Enterpreneurial Finance - Boston Beer Case

Boston Beer

 

1. What factors determine when a company should go public?

 

Following factors should be kept in mind before going public.

The size of the company: The Company should be big enough and should have invested reasonable amount of money in either asset or service that they provide. For example with an investment of $50 million, investment banking forms could come up with $10 per share for that company. If the company is small then its difficult to market and the initial price is much lower.

The company’s performance: Company going public should at least be in market for some time and have shows growth and consistent financial performance. They product should be knows to customers and should show the sigh of growth. If the company is not growing then the initial public offering is less attractive.

The company’s future prospectus must be good and growing: The Company’s future prospectus must be good and should show the sigh of growth. The company should reveal about their future plans and investments

Good market conditions: The market should be in favor of the company and should show the sign of growth. Not only the market, but the field where the product belongs to should be growing. For example if the market is growing and the product is related to internet, then internet market should also grow. 

 

 

2. What are BBC’s financial strengths and weaknesses?  (Show calculations)

 

Financial ratios are given as below. (See the attached excel sheet for detail calculations)

 

	1993	1994
Current ratio	1.619167	1.334075
quick ratio	1.338409	1.019437
NWC-to-asset ratio	0.339777	0.217965
Inventory-to-sales conversion period	38.12435	39.57603
Sale-to-purchase conversion ratio	31.37689	23.46707
Purchase-to-payment period	30.00775	42.08298
	39.49349	20.96012
Total-debt-to-Total-Assets Ratio	1.125439	1
Equity Multiplier	2.716738	3.612657
Current-Liabilities-to-Total-Debt Ratio	0.548765	0.652445
Gross profit Margin	$0.62	$0.63
Operating Profit Margin	$0.05	$0.06
Net Profit Margin	$0.05	$0.06
Sales to Asset ratio	$3.92	$5.06
Operating return on Assets	0.203542	$0.32
ROA	0.203459	$0.33

 

Strengths:

Quick ration is slightly above 1 which means that the company would have just enough money to pay all their liabilities.

 

NWC-to-Total-Asset ratio lies between 20% and 30%.  It indicates greater liquidity but is decreasing from 2003 to 2004

 

Current ratio is greater than one which means that the company’s liquidity cushions in the event that some non cash current assets cannot be fully converted into cash.

 

The conversion ratios look pretty good. They are able to get money back in much lesser time and can use that money to invest. With inventory to sale conversion period being less than 40 days i.e. it took less than 40 days to convert the purchase of materials into a sale of finished good. The collection period also seems to be between 20 days and 30 days which are not bad.

 

 

Weaknesses

 

Leverage ratios do not look very impressive. Debt to asset ration is slightly above one and that is a bad sign. It means that 100% has been pledged to debt.

 

Profitability and efficiency rations are also good with only 30% required to spend in production. Operating profit margin is 5% and Net profit margin is 5 to 6 cents per dollar of sale.

 

 

 

3. How attractive is the craft beer market?  What are the risks?

 

The craft brewing market has grown rapidly (approximately 40% per year) and is still in the growth phase. Their products are being sold in twice the price of mass-produced beers. Analyst growth forecast showed that this segment looks positive. Analyst estimated the growth to be between 5% and 10%.

Risk

Competition: The risk is competition from major and second-tier domestic producers. These are small brewing companies and mostly operate locally. They have their own specialty and build strong brand name through intensive marketing.

Sustainability: If the growth rate is not sustained then that becomes a risk

Saturation: Many analysts believed that the market was in their saturation phase and there won’t be any future growth in the market as it was during that time.

 

4. Do you feel that BBC is properly “valued” at $12.50 per share?  Explain and show calculations.  What is the value of the firm at this price?

 

Ans: I think that BBC is undervalued at $12.50 per share. According to my calculations the share value should be around $25 per share. (See the excel sheet for calculations) Few assumptions has been taken while coming up with the share value.

The value of the firm is $31,754,738

 

5. Explain the 2 different types of stock, Class A and B.  What are the implications of the distinction?

 

Class A Stock is the most preferred tier of classified stock, offering more voting rights than Class B shares. Class A shares are designed to insulate management from the short-term swings of Wall Street, by allowing those in management to control a small amount of the equity of the company but still maintain voting power. These types of shares are not sold to the public and cannot be traded, which allows management to focus on long-term goals. This common stock is used for mergers and acquisitions and to dilute or sell the company.

 

Class B Stock is a special category of stock usually retained by company founders at the time a company goes public. It carries certain rights not granted to stock available to the public. One of those rights is one share of Class B stock has 10 votes while regular shares have only one vote. These kinds of stocks are used during anti-merger and acquisitions.