Sun Brewing Case- Company Valuation

Valuation of SUN: We have developed a financial valuation model for SUN in order to inform your efforts during all future negotiations with potential strategic partners. Exhibit 5 provides the details behind our calculations and a brief mechanical discussion follows:

In March 1999, SUN's $40 million bridge loan will come due. According to our expectations, the company will have negative cash flow throughout the next three years. We assume that the company will need to raise funds to finance forecasted capital expenditures. Per Exhibit 5, we have determined the present value of these cash outflows to be approximately $80 million. Thus, the company needs approximately $120 million in total.

Based on the information provided in the prospectus, we used The Country Spread Model (Goldman Model) to determine SUN's cost of equity. First, we chose Anheuser-Busch, Heineken and SABMiller as comparative companies and estimated the average asset beta in the brewing industry to be approximately 0.55. According to SUN's capital structure, we have determined that the company's beta is 1.36. Next, the CAPM model was applied to determine the required rate of return. We use the spread between the Russian government bond and the U.S. Treasury bond to estimate the country risk premium. When we add this country spread to the required rate of return from the CAPM, the cost of equity is approximately 29.55%, which reflects the current risk associated with Russia.

We expect that in the long run, the Russian economy will grow at a 6% rate. Based on this assumption and our expectations around SUN's forecasted performance over the next five years, we used a DCF model (Exhibit 5) to calculate the value of the company as of March 1999. As reflected in Exhibit 5, the value of the company is approximately $25.6 million

In addition to very conservative estimates of long run growth, we see the high required rate of return to be a function of general market conservatism regarding the...