2/3*1.54+1/3*1=1.36 • Adjust for recent year’s trend then the final beta is 1.2

  10. CAPM • Assume a market risk premium of 5% • Market consensus • 30 year T-bill yield as risk free rate: 3.69% • Calculation of return on equity:

  11. Cost of Debt Capital rD = Pretax borrowing rate for debt X (1 – Tax rate) Pretax borrowing rate often proxiedby: Interest expense / Average amount of interest-bearing debt Effectively FEAT/NFL

  12. Cost of Debt Capital: Debt Rating Not sufficient information Hard to get rates S&P: Junk Grade

  13. Cost of Enterprise Capital (WACC) • Formula: • For Einstein Noah • VD = $127,808,120 (book value of NFL) • VEq = $262,724,363 million (stock price of $14.95 at Feb 11, 2014 times 17,573,536 common shares outstanding) • Implied VEnt = $390,532,483 ($127,808,120 + $262,724,363) • rEnt=(1.67%*127,808,120/390,532,383)+(9.69%*262,724,363/390,532,383)=7.065%

  14. Bloomberg WACC Close to Bloomberg estimation May be a good discount factor for FCF valuation

  15. Calculation Summary

  16. Valuation • Market Cap: $262,724,363@$14.95 per share • $227,461,027-NFL=99,652,907

  17. Thanks!Q&A

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