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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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