Discounted Cash Flow Valuation
1. Construct a pro forma income statement from 2013 to 2019 and a pro forma balancesheet from 2013 to 2018 containing projections for Teuer’s financials. Use theforecasting parameters provided in Exhibit 10 of the case. Templates are provided to youin the supplementary case material (see spreadsheets “Teuer IS Pro Forma” and “TeuerBS Pro Forma”).2. Value the firm using the discounted cash flow (DCF) method. Forecast Teuer’s cashflows for the next six years (from 2013 to 2018). Your value should not include the 2012cash flows. You need to include a terminal value in your valuation. Use the forecastingparameters provided in Exhibit 10 of the case. A template is provided to you in thesupplementary case material (see spreadsheet “Teuer CFA Pro Forma”).3. The value of Teuer that you calculated depends on the assumptions made by Teuer’sfinance team (see Exhibit 10). Evaluate some of these valuation assumptions, especiallythe ones that are crucial. An assumption is considered crucial when it is both empiricallyrelevant (i.e., changing the assumption has a non-trivial effect on the valuation) and
cannot be measured precisely.Hints/Suggestions1. Teuer finance team uses a bottom-up approach to forecast the company’s futurefinancials. That is, you first need to forecast financials at the store-level (by store age andopening year) and then sum up these estimates to produce the corresponding firm-levelfigures. Therefore, you first need to fill in the store-level income statement with forecastsup to 2019 (see spreadsheet “Exh 5 Stores IS”) and the store-level balance sheet withforecasts up to 2018 (see spreadsheet “Exh 6 Stores BS”) and then construct the firmlevelincome statement and balance sheet (see spreadsheets “Teuer IS Pro Forma” and“Teuer BS Pro Forma” respectively).2. To forecast sales for each cohort, Teuer team uses the average adjusted sales growth ratesfor each cohort age (see Panel A of “Exh 8 Sales forecasting”), along with the projectedgrowth of aggregate furniture sales (see “Exh 2 Econ Indicators”). Consider the followingexample: All stores that opened in 2011 had sales revenues of $3,354K in 2012 (see Exhibit5). Because i) 2013 will be the second year these stores are open and the average growth