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Drug Stores

Drug Stores. Trevor Yerrick Section 2. Agenda. Quick Background Drug Stores Industry Walgreen Co. Cost of Equity Capital Cost of Debt Weighted Average Cost of Capital Valuing WAG – DCF Model. Quick Background. Drug Store Industry Traditional vs. In-store

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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. • Cost of Equity Capital • Cost of Debt • Weighted Average Cost of Capital • Valuing WAG – DCF 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. Cost of Equity Capital • Capital Asset Pricing Model • Utilize a β – estimated using historical values • For WAG: • Risk free rate = 3.69% (30-year T-bill at 2/11/14) • Market risk premium = 6% (assumption) • Beta = 1.20 (best estimate)

  5. Cost of Equity Capital • Compiled monthly returns on the S&P 500 (market) and WAG • 60 months of returns, ending with 1/2/2014 • Allows regression of Return on WAG on Return on S&P 500

  6. Cost of Equity Capital Alpha ≈ 0 Estimate of β = 1.27 Range (95% confidence) = 0.90 to 1.63

  7. Cost of Equity Capital • Average estimate: 1.19 Bloomberg Adjusted Beta: 0.971 • MY best estimate: 1.20

  8. Cost of Equity Capital • Capital Asset Pricing Model • Utilize a β – estimated using historical values • For WAG: • Risk free rate = 3.69% (30-year T-bill at 2/11/14) • Market risk premium = 6% (assumption) • Beta = 1.20 (best estimate)

  9. Cost of Debt • rD = Pretax borrowing rate for debt X (1 – Tax rate) • WAG 2013 10-K (Note 9) • Average long-term disclosed interest rate = 3.11% • Federal statutory tax rate + state statutory tax rate = 37.1% • For WAG:

  10. 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)

  11. Weighted Average Cost of Capital

  12. Valuing WAG – DCF Model Estimated growth rate beyond 2017: 4% Estimate of enterprise cost of capital: 10.52%

  13. Valuing WAG – DCF Model

  14. Questions?

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