Essay on Brown-Forman Distillers Corporation

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Question 1 As a leading producer, marketer and importer of wines and distilled spirits, Brown-Forman was the fifth-largest distiller in the United States. But the company spent huge amount of money advertising premium brands and significantly less on low profit brands. In the late 1970’s, the whiskey market declined and this presented Brown Foreman with growth challenges in a mature market. Brown-Foreman’s response to market pressures and competition was to aggressively move into other faster growing segments of the alcohol beverage market which required it to expand its product lines. The company also intended to increase its advertising spend to $86 million to aggressively promote its alcoholic product lines. The company also…show more content…
This means that Brown-Forman would be a bad deal if they were to go ahead with the acquisition at the $94.6 million price. Because the Southern Corporation seems have no enough free cash flow to generate additional firm value.

Question 3
Assumptions
Long Term Growth Rate of Guideline Companies

|Guideline Company |LTG |
|American Distilling |4.9% |
|Brown-Forman |10.2% |
|Heublein |5.3% |
|National Distillers |7.9% |
|Publicker Industries |1.5% |
|Seagram |4.1% |
|Hiram Walker |5.4% |
|Average Growth Rate |5.6% |

Growth Rate of Gross Profit
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In Exhibit 9 the Southern Corporation is showing a good average gross profit growth rate of 7% which will enhance the shareholder value after the acquisition, historic data shows shipments of Southern Corporation’s 5-year compound growth is 13% and 20-year compound growth is 13.45%. The growth slow down could be attributed to the lifecycle of the product. The product could have reached maturity and will need some innovation.

Cost of Capital (WACC) Using the CAPM model, the cost of equity for this project worked out round to 15% and the

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