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```					                                Value/Sales Ratio: An Example

n     Consider, for example, the Value/Sales ratio of Coca Cola. The
company had the following characteristics:
After-tax Operating Margin =18.56%        Sales/BV of Capital = 1.67
Return on Capital = 1.67* 18.56% = 31.02%
Reinvestment Rate= 65.00% in high growth; 20% in stable growth;
Expected Growth = 31.02% * 0.65 =20.16% (Stable Growth Rate=6%)
Length of High Growth Period = 10 years
Cost of Equity =12.33%                    E/(D+E) = 97.65%
After-tax Cost of Debt = 4.16%            D/(D+E) 2.35%
Cost of Capital= 12.33% (.9765)+4.16% (.0235) =    12.13%
                     (1.2016)10                                 
 ( 1 -.65)(1.2016)*  1−      10                                 
Value of Firm 0                              (1.1213)      ( 1 -.20)(1.2016)10 * (1.06) 
= .1856*                                    +                                = 6.10
Sales 0                          .1213-.2016               (.1213-.06)(1.1213)10 
                                                                  
                                                                  

Aswath Damodaran                                                                                             161
Value Sales Ratios and Operating Margins

Coca Cola: The Operating Margin Effect

12                                                         250

10
200

8
Value/Sales Ratio

150

\$ Value
Value/Sales
6
\$ Value

100

4

50
2

0                                                         0
6%   8%   10%     12%       14%     16%   18%   20%
Operating Margin

Aswath Damodaran                                                                                                                162
U.S. Specialty Retailers: V/S vs Operating Margin
2.0                                                                                                                                                         LUX
CDWC
CHCS
ISEE
DABR                       BID

VVTV                                          MBAY
TOO

BFCI

1.5                                                                                                                            SCC
TWTR
CPWM
HOTT

TLB
PCCC                                          WSM
SATH                                               JWL                       PLCE
PSUN                        CLE
FOSL
V    1.0
/                                                                                                 ORLYZLC
S                                                                                               LTD
BBY
NSIT                                                   AZO
a                                                                                                               ANN
CWTR
MIKE                       IPAR
l                                                                                                 ZQK                        GLBE
RAYS     PIR
e
LE     LIN                      MDLK
MENS
s                                                                                                                                                           HLYW
SCHS
MNRO
GBIZ                            DAP                                       RUS
CAO
CC                ITN                                                                                        BEBE
0.5                                                                    PGDA                                                            AEOS
ROST
URBN
MTMC                                         PBY        HMY
Z        CHRS                       PSS                                   BKE
ANIC                VOXX
CLWY                                                                                  IBI
CELL          JILL                                FNLY
GADZ                   DBRN       WLSN
RUSH                                                                                                                  MDA
SAH
LVC                         SPGLA              TWMC
FLWS               ROSI                    FINL
PSRC                           ZANY
MHCO
GDYS RET.TO                MLG
-0.0            MSEL

-0.000                                             0.075                                       0.150                                          0.225
Operating Margin
Aswath Damodaran                                                                                                                                                                          163
Brand Name Premiums in Valuation

n   You have been hired to value Coca Cola for an analyst reports and
you have valued the firm at 6.10 times revenues, using the model
described in the last few pages. Another analyst is arguing that there
should be a premium added on to reflect the value of the brand name.
Do you agree?
o   Yes
o   No
n    Explain.

Aswath Damodaran                                                                       164
The value of a brand name

n   One of the critiques of traditional valuation is that is fails to consider
the value of brand names and other intangibles.
n   The approaches used by analysts to value brand names are often ad-
hoc and may significantly overstate or understate their value.
n   One of the benefits of having a well-known and respected brand name
is that firms can charge higher prices for the same products, leading to
higher profit margins and hence to higher price-sales ratios and firm
value. The larger the price premium that a firm can charge, the greater
is the value of the brand name.
n    In general, the value of a brand name can be written as:
Value of brand name ={(V/S)b-(V/S)g }* Sales
(V/S)b = Value of Firm/Sales ratio with the benefit of the brand name
(V/S)g = Value of Firm/Sales ratio of the firm with the generic product

Aswath Damodaran                                                                         165
Illustration: Valuing a brand name: Coca Cola

Coca Cola         Generic Cola Company
AT Operating Margin   18.56%            7.50%
Sales/BV of Capital   1.67              1.67
ROC                   31.02%            12.53%
Reinvestment Rate     65.00% (19.35%)   65.00% (47.90%)
Expected Growth       20.16%            8.15%
Length                10 years          10 yea
Cost of Equity        12.33%            12.33%
E/(D+E)               97.65%            97.65%
AT Cost of Debt       4.16%             4.16%
D/(D+E)               2.35%             2.35%
Cost of Capital       12.13%            12.13%
Value/Sales Ratio     6.10              0.69
Aswath Damodaran                                                     166
Value of Coca Cola’s Brand Name

n   Value of Coke’s Brand Name = ( 6.10 - 0.69) (\$18,868 million) =
\$102 billion
n   Value of Coke as a company = 6.10 (\$18,546 million) = \$ 115 Billion
n   Approximately 88.69% of the value of the company can be traced to
brand name value

Aswath Damodaran                                                                167

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