Hbr - Eskimo Pie Case
Statement of Purpose: The purpose of this analysis is to determine if Reynolds Metals (“Reynolds”) should accept Nestlé’s offer of $61 million for its holdings of Eskimo Pie. The crux of the issue is whether or not the projected income from a proposed Initial Public Offering (“IPO”) by Wheat First Securities (“Wheat First”) is reasonable and will actually result in proceeds between $61 and $68 million to Reynolds, the Reynolds family and the Reynolds foundation, as projected. To get at this question, this paper will seek to value Eskimo Pie as a stand-alone company, if the IPO option is selected.
Discount Rate: The first task is to estimate the discount rate, or the rate that investors will require on this type of investment. In 1990, the last year for which we have data, Eskimo Pie had $744,000 in long-term debt obligations and $19,496,000 in Stockholders’ equity. This amounts to 3.67588% of their financing coming from debt and 96.32411% of their financing coming from equity.
Exhibit 9 reflects the corporate borrowing rates as of 1991. Being that Eskimo Pie is a small operation with fairly thin margins, they would not qualify for an A or AA bond rating. Thus, I am assuming that any bonds they have issued have a BB rating. The long-term bond yield for BB bonds is 11.44%.
The case does not provide any information regarding the required return on equity. However, by imputing the data from Exhibit 8c into a spreadsheet we can calculate Beta for comparable companies. I calculate the Beta for Ben & Jerry’s to be 1.5994. I calculate Beta for Dreyer’s to be 1.2524. This averages out to 1.4259, which is the Beta I estimate for Eskimo Pie.
Using the risk free rate of 4.56% from Exhibit 9, and an expected market return of 13.99% , I calculate the expected return on equity to be 17.9968%.
Thus, calculating the Weighted Average Cost of Capital: (.0367588)(11.44%) + (.9632411)(17.9968%) = 17.7558%. The applicable discount rate is 17.7558%.
Discount Rate: The first task is to estimate the discount rate, or the rate that investors will require on this type of investment. In 1990, the last year for which we have data, Eskimo Pie had $744,000 in long-term debt obligations and $19,496,000 in Stockholders’ equity. This amounts to 3.67588% of their financing coming from debt and 96.32411% of their financing coming from equity.
Exhibit 9 reflects the corporate borrowing rates as of 1991. Being that Eskimo Pie is a small operation with fairly thin margins, they would not qualify for an A or AA bond rating. Thus, I am assuming that any bonds they have issued have a BB rating. The long-term bond yield for BB bonds is 11.44%.
The case does not provide any information regarding the required return on equity. However, by imputing the data from Exhibit 8c into a spreadsheet we can calculate Beta for comparable companies. I calculate the Beta for Ben & Jerry’s to be 1.5994. I calculate Beta for Dreyer’s to be 1.2524. This averages out to 1.4259, which is the Beta I estimate for Eskimo Pie.
Using the risk free rate of 4.56% from Exhibit 9, and an expected market return of 13.99% , I calculate the expected return on equity to be 17.9968%.
Thus, calculating the Weighted Average Cost of Capital: (.0367588)(11.44%) + (.9632411)(17.9968%) = 17.7558%. The applicable discount rate is 17.7558%.