Hansson Case
HANSSON PRIVATE LABEL
Objectives: • • • • • Define and derive debt free cash flows Critically analyze the assumptions underlying financial projections Role of opportunity cost of capital in capital budgeting decisions. Calculate NPV and its sensitivity to project variables Alternative methods of project evaluation
Overview of Hansson Private Label (HPL): • • • Given the comparable company information, HPL ranks mid-pack in terms of revenue. Christine Sinclair and Skin Care Enterprises are more than twice the size of HPL. In terms of profitability, HPL’s EBITDA margins significantly lag those of the competition. Exhibit 1 indicates that HPL was not as profitable as peers even in its best year. Exhibit 1 does show that HPL has been able to grow its top line at a 7.8% compound annual rate which is much higher than industry growth. It is reasonable to conclude the firm may have decided to grow revenues at the expense of operating margins given the observation above. Exhibit 8 indicates a much lower level of debt financing than peers which may relate to the firm’s ownership structure since Tucker Hansson has most of his personal wealth tied up in this one asset.
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Cash Flows and Net Present Value: • You need to specifically think about the issue of this form of valuation not capturing all of the potential benefits. It is frequently argued that discounting future cash flows ignores strategic issues, etc. The point, however, is that in order to maximize shareholder wealth any strategic benefit would have to be captured in the cash flows. Future cash flows are the statistical mean of random variables rather than the median or mode. The project is discrete and does not therefore have a terminal value whereas that would not be the case in valuing a going concern. Additionally, capital budgeting project in competitive markets cannot sustain positive economic rents indefinitely. (Your latest and greatest bank product will be imitated by your competitors in an
Objectives: • • • • • Define and derive debt free cash flows Critically analyze the assumptions underlying financial projections Role of opportunity cost of capital in capital budgeting decisions. Calculate NPV and its sensitivity to project variables Alternative methods of project evaluation
Overview of Hansson Private Label (HPL): • • • Given the comparable company information, HPL ranks mid-pack in terms of revenue. Christine Sinclair and Skin Care Enterprises are more than twice the size of HPL. In terms of profitability, HPL’s EBITDA margins significantly lag those of the competition. Exhibit 1 indicates that HPL was not as profitable as peers even in its best year. Exhibit 1 does show that HPL has been able to grow its top line at a 7.8% compound annual rate which is much higher than industry growth. It is reasonable to conclude the firm may have decided to grow revenues at the expense of operating margins given the observation above. Exhibit 8 indicates a much lower level of debt financing than peers which may relate to the firm’s ownership structure since Tucker Hansson has most of his personal wealth tied up in this one asset.
•
Cash Flows and Net Present Value: • You need to specifically think about the issue of this form of valuation not capturing all of the potential benefits. It is frequently argued that discounting future cash flows ignores strategic issues, etc. The point, however, is that in order to maximize shareholder wealth any strategic benefit would have to be captured in the cash flows. Future cash flows are the statistical mean of random variables rather than the median or mode. The project is discrete and does not therefore have a terminal value whereas that would not be the case in valuing a going concern. Additionally, capital budgeting project in competitive markets cannot sustain positive economic rents indefinitely. (Your latest and greatest bank product will be imitated by your competitors in an