Boston Beer HBS Case

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--------------------------------------------------Question 1--------------------------------------------------- Boston Beer, in response to consumers’ preference changes to more flavorful and bitter tasting brews, was founded in 1894. Boston Beer implements a “quality at any cost” strategy with a strong emphasis on product differentiation and implementing quality ingredients into its products. For instance, Boston Beer was the first company to employ a stamped freshness date on its bottles and ingredients are imported from around the world. Additionally, Boston Beer relies heavily on contract brewing to gain competitive advantages. Boston Beer’s contract brewing strategy results in lower overhead and transportation costs, as well as…show more content…
Based upon the firm’s low target leverage of 5%, low degree of operating leverage, and favorable credit history and financial outlook, the model assumes a cost of debt in line with AAA corporate debt at 7.02%. This estimate seems reasonable and sensitivity analysis shows a 1% decrease in the forecasted share price requires at least a 2.4% increase in the cost of debt. Risk Free Rate: The six-month and 30-year treasury rates given imply a fairly flat yield curve. Due to the relatively short forecast period and the short-term risk characteristics of this industry, the model uses the six-month rate as the risk free rate in calculating the cost of equity. 1995 Net Working Capital Requirement: In order to calculate the change in NWC over 1996, the model assumes 1995’s year-end NWC is composed of the existing September 30, 1995 balance plus 10% of fourth quarter net sales due to the firm’s recapitalization strategy. CAPX: Historical analysis shows an average 3.3% capital intensity ratio. Based on a likely decrease in efficiency due to rapid expansion, the model forecasts a 3% capital intensity ratio--this includes restricted investments (Exhibit 1). Depreciation: Depreciation was not included in the calculation of free cash flows because net CAPX was used. 1995 Value of Debt: Boston Beer’s debt is private, so the market value will be very similar to, if not exactly the same as, its book value.

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