Warute Phanthumkmol

Calaveras Vineyards Case

Dear Dr. Lynna Martinez,

After reviewing your projections of Calaveras Vineyards, I used the adjusted present value method to come up with the value of the company. With this method, I assume that the whole firm is financed only through equity. Therefore, when calculating the free cash flow, debt was not taken into account. Despite that, the net present value of interest shields is added back to compensate the debt in the capital structure. With this method, the company is valued at $9.62 million.

In order to assess Calaveras’ value, I calculated the free cash flow from 1994 to 1998. The free cash flow from each year derived from adding Earnings before Interest and Taxes,
*…show more content…*

You were hired back then to develop and implement a strategy to lift the company out of the bulk-wine category and into the premium-brand segment of the market. In addition to that, your resume is stronger than the others. Your education is better than the others and you had a lot of experience in directing the making of wine. Not only that you trained in family-owned winery and distillery, but you also gained a lot of experience in champagne and white-wine technology at the Moet et Chandon installation in Epernay when you took trips to Europe.

Please note that if you decide to buy the company, you might become more conservative. Currently, you are the vice president/general manager and winemaker of Calaveras. If you buy the company as proposed, you will own 85% of the company. This means that you will relate to the company in two ways; as a manager, and also an owner. Therefore, I am assuming that you will become more conservative because it’s always better to expect less, so you wouldn’t forecast too positively. A reduction in forecasted real growth rate from 2% to 1-1.5% is what I am expecting you might do.

Thank you. Please do not hesitate to ask if you have any further questions.

Best regards,

Warute

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