Eskimo Pie Essay

833 Words4 Pages
Eskimo Pie

1. What is your estimate of the value of Eskimo Pie Corporation as a stand alone company?

First we are going to consider the projected growth rate of Eskimo Pie Corporation using the sustainable growth model.

Sustainable Growth Model (SGM) = ROE * (1-PR) ROE = Return on Equity PR = Payout Ratio

ROE = Net Income/ Stockholders Equity = 2526 / 19496 = 12.95%

PR = Dividends per Share / Earnings per Share = .40 / .76 = 52.6%

SGM = 12.95% * (1-52.6%) = 12.95% * (.474) = 6.14%

Calculating WACC:

First step in calculating WACC is to use the Capital Asset Pricing Model (CAPM)

CAPM = Rf + Beta (MRP) Rf = Risk Free Rate Beta = Market figure as to how stock reacts to market
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Is Eskimo Pie worth more to Nestle than it is worth as a stand alone company?

Nestle would want to acquire Eskimo Pie due to the synergy that is created with the purchase of Eskimo Pie. Simply, Nestle would be able to use their existing supply chain to help and advance Eskimo Pie´s causes. For instance, since Nestle´s current ice cream novelties are sold in a wide range of stores, adding the Eskimo Pie branded ice cream novelty would not add much in the way of cost to providing the product for customers, as a matter of fact, it is likely to create added value in distribution, costing the same amount of money to distribute the combined product lines as it would to continue to distribute the current product lines.

Eskimo Pie would also benefit from being able to utilize economies of scale with respect to their suppliers. Since Nestle is currently participating in purchasing common ingrediants that would go into producing novelty ice cream products, they would be able to garner larger discounts from suppliers, especially considering Eskimo Pie is a much smaller company, and does not produce the level of items such as chocolate, or does not require the amount of milk that a company the size of Neste does.

Nestle would also gain access to a very large share of the novelty ice cream market. As seen in Table B, Eskimo Pie owns 5.3% of this particular market. With Nestle not in the top 5 producers in this market, Eskimo Pie would
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