EskimoPieCase2006

Eskimo Pie Case
January 19, 2006

J. K. Dietrich - FBE 532 – Spring 2006

Basic Steps to
Valuation in Finance


Estimate cash flows
– Cash - after tax, consumable
– Sometimes easy (fixed incomes), sometimes hard
(residual claims)



Choose a discount rate
– opportunity rate on alternative
– risk adjusted



Calculate present value and net present value and decide if worth more than costs

J. K. Dietrich - FBE 532 – Spring 2006

Updated Estimates in Valuation
Eskimo Pie Profit/Cashflow '91
92
93
Sales
$61.0 $
64.9 $
65.7
Operating Expenses
41.4
44.7
45.2
SG&A
15.8
16.8
17.0
Op. Profit
$3.8
$3.5
$3.5
Free Cash Flow
$2.7
$2.5
$2.5
Net Income
$2.3
$2.1 $
2.1
Growth '90-91
29.2%
6.4%
1.2%
FCF + TV
$2.7
$2.5
$50.76
PV @ 15.5%
$37.2
Cash
$13.0
Total Value
$50.2

J. K. Dietrich - FBE 532 – Spring 2006

Sensitivity to Operating Ratios
Eskimo Pie Profit/Cashflow '91
Sales
$61.0 $
Operating Expenses
34.3
SG&A
19.0
Op. Profit
$7.8
Free Cash Flow
$5.1
Net Income
$4.7
Growth '90-91
29.2%
FCF + TV
$5.1
PV @ 15.5%
$86.0
Cash
$13.0
Total Value
$99.0
J. K. Dietrich - FBE 532 – Spring 2006

92
93
64.9 $
65.7
36.4
36.9
20.2
20.5
$8.2
$8.3
$5.3
$5.4
$4.9 $
5.0
6.4%
1.2%
$5.3
$119.61

Eskimo Pie Cost of Capital
Company
Equity Total Debt
Ben & Jerry's
110.1
2.8
Dreyer's Grand Ice Cream
534.0
44.3
Empire of Carolina, Inc.
51.4
89.8
Steve's Homemade Ice Cream
37.4
3.1
Hershey Foods Corp.
4002.5
282.9
Tootsie Roll Inds.
728.8
0.0
Average

E/TMV Equity Beta Asset Beta
0.98
1.2
1.17
0.92
1.4
1.29
0.36
0.3
0.11
0.92
2.5
2.31
0.93
1.0
0.93
1.00
1.0
1.00
0.85
1.23
1.14

Estimated WACC using short-term and long-term Treasuries:

WACC S  Trf 4.56%  1.14 * 9.2% 15.0%
WACC L  Trf 7.42%  1.14 * 7.4% 15.9%
J. K. Dietrich - FBE 532 – Spring 2006

Valuations under Varying Rates
Growth =
Discount Rate
14%
15%
16%
17%

10%
$
$
$
$

121.0
96.8
80.7
69.1

12%
$
$
$
$

246.4
164.3
123.2
98.6

14%
-535.8
267.9
178.6

Assuming $4.4 million assumed in the case FCF ($4 + .4) grows in perpetuity