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Calaveras Vineyards

Company Valuation

Gavrilenco Nicolae
Sabic Ada
Saric Amela
1. Company Overview

Calaveras Vineyard was originally established in 1883 as a family-owned business, since when it
expanded to production of table wines to retailers and restaurants. Moreover, their products are
categorized into 3 main quality categories in which 5 product categories can be found:

Estate wines
High-quality products Super-premium category
Selected vineyard wines

California wines
Medium-quality products Selected-vineyard-programs
Generic wines

Lower-quality products Special-accounts Special-programs

Figure1 Product Categorization

Throughout the years, the company had changes in the ownership structure, but also
improvements in the brand quality and market position through major capital improvements and
upgrading of machinery, which lead to an increase in the average wholesale price. The main
strategy from 1987 was broadening the company’s position on premium brand category, which
was successful. The new strategy consists of recruiting the West-Coast marketer Winston Fendall,
who will provide them a strong mechanism to secure cash flow position due to the paying
arrangement between those two companies.

We based our further analysis of the company on set of assumptions including the historical and
forecasted data in which an optimistic sales trend is included. Moreover, sales are forecasted to
grow on average 9% over next five years due to the assumption of increase in demand for wine
products, increase in real prices and increase in production per ton of grapes and yield per acre.
(Figure 1 and Figure 2) The preferences of the US population are expected to shift towards a more
consumption of wine, meaning that it is expected that the market will grow at a higher rate than
the increase in prices within the market. Based on these assumptions the forecast shows us that
some of the product groups will generate sales in a significantly increasing amount whereas other
of the product groups will have a smaller share of the sale.

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1.1 S.W.O.T Analysis

STRENGHTS: WEAKNESSES:
Company with long tradition Limitation of sales volume
Strong brand position Unstable COGS
Variety of products category The cost per unit of product is unstable
Differentiated and strong distribution and the revenues (profit) are harder to
channel predict
Skilled and experienced management and Supplier relationships
owners The long average processing time of final
production

OPPORTUNITIES: THREATS:
Strategy towards increase in prices and Strong competition in the higher quality
utilization of low-quality products products category
Strong position in the higher quality Cash flow limitation for covering
products category expenses
Increase of sales in supermarkets with Supplies of grapes depends on many
volume remained unchanged factors, therefore unpredictable
New marketing strategy Limitations in capacity
Strong mechanism to secure cash flow
position by the marketing company
Improvements of quality and capital
Nation-wide demand increase for wines
Expansion towards international sales

2. Calaveras Vineyard Valuation

The quantitative analysis of market value estimation of the company we started by using the DCF
model, and in order to obtain the continuous value we are using the value driver model.
Furthermore, we estimated WACC for a long-term horizon and included the risk free rate
corresponding to the interest rate of 30 years T-bond. (Table 1) Therefore, we also incorporated
the geometric mean for market risk premium in order to exclude autocorrelation in returns. But,
the main concerns in this estimation are regarding the comparison of Calaveras with the
competitors (Canandaigua, Finn&Sawyer, and Frogg's Jump), which brought us to the conclusion
that they are not optimal comparable companies since they significantly differ in market strategy
and even more important in the amount of sales. Consequently, we divided our products into 3
product lines and computed their shares in our sales, which we then multiplied with the respective

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beta of the compared companies. (Table 2) We have discounted the FCF by a WACC for each
correspondent year because of the capital structure difference of Calaveras for each year. For the
longer forecast we computed the industry average capital structure. Due to the fact that smaller
companies bear higher risks for potential failures, we have used the particular method for
calculating beta, which gave us more reliable results. For that reason, the adjustments have been
made in order to smooth the size gap of Calaveras and the competition, which may bias upwards
the estimated value. Having in mind that a smaller company has higher risk and also higher
levered beta, as a result it leads to higher WACC and also the value of the company is
correspondently lower. In order to compute the continuing value of the company we have
assumed a perpetuity growth of 3% which already takes into account the inflation rate and, we
also assumed a RONIC equal to WACC in order to exclude abnormal returns. Whatsoever, based
on the faces that Calaveras faces a strong competition and its own limitations in capacity we
excluded the abnormal returns. As a result we estimated the enterprise vale to be at a WACC of
10.4% the value of Calaveras Vineyards was calculated to be $6.6 million. (Table 3)

Since the key value drivers in our case are growth, RONIC, and WACC the sensitivity analysis
shows us various scenarios of the behavior of the value of the company. The conducted sensitivity
analysis explains how the value of the company is affected by an increase in growth of 5p.p, a rise
in 1% in RONIC, and 1% in cost of capital. Thus, we may say that having RONIC lower than the
actual WACC we observed that together with the increase in growth rate we have a decrease in
the value of the company due to the accelerating effect. What is more important is that, Calaveras
is more sensitive to increases in the cost of capital than to increases in capital intensity. (Table 4)

In line with our expectations, alternative methods for estimating the value of the company gave us
much lower results. The lowest value of the company was anticipated with the book value, which
can be interpreted as a lower bound for intrinsic value. According to it the value over a 5 year
period increases from $1.3 million to $3.9 million. Considering the multiple method it is
important to add that the multiple ratios for Calaveras were computed consistently as the
computation of beta in the DCF model. Thus, the value of the company is estimated to be $4.3
million for 1994, which can be taken only as the benchmark of the value. The liquidation method
shows $ 3.8 million in value of the company in accordance with the expectations of the financial
institution. The alternative methods compared to the DCF method, do not reflect all available

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information. Each of them is based on assumptions and conditions which considerably lower the
value of the company.(Table 5)

3. Credit Analysis and Financial Ratios

The debt repayment for Calaveras Vineyard show a shortage in liquidity compared to the
demonstrated leverage. Therefore, we claim that the company could have difficulties to meet the
obligations of the loan, which is also illustrated by the graph showing the forecasted quick and
current ratio, which are below the industry average. (Figure 3 and Figure 4) In accordance with
that we assume that the risk premium of the credit could be increased, meaning higher interest
costs for Calaveras. Upon that, current liability and total liability to net worth are significantly
higher than the average industry, with the peak in the year of taking the credit and as the
repayment proceeds so is a decreasing stream visible in the years after 1994. (Figure 5 and Figure
6) Alternatively, the efficiency and profitability ratios compared again to the industry average lie
between the upper and median quartile, which means sales boost and enough cash to meet its
obligations. From the Du-Pont analysis we have drawn a conclusion that the overall profitability
is lead by ROIC and spread, while the leverage is expected to decrease. (Figure 7 and Figure 8)
This tells about the increasing operational activity of Calaveras and at the same time a decrease in
liability. This signals management commitment for stable investments and improvement of the
financial health of the company.

3.1 5 C Analysis

Capacity: For the capacity of Calaveras to repay the debt, we have taken into account the
mechanism to secure cash flow by the contract with Winston-Fendall to collect all receivables and
remit to Calaveras. Taking into account the increasing amount of FCF and the return to sales ratio
that compared to the industry average is suited in the upper quartile; we believe that Calaveras
will have enough cash flow to repay the debt. (Figure 9)
Collateral: Considering assets Calaveras has on the balance sheet including the equipment,
accounts receivables and inventories, we can say that the company is covered by an adequate
amount of assets in order to ensure the collateral for the loan. Looking at the PP&E we conclude
that for the term loan is secured by an equally amortized and sufficient amount over the next 5
years.

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Capital: We incorporated the facts of entrepreneurial intentions of the owners and their
commitment to engage in sustainable investment activities as very positive signs. Moreover, the
general manager of the company, who at the same time has the required education, skills and
experience in the company, intends to buy 85% of total equity, and the remaining 15% are
intended to be purchased by the vice president of the company. This tells us that the compatibility
of the management with the ownership structure is a positive signal of confidence of the
management into the business. Therefore, the motivation for active engagement in value
generation of the company is present, meaning that we expect that they will remain or increase the
volume base of the business.

Conditions: Calaveras Vineyards operates under favorable conditions regarding the nationwide
increase in demand assumptions and the long tradition of the company in the activities of
producing wines. The tradition for over 100 years tells a lot about the brand that survived under
different circumstances and succeeded to stay in business for such a long time. Additionally, it
has strong relationships with its suppliers that ensure them stable sales over a longer horizon. The
diversity of supplier relationship enables them to concentrate on both lower and higher quality
wines. Gigantic Airlines stated a demand of minimum of 16500 cases for the next periods
including the hotel chains to increase the demand considerably. And in general considering that
Calaveras Vineyards are located in California, the strategic location for tourism, we can say that it
is a plus in terms of creating new customer relationships with the hotel chains.

Character: This is one of the strengths of Calaveras vineyard, since the management team has
the relevant experience not only in the industry but also in the company; it understands very well
the market and has a strong will for expansion towards a more strengthening market position
because of their aim for ownership.

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4. Conclusions and Recommendations

Since we base our analysis on assumptions of optimistic trends, meaning that we have included
significant increase in sales, after a drop in the year 1993. Moreover, the sales forecast is based on
increase in demand and a successful marketing strategy that will lead to increase in case sales and
prices due to the orientation towards high quality wines. Therefore, we expect that these
assumptions will not deviate extensively and according to it we can conclude that Calaveras will
be able to repay the debt. In case of any larger deviations towards decrease of case sales followed
by increased competition in the market or unsuccessful marketing strategy in terms of high-
quality wines, it might happen that the goals of achieving required levels of sale would not be
met. This would have a negative impact on the ability to repay the debt.
As Calaveras Vineyards are limited by the supply chain, it should focus on the improvements of
production and increased contractual securities in order to guarantee supplies. Moreover, the
increase in the wine market is a great opportunity for Calaveras to strengthen their market
position especially in the wholesale market, where the company has secure brand position and
stable relationships with the distributors. This brings us to the conclusion that Calaveras has big
opportunities to expand its market share. Another advantage Calaveras is its ability to be present
in both the markets of premium wines as well as in the private-label wines for hotels, resorts, and
airlines, and in servicing the higher-volume wine. The last but not least advantage of the company
is the special agreement with Winston-Fendall, which is believed to relieve Calaveras of credit
risk. Hence, based on all this we can say that Calaveras is a company worth investing in and
according to the conditions proposed by Goldengate the company is able to repay the debt.
However, Goldengate may consider increasing the interest rate up to 12 %, and at the same time
increasing the frequency of paying the interests up to 4 times a year. This alternative is supported

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by the Debt-Service-Coverage-Ratio, where 1.2 is the lowest admissible level. (Figure 10)
Anyway, increasing the interest rate represents the worst-scenario case that will hedge Goldengate
against deviations from above stated assumptions. Nevertheless, our final remark on the proposal
is that Goldengate should participate in the offered deal accepting the given conditions.

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5. Appendix

Projected revenue from wine types per sales channel / annum


2,000,000

1,500,000

1,000,000 1994
500,000 1995
1998
1996 1996
-
1994 1997
Estates

Select Vineyards

California

Generic
1998

Special Accounts

Figure 1 Sales by type of products Winery

Sales
$6,000

$5,000

$4,000

$3,000
Sales Volumes
$2,000

$1,000

$-
1994 1995 1996 1997 1998

Figure 2 Sales (thousands $)

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Weighted Average Cost of Capital

risk-free rate 5.85%


market risk premium 7.40%
beta 1.17

Tax Rate 37%

cost of equity 14.50%


cost of debt 9.50%
1994 1995 1996 1997 1998 Industry
Debt/Total Asset 71.9% 64.6% 55.0% 44.4% 31.0% 48%
WACC 8.4% 9.0% 9.8% 10.7% 11.9% 10.4%

Table 1

Comparable's Unlevered
Product line / Comparable Calaveras %
beta
Premium/Finn & Sawyer 74% 1.312
Generic/Canandaigua 9% 0.54
Specialty/Frogg's Jump 17% 0.867
Weighted average unlevered beta 100% 1.17

Table 2

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Free Cash Flow

1994 1995 1996 1997 1998


EBIT $ 929.66 $ 1,084.51 $ 1,223.62 $ 1,300.59 $ 1,420.36
Tax rate 37% 37% 37% 37% 37%
Depreciation $ 116.00 $ 283.00 $ 499.00 $ 766.00 $ 1,082.00
Amortization of org. costs $ 60.00 $ 60.00 $ 60.00 $ 60.00 $ -
CAPEX $ 366.00 $ 533.00 $ 749.00 $ 1,016.00 $ 1,332.00
Change in Net Working Capital $ 149.02 $ 301.98 $ 200.73 $ 215.45 $ 152.19
Free cash flow $ 246.66 $ 191.26 $ 380.16 $ 413.92 $ 492.64

Present Value of FCF $ 227.60 $ 160.98 $ 287.07 $ 275.48 $ 281.34


Total PV of FCF $ 1,232.47

$
Base for CV 921.67 Base for CV $ 507.42
RONIC 10.4% WACC 10.4%
g 3% g 3%
$
Continuing Value 8,830.58 Continuing Value $ 6,822.63
$
Present Value of CV 5,375.39 Present Value of CV $ 4,153.10

Enterprise Value of $
Calaveras 6,607.86 $ 5,385.58
(we show two methods of computing the Continuing value, but throughout this analysis we used the value driver
model )

Table 3

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Sensitivity Analysis (Table 4)
$
2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% Growth
6,607.86
$ $ $ $ $ $ $ $ $
7.0%
5,982.18 5,776.49 5,543.14 5,276.16 4,967.70 4,607.30 4,180.60 3,667.49 3,038.74
$ $ $ $ $ $ $ $ $
8.0%
6,219.66 6,092.04 5,947.27 5,781.62 5,590.24 5,366.63 5,101.89 4,783.54 4,393.43
$ $ $ $ $ $ $ $ $
9.0%
6,404.37 6,337.48 6,261.59 6,174.76 6,074.44 5,957.22 5,818.45 5,651.57 5,447.09
$ $ $ $ $ $ $ $ $
10.0%
6,552.14 6,533.82 6,513.04 6,489.27 6,461.80 6,429.70 6,391.70 6,346.00 6,290.01
$ $ $ $ $ $ $ $ $
11.0%
6,673.04 6,694.47 6,718.78 6,746.59 6,778.73 6,816.27 6,860.72 6,914.17 6,979.67
$ $ $ $ $ $ $ $ $
12.0%
6,773.79 6,828.34 6,890.23 6,961.03 7,042.83 7,138.41 7,251.57 7,387.65 7,554.40
$ $ $ $ $ $ $ $ $
13.0%
6,859.05 6,941.62 7,035.30 7,142.48 7,266.31 7,411.00 7,582.29 7,788.28 8,040.70
$ $ $ $ $ $ $ $ $
14.0%
6,932.12 7,038.71 7,159.64 7,298.00 7,457.86 7,644.64 7,865.77 8,131.68 8,457.53
$ $ $ $ $ $ $ $ $
15.0%
6,995.45 7,122.86 7,267.41 7,432.79 7,623.87 7,847.13 8,111.44 8,429.30 8,818.78
RONIC

$ 6,607.86 7% 8% 9% 10% 11% 12% 13% 14% 15% WACC


$ $ $ $ $ $ $ $ $
2.0%
11,856.86 9,683.76 8,150.18 7,015.29 6,145.34 5,460.16 4,908.75 4,457.16 4,081.92
$ $ $ $ $ $ $ $ $
2.5%
12,337.78 9,905.70 8,240.83 7,035.27 6,126.07 5,418.95 4,855.57 4,397.95 4,020.28
$ $ $ $ $ $ $ $ $
3.0%
12,938.94 10,172.03 8,346.59 7,058.11 6,104.39 5,373.15 4,797.08 4,333.37 3,953.51
$ $ $ $ $ $ $ $ $
3.5%
13,711.85 10,497.54 8,471.57 7,084.45 6,079.81 5,321.98 4,732.44 4,262.64 3,880.93
$ $ $ $ $ $ $ $ $
4.0%
14,742.40 10,904.43 8,621.56 7,115.20 6,051.73 5,264.40 4,660.61 4,184.83 3,801.75
$ $ $ $ $ $ $ $ $
4.5%
16,185.17 11,427.57 8,804.87 7,151.53 6,019.32 5,199.15 4,580.33 4,098.83 3,715.03
$ $ $ $ $ $ $ $ $
5.0%
18,349.32 12,125.10 9,034.01 7,195.12 5,981.52 5,124.58 4,490.02 4,003.28 3,619.64
$ $ $ $ $ $ $ $ $
5.5%
21,956.24 13,101.64 9,328.62 7,248.41 5,936.84 5,038.53 4,387.66 3,896.48 3,514.21
$ $ $ $ $ $ $ $ $
6.0%
29,170.09 14,566.44 9,721.43 7,315.01 5,883.23 4,938.14 4,270.68 3,776.34 3,397.07

Growth

$ 6,607.86 7% 8% 9% 10% 11% 12% 13% 14% 15% WACC


$ $ $ $ $ $ $ $ $
7.0%
10,620.20 8,401.34 6,937.47 5,904.20 5,139.39 4,553.00 4,091.03 3,719.17 3,414.54
$ $ $ $ $ $ $ $ $
8.0%
11,500.30 9,073.42 7,472.32 6,342.18 5,505.66 4,864.30 4,359.02 3,952.29 3,619.11
$ $ $ $ $ $ $ $ $
9.0%
12,184.82 9,596.15 7,888.30 6,682.83 5,790.54 5,106.42 4,567.46 4,133.62 3,778.22
$ $ $ $ $ $ $ $ $
10.0%
12,732.44 10,014.34 8,221.10 6,955.34 6,018.45 5,300.11 4,734.21 4,278.67 3,905.51
$ $ $ $ $ $ $ $ $
11.0%
13,180.49 10,356.49 8,493.38 7,178.31 6,204.91 5,458.59 4,870.64 4,397.36 4,009.65
$ $ $ $ $ $ $ $ $
12.0%
13,553.86 10,641.61 8,720.28 7,364.12 6,360.30 5,590.66 4,984.33 4,496.26 4,096.44
$ $ $ $ $ $ $ $ $
13.0%
13,869.80 10,882.87 8,912.28 7,521.34 6,491.79 5,702.41 5,080.53 4,579.94 4,169.88
$ $ $ $ $ $ $ $ $
14.0%
14,140.60 11,089.67 9,076.85 7,656.10 6,604.49 5,798.19 5,162.99 4,651.68 4,232.82
$ $ $ $ $ $ $ $ $
15.0%
14,375.29 11,268.89 9,219.47 7,772.90 6,702.16 5,881.21 5,234.45 4,713.84 4,287.37
RONIC

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Calaveras Vineyards Company Value
(thousands of dollars)

Discounted Cash Flow


Method

Total PV of FCF $ 1,232.47


Present Value of CV $ 5,375.39 $ 4,153.10
Total Value of Calaveras $ 6,607.86 $ 5,385.58

Multiples Method

Equity Net Income


Book Value $ 1,392.85 $ 392.85
Market
Value $ 3,500.79 $ 5,272.86

Market to Book ratio 2.51 Average Value $ 4,386.83


Price/Earnings Ratio 13.422

Liquidation Method

Book value Market Value


Recivables 85% $ 316,782.00 $ 269,264.70
Inventories 75% $ 2,332,241.00 $ 1,749,180.75
PPE 40% $ 3,420,107.00 $ 1,368,042.80
Acres 175 $ 7.50 $ 1,312.50
$ 3,387,800.75

Book Value of the


Company

1994 1995 1996 1997 1998


$ $
1,393 1,882 $ 2,477 $ 3,148 $ 3,934

Table 5

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Comparative Quick Ratio

1.40

1.20

1.00
QR Calaveras
0.80
Median
0.60
Lower Quartile
0.40 Upper Quartile
0.20

0.00
1994 1995 1996 1997 1998

Figure 3

Comparative Current Ratio


6

4 Upper Quartile
3 Median
2 Lower Quartile

1 CR Calaveras

0
1994 1995 1996 1997 1998

Figure 4

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Current Liabilities to Net Worth
180%
160%
140%
120%
Upper Quartile
100%
Median
80%
Lower Quartile
60%
40% Calaveras

20%
0%
1994 1995 1996 1997 1998

Figure 5

Total Liabilities to Net Worth


300%

250%

200%
Upper Quartile
150% Median
Lower Quartile
100%
Calaveras
50%

0%
1994 1995 1996 1997 1998

Figure 6

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ROE
35%

30%

25%

20%
ROE
15%
Upper Quartile
10%

5%

0%
1994 1995 1996 1997 1998

Figure 7

ROIC
20%
18%
16%
14%
12%
10%
8% ROIC
6%
4%
2%
0%
1994 1995 1996 1997 1998

Figure 8

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Present Value of FCF
$350.00

$300.00

$250.00

$200.00

$150.00 Present Value of FCF


$100.00

$50.00

$-
1994 1995 1996 1997 1998

Figure 9

DSCR

1.71
1.59 1.63
1.46
1.29

1994 1995 1996 1997 1998

DSCR

Figure 10

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