Questions for American Greetings Essays - Free Essays, Term Papers

Questions for American Greetings Essays - Free Essays, Term Papers Questions for American Greetings 1. The shares of American Greetings are currently trading at an EBITDA multiple that is at the bottom of its peer group. Do you think a 3.5 times multiple is appropriate for American Greetings? If not, what multiple of EBITDA do you think is justified? What is the implied share price that corresponds to your multiple? EBITDA , which is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization is one of the valuation measures that is used to indicate the financial performance of a company. EBITDA therefore, is equivalent to Revenue-Expenses (excluding amortization, depreciation, interest and tax). Thus means that it refers to net income with amortization, depreciation, taxes and interest added back to it. This measure can help in the analysis and comparison of profitability between companies since it eliminates the effects of accounting and financing decisions (Ferris & Petitt, 2002). Financially, when the EBITDA margin is higher, it means that less operating expenses will be eating into the bottom line of the company and this will lead to an operation that is more profitable. EBITDA multiple according to the article refers to the Enterprise Value divided by EBITDA. For the case of American Greetings, the EBITDA multiple being at the bottom of its competitors is encouraging to investors. This is because the comparatively low EBITDA equates to low EBITDA margin and when the EBITDA margin is low, the EBITDA multiple will be high since EBITDA margin is the denominator. At the same time, high EBITDA margin will result in low EBITDA multiple. However, Therefore, since high EBITDA means that less operating expenses be eating into the bottom line of the company and this will lead to an operation that is more profitable, then I think a 3.5 times multiple, which is the lowest in the group is appropriate since it means less operating expenses eating into the company's revenues and hence higher profitability. The implied share price corresponding to this multiple is 12.51. 2. Please model cash flows for American Greetings for fiscal years 2012 through 2015 based on the two sets of ratios in Exhibit 8. | |Actual 2011|2012 |2013 |2014 |2015 | |Bull | | | | | | |Scenario | | | | | | |Cash Inflow|1747.98 |1676.6 |1684.9 |1693.2 |1701.5 | |Operating |0.10393 |0.10355 |0.10355 |0.10355 |0.10355 | |Margin | | | | | | |Net Working|11.0811 |13.2444 |14.3481 |15.4518 |16.5555 | |Capital | | | | | | |Turnover | | | | | | |Fixed Asset|1675.05 |1675.05 |1675.05 |1675.05 |1675.05 | |Turnover | | | | | | |Bearish | | | | | | |Scenario | | | | | | |Revenue |1747.98 |1747.98 |1747.98 |1747.98 |1747.98 | |Growth | | | | | | |Operating |0.10393 |0.10355 |0.10355 |0.10355 |0.10355 | |Margin | | | | | | |Net Working|11.0811 |13.2444 |14.3481 |15.4518 |16.5555 | |Capital | | | | | | |Turnover | | | | | | |Fixed Asset|1675.05 |1675.05 |1675.05 |1675.05 |1675.05 | |Turnover | | | | | | 3. Based on the discounted cash flows associated with the forecast, what is the implied enterprise value of American Greetings and the corresponding share price? Enterprise Value refers to a measure of the total value of a company. It is calculated by adding the market capitalization of the company to the preferred shares, minority interest and debt and subtracting cash equivalents and total cash. Since the minority preferred equity and minority interest is zero, then the Enterprise value is obtained by (Share Price* number of shares)+ debt-cash and cash equivalents. =($12.51*75)- 172. - 938.25-172=766.25. According to the discounted cash flows, the corresponding share price is 12.52 and the implied enterprise value of the American Greetings is $766.25 4. What are the key drivers of value in your model? 1) Cutting-edge Technology and Innovation According to analysts, the product innovation in the company is needed to drive the interest of the customers in the company's goods. The valuation will improve if technological enhancements are left to be the key to the company's long-term approach. The rolling out of several complementary interactive goods such as mobile apps is for instance, one of the innovative moves meant to bolster the company's digital position. The effect of technology is evident from the information provided in the case study. For instance, with the introduction of social networking sites, some respondents are claiming that they are sending fewer e-cards that they used to since most of the greetings are being sent through facebook. This means that technology is affecting the American Greetings