equity valuation - anheuser busch

[2008]

ROHAN PATIL

Equity Valuation and Analysis Anheuser-Busch

FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

2

Table of Contents I. Assessment of Financial Distress ...................................................................... 3

A. Altman Z- score ........................................................................................................ 3

B. Significance of the Altman Z- score ........................................................................... 3

II. Analysis of Historical Operating Performance ................................................. 3

A. Year to Year Trend Analysis ...................................................................................... 3

B. Ratio Analysis ........................................................................................................... 4

C. Financial Performance Discussion ............................................................................. 4

III. Financial Position (GAAP basis) and ROE (DuPont Analysis) ........................ 5

A. Return on Equity ...................................................................................................... 5

B. Liquidity Position ...................................................................................................... 5

C. Capital Structure Analysis ........................................................................................ 6

D. Ratio Analysis – Property Plant and Equipment......................................................... 7

IV. 3 Year Financial Forecast – Management Case ............................................... 8

A. Income Statement Forecast - 2007,2008,2009 .......................................................... 8

B. Statement of Free Cash Flows - 2007,2008,2009 ...................................................... 8

C. Fixed Charge Coverage Forecast - 2007,2008,2009 ................................................... 8

D. Analysis of Overall Trends and Analyst Comments .................................................... 9

V. 3 Year Financial Forecast – Independent Analyst Case ................................... 9

A. Independent Outside Review - Current State of the Beer Industry ............................ 9

B. Forecast of Selected Income Statement Variables - 2007,2008,2009 ........................ 9

C. Income Statement Forecast - 2007,2008,2009 ........................................................ 11

D. Statement of Free Cash Flows - 2007,2008,2009 .................................................... 11

E. Rationale for Selection of Variables and Financial Performance Trends................... 12

VI. Adjusted Financial Analysis (Non GAAP) ...................................................... 13

A. Adjusted Income Statement – 2005,2006 ............................................................... 13

B. Rationalization for Analyst Assumptions ................................................................ 14

C. Comparison of GAAP Analysis to Non GAAP Analysis ............................................. 14

VII. Appendix – Calculation Details ....................................................................... 16

VIII. References ........................................................................................................ 23


3

I. Assessment of Financial Distress

AA.. TThhee AAllttmmaann ZZ –– SSccoorree::

It is one of the best known bankruptcy prediction formulae. Using Multiple

Discriminant Analysis (MDA) with five different financial and economic ratios, it

helps indicate the probability of bankruptcy in the near future with considerable

accuracy.

Using the formula as shown in the appendix, we get a Z-score of 6.23 for 2006 and 5.61

for 2005.

BB.. SSiiggnniiffiiccaannccee ooff tthhee AAllttmmaann ZZ –– SSccoorreess::

Based on the empirical research we know that a z-score above 2.99 is a sign of a

financially healthy company. With a Z-score of 6.23 and 5.61, Anheuser Busch has

a very low probability of bankruptcy. * Please refer to Appendix for calculations

II. Analysis of Historical Operating Performance (GAAP Basis)

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Relative change and dollar change for Fiscal year 2006 and 2005

Trend Analysis

Income Stmt Items 2006 2005 Dollar Change Percentage Change

Net Sales $15,717.10 $15,035.70 $681.40 4.53%

Gross Profit $5,552.10 $5,429.40 $122.70 2.26%

Operating Income $2,719.60 $2,591.90 $127.70 4.93%

EBIT $2,708.80 $2,594.60 $114.20 4.40%

Interest Expense ($451.30) ($454.50) ($3.20) -0.70%

Net Income $1,965.20 $1,744.40 $220.80 12.66%

EBITDA $3,697.50 $3,573.60 $123.90 3.47%


4

BB..

Profitability Ratios Ratios 2006 2005

Gross Margin 35.33% 36.11%

Operating Margin 17.30% 17.24%

EBIT Margin 17.23% 17.26%

Interest Coverage 6.00 5.71

Net Margin 12.50% 11.60%

EBITDA Margin 23.53% 23.77%

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Starting out with the total domestic beer sales of the company, we saw declining

sales in the fiscal year of 2005. Although the situation improved a little in 2006

with a marginal growth of 2.8%, the domestic beer segment has not performed

well as compared to other segments.

However, their aggressive foreign expansion in recent times has resulted in steep

growth of about 7% in the international beer sales in 2006. This has primarily due

to sales in China, Canada and Mexico. Overall, we saw a growth of 4.53% led by

their international segment.

Looking at the profitability analysis, we note the fact that cost associated with

higher beer volume, increased packaging materials and plant operating costs for

domestic beer and higher energy costs have considerable reduced the gross

margin of the company.

As the company enters new markets like China the marketing costs went up as

expected. However, a steep decline in the domestic marketing costs has offset this

increase resulting in a overall reduction in the operating expenses. The growth in

the operating income is primarily due to reduction in operating expenses rather

than growth in net sales.

Thus, the financial performance of the company in US market has been flat but

comparatively the international line of businesses has seen staggering growth in

the fiscal year 2005-06.


5

III. Financial Position (GAAP Basis) and ROE (DuPont) Analysis

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SolvencyActivityyofitabilitROE Pr

monEquityAverageCom

alAssetAverageTot

alAssetsAverageTot

NetSales

NetSales

NetIncomeROE

Return on Equity

Factor 2006 2005

Profitability 0.1250 0.1160

Activity 0.9545 0.9188

Solvency 4.3227 4.9159

ROE 51.59% 52.40%

The ROE has reduced by 1.57 % during 2006. Among the three factors that

influence the Return on Equity for Anheuser-Busch the financial leverage

ratio (solvency) is primarily responsible for driving the change in ROE

between fiscal 2006 and 2005. Change in the solvency has been over -12%

indicating more leverage. This has reduced the overall ROE by 1.57%.

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We shall begin with the calculations of the liquidity ratios for Anheuser

Busch.

Liquidity Ratios

Ratios 2006 2005

Current Ratio 0.81 0.89

Quick Ratio 0.51 0.56

Cash Ratio 0.18 0.21

Cash flow from operations Ratio 1.21 1.36 * Please refer to Appendix for calculations

As shown by the ratios here, the company has more short term liabilities

than short-term assets. However, the company’s operating cash-flows are

substantially higher than their current liabilities. Moving forward, with $ 2

billion revolving credit, $1.35 registered debt available for issuance we

envisage no short-term credit crunch for the company in the near future.


6

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Total Debt-to-Total Capital Ratio

Components 2006 2005

Total Debt $7,653.50 $7,972.10

Total Capital $11,592.20 $11,651.90

Ratio → 0.6602 0.6842

Total Debt-to-EBITDA Ratio


Total Debt $7,653.50 $7,972.10

EBITDA $3,697.50 $3,573.60

Ratio → 2.0699 2.2308

After conducting ratio analysis specifically on the debt ratios, it is clear that

Anheuser-Busch is highly leveraged. Company enjoys a strategic and

competitive advantage as it represents almost half the beer sales and almost

2/3 of the operating profits. We would like to say that the company has used

this advantage to its benefit. It is clear that the cost of debt is substantially

lower than the cost of equity. In recent times it has successfully conducted

several leveraged buyouts that have substantially increased its long-term

corporate debt. However, the company is still rated A+ by Fitch.

Anheuser Busch operates with a working capital deficit. The accounts payable

constitute a major portion of their current liabilities. The cash cycle of the

company is of -16 days which indicates that the company is very efficient in

terms of its operations and cash management.

An important drawback in its capital structure that has come to light after

implementation of FAS 158 is that A-B’s pension benefit plan is highly

underfunded. This liability of over a billion dollars could create problems in

the not-so-distant future. A detailed analysis of this section is recommended.


7

C. The Enterprise value of Anheuser-Busch is $47,010.37 million.

The enterprise value takes into account the value of debt as well as equity and

hence is unaffected by the company’s capital structure. Cash is subtracted

because when it is paid out as dividend, it reduces the net cost to the

purchaser. Therefore the business was only the reduced amount to start with.

The same effect is accomplished when the cash is used to pay down debt.

The ratio of the Enterprise value to EBITDA 12.7141

This ratio is significant as it is not influenced by capital structure and taxes.

The inverse of this ratio tells us that the cash return on investment for

Anheuser-Busch 7.86%

*See Appendix for calculations

D.

AAvveerraaggee ttoottaall lliiffee ssppaann of Anheuser-Busch’s property, plant and

equipment at December 31st 2006 18.92 years

AAvveerraaggee aaggee of Anheuser-Busch’s property, plant and equipment at

December 31st 2006 9.91 years

Additionally, the relative age of A-B’s property, plant and equipment at

December 31st 2006 52.35%

OOuuttccoommee ooff tthhee rraattiiooss.

The average relative age of the plants and equipments is about half their

useful lives. Thus, in out opinion there are no major purchases of plants and

equipments in the near future


8

IV. 3-Year Financial forecast – Management Case (with predefined assumptions)

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CONSOLIDATED STATEMENT OF INCOME

Year Ended December 31 (in millions, except per share) 2007 2008 2009

Net sales 16,172.90 16,852.16 17,357.72

Cost of sales 10,433.91 10,845.17 11,142.75

Gross profit 5,738.99 6,006.99 6,214.97

Marketing, distribution and administrative expenses (2,978.19) (3,106.87) (3,174.87)

Restructuring Expense (8.50) (13.00) (17.00)

Operating income 2,752.30 2,887.11 3,023.10

Interest expense (461.23) (471.38) (481.75)

Other income/(expense), net (15.00) 24.00 14.00

Income before income taxes 2,276.07 2,439.74 2,555.35

Provision for income taxes (853.53) (914.90) (958.26)

Equity income, net of tax 597.63 606.60 615.70

Net income 2,020.18 2,131.43 2,212.79

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Statement of Free Cash Flows

Components 2007 2008 2009

EBITDA $3,759.22 $3,962.87 $4,118.82

- Maintenance CapEx ($295.75) ($323.75) ($367.50)

- Dividends ($80.81) ($85.26) ($88.51)

Free cash flow $3,382.66 $3,553.86 $3,662.81

C. FFiixxeedd cchhaarrggee ccoovveerraaggee rraattiioo ffoorr 22000077,, 22000088,, 22000099.

The Fixed charge coverage ratios for year:

2007 4.29

2008 4.35

2009 4.24


9

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ssttaatteemmeenntt ffoorreeccaasstt,, aanndd tthhee 33--yyeeaarr ffiixxeedd cchhaarrggee ccoovveerraaggee ffoorreeccaasstt:

Looking at the trends in the free cash flow statement presented above we

notice that the there is steady growth of free cash flow over the three

years. This trend is accompanied by steady growth in sales as well as net

income. With the absence of any major acquisitions we would like to

ascertain that company will most likely experience overall organic growth

in all of its major segments.

We see no substantial change in the fixed charge coverage ratio.

V. 3-Year Financial Forecast: Independent analyst assumptions

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iinnddeeppeennddeenntt oouuttssiiddee rreevviieeww

..

The U.S. brewing industry is a dynamic part of our national economy,

contributing billions of dollars in wages and taxes. An indication of

beer’s importance is its inclusion in the basket of goods the government

uses to calculate the Consumer Price Index.

The industry today includes more than 2,000 brewers and importer

establishments and over 2,700 beer distributor facilities across the

country but is dominated by three producers who command a nearly 80

percent market share as of 1997 -- Anheuser-Busch (45%), Miller

Brewing (23%), and Adolph Coors (10. In recent years, the industry has

seen a flat trend of sales growth. However in 2006, the industry

recorded 2.2% growth, hitting an all-time record of over 210 million

barrels of beer.

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Projected Outlook:

Looking at the trend in the beer consumption in US for last 3-year, we

note that the consumption level has been almost flat.

Thus, assuming a recessionary environment in 2007 wherein the

consumption of the beer is expected to decrease, we expect that their

domestic sales would decrease from their current levels.

However, the company has well diversified investments in foreign

breweries and establishments. Given that the international sales accounted

for 32% of their net income as reported in 2006, the impact of recession

would be cushioned. In our opinion, the company might experience flat

sales growth or even slight decline in overall sales for 2007.


10

Projected Variables:

Sales:

From our discussion above, we are of the opinion that the company will

experience a decline in the net sales of beer of about 1% in 2007.

However, in the following year, although the economy is expected to

recover in the second half, we expect the sales to increase by only 2%.

This growth is held back because of the advent of a new competitor and

post-recessionary economic conditions.

After a slack period of these two years, we expect the company to recover

quickly and overcome the competition given its dominating presence and

brand name.

Our projection is that in 2009 the company’s net sales will grow by about

5%.

Gross Margin:

After analyzing various factors affecting the production cost of the beer,

we have a reason to believe that the cost of packaging materials, energy

costs, aluminum costs and plant operating costs are on an upward trend.

Thus, in the future we expect a declining gross margin.

It would be reasonable to anticipate the decline in the gross margin to be

1% for 2007. Additionally, the higher incremental expenses and increase

in the beer ingredient costs would be reflected through the decline of 1.5

% in gross margin of 2008 and 2009.

Marketing, distribution and administrative expenses:

We expect the MD&A expense to follow the current trend (i.e. moving

average of last three years).

Interest Expense:

Given that the company works on a working capital deficit basis and its

not likely to change its policy within the next couple of years, the interest

expense would go up by about 3%.

Given that the company will have higher average usage of the revolving

credit facility during 2008 and 2009 to fund the increased beer ingredient

cost, the interest expense is expected to grow at a rate of 4%.

Income Statement Forecast for selected variables


Sales Growth -1.00% 2.00% 5.00%

Gross Margin -1.00% -1.50% -1.50%

MD& A expense* -18.41% -18.44% -18.29%

Interest expense* -2.99% -3.05% -3.02% * Expressed as percentage of Net Sales


11

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tthhee mmaannaaggeemmeenntt ccaassee aanndd tthhee iinnddeeppeennddeenntt aannaallyysstt ccaassee..


Year Ended December 31 (in millions, except per share) 2007 2008 2009

Net sales 15,559.93 15,871.13 16,664.68

Cost of sales 10,218.95 10,661.40 11,444.44

Gross profit 5,340.98 5,209.73 5,220.25

Marketing, distribution and administrative expenses (2,865.31) (2,926.01) (3,048.11)

Restructuring Expense (8.50) (13.00) (17.00)

Operating income 2,752.30 2,887.11 3,023.10

Interest expense (464.84) (483.43) (502.77)

Other income/(expense), net (15.00) 24.00 14.00

Income before income taxes 1,987.33 1,811.29 1,666.37

Provision for income taxes (745.25) (679.23) (624.89)

Equity income, net of tax 597.63 606.60 615.70

Net income 1,839.71 1,738.65 1,657.18

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ooff tthhee mmaannaaggeemmeenntt ccaassee aanndd tthhee iinnddeeppeennddeenntt aannaallyysstt ccaassee..

Statement of Free Cash Flows


EBITDA $3,474.09 $3,346.47 $3,250.86

- Maintainence CapEx ($295.75) ($323.75) ($367.50)

- Dividends ($73.59) ($69.55) ($66.29)

Free cash flow $3,104.75 $2,953.18 $2,817.07


12

EE.. RRaattiioonnaallee ffoorr SSeelleeccttiioonn ooff VVaarriiaabblleess aanndd FFiinnaanncciiaall PPeerrffoorrmmaannccee TTrreennddss

The variables selected here capture the entire financial performance of the

company. With percentage change in net sales we are trying to gauge the

top-line growth of the company. But the overall profitability depends on

the company’s performance in cutting the cost of production as well. This

is indicated by the gross margin forecast.

In the beer industry it is clear that advertising costs constitute a major

portion of their operating costs. Also distribution expense is considerably

high. This part is indicated by the MD&A expense. The effects of the

organic growth and increases in the expenses on the capital structure of the

company are indicated by the change in the interest expense. Higher the

debt more is the interest expense.

Thus using these variables we are able to capture the performance of the

company on the front end of the business with sales and marketing costs

and cost of sales and also, we are able to predict the effects on the back-

end i.e. the way they can finance this growth as indicated by the interest

expense.

In our analysis, we expect that the sales of the company are likely to

decline due to a recessionary domestic market. However, effective cost

management may help the company in keeping its production costs under

control. Also, with more competition in the domestic markets and newly

entered international markets, the cost of marketing is likely to go up

initially. But later on, it is expected top be inline with the current trend.

As in the past, we expect the company to finance higher costs of

production with debt which would increase the interest expense

considerably.


13

VI. Adjusted Financial Analysis (Non GAAP)

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Year Ended December 31 (in millions, except per share)

2006 Adjustments Adjusted 2005 Adjustments Adjusted

Gross sales 17,957.80 0.00 17,957.80 17,253.50 17,253.50

Excise taxes (2,240.70) 0.00 (2,240.70) (2,217.80) (2,217.80)

Net sales 15,717.10 727.00 16,444.10 15,035.70 710.20 15,745.90

Cost of sales (10,165.00) 44.00 (10,121.00) (9,606.30) 45.00 (9,561.30)

Gross profit 5,552.10 771.00 6,323.10 5,429.40 755.20 6,184.60

Depreciation Expense 0.00 (26.16) (26.16) 0.00 (20.41) (20.41)

Marketing, distribution (2,832.50) (401.20) (3,233.70) (2,837.50) (439.20) (3,276.70)

and administrative expenses

Operating income 2,719.60 343.64 3,063.24 2,486.90 295.59 2,887.49

Interest expense (451.30) (34.34) (485.64) (454.50) (32.96) (487.46)

Interest capitalized 17.60 (17.60) 0.00 19.90 (19.90) 0.00

Interest income 1.80 1.80 2.40 2.40

Net effective gains/(losses) 0.00 (51.70) (51.70) 0.00 6.50 6.50

from derivative instruments

Litigation settlement 0.00 (105.00) 105.00 0.00

Other income/(expense), net (10.80) (274.10) (284.90) 2.70 (277.50) (274.80) Income before income taxes 2,276.90 (34.10) 2,242.80 2,057.40 76.73 2,134.13

Provision for income taxes (900.50) 46.66 (853.84) (811.10) 39.57 (771.53)

Equity income, net of tax 588.80 588.80 498.10 498.10

Net income 1,965.20 12.56 1,977.76 1,744.40 116.31 1,860.71

Basic earnings per share 2.55 2.57 2.24 2.41

Diluted earnings per share 2.53 2.55 2.23 2.40


14

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Following are the adjustments made based on the information given in the

footnotes and the Management Discussion and Analysis (MD&A):

1. From the footnotes we find that the company has included the cost of delivery

of their products in the Marketing, distribution and administrative expense.

Since delivery of these products is not the main business of the company, we

are of the opinion that these expenses, although recurring, should be treated as

non-operating. Thus, they have been removed from the MD&A expense and

added to the other non-operating expense. (Reference - footnote 1. page 47,

Delivery costs)

Costs incurred in fiscal year 2006 and 2005 are $274.1 million, $277.5 million

respectively.

Adjustment: Removed from MD&A expense.

Added to other non-operating expense.

2. Company deducts the cost of sales promotion from the net sales as given in

the footnotes. We think that it would be more appropriate if we include these

costs in the MD&A expense as other costs like advertising costs. (Reference -

footnote 1. page 48, Advertizing and promotional costs)

Costs incurred in fiscal year 2006 and 2005 are $675.3 million, $716.7 million

respectively.

Adjustment: Removed from net sales.

Added to MD&A expense.

3. Company has capitalized the interest as required by the US GAAP. But for the

purpose of analysis we treat it as an expense and add it back to the interest

expense. (Reference - page31. Interest Capitalized)

Interest Capitalized in fiscal year 2006 and 2005, are $17.6 million and $19.9

million respectively.

Adjustment: Removed as a separate line item.

Added back to the interest expense.

4. Litigation expense was a one time charge and it is certainly not related to

operations of their business. Thus, it is treated as a non-operating expense.

(Reference - the income statement)

Adjustment: Removed from the operating expense.

Added as a separate line item to the non-operating expense.


15

5. Net sales have been reported including net of effective gains (losses) from the

hedging activity. In order to get a better picture of the net sales of the

company we have treated the hedging gain(loss) as a separate line item. These

hedging gains (loss) are non-recurring in a sense that they may or may not be

similar and are too uncertain to predict next year. (Reference - page 52.

Derivative and other financial instruments)

Net effective gains (loss) for the fiscal year of 2006 and 2005 are $(51.7)

million and $ 6.5 million respectively.

Adjustment: Removed from net sales.

Added as a separate line item in the non-operating gains (losses).

6. Company has several operating leases which we have capitalized. (Reference

- page 36. Management Discussion and Analysis)

Adjustment:

Based on certain assumptions, we calculate the interest expense and the

depreciation expense for the year 2006 and 2005 *.

We remove the rent expense from the cost of sales.

Add back the interest part of the payment to the interest expense and the

depreciation of the capital lease is added as a separate line item in the

operating expenses.

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Return on Equity for 2006 = 0.4989

Return on Assets for 2006 = 0.1200

The return on equity and return on assets (GAAP)

Return on Equity for 2006 = 0.5021

Return on Assets for 2006 = 0.1208

The difference between the GAAP and Non GAAP ROE and ROA is very small.


16

VII. Appendix – Calculation Details

I.A] Z = 1.2 x Working Capital / Total Assets

+ 1.4 x Retained Earnings / Total Assets

+ 3.3 EBIT / Total Assets

+ 0.6 x Market Value of Equity / Book Value of Debt

+ 1.0 x Sales / Total Assets

Z-Score Calculations

Z-score components 2006 2005

Short term Assets $1,829.50 $1,758.70

+ Short term Liabilities $2,246.10 $1,982.60

Working Capital $4,075.60 $3,741.30

Total Assets $16,377.20 $16,555.00

Net Sales $15,717.10 $15,035.70

Retained Earnings $16,741.00 $15,698.00

Closing Price on Dec. 31st (per share) $49.20 $42.96

x Weighted avg shares outstanding $777.50 $798.90

Market Value of Equity $38,253.00 $34,320.74

Book Value of Debt $7,653.50 $7,972.10

Operating Income $2,719.60 $2,486.90

+ Non-operating income(expense) ($10.80) $2.70

EBIT $2,708.80 $2,594.60

* All dollar amounts in the above table are in millions of dollars except per share values

III.A] ROE Calculations

ROE Components 2006 2005

Net Sales $15,717.10 $15,035.70

Net Income $1,965.20 $1,744.40

Average Total Asset $16,466.10 $16,364.20

Average Common Equity $3,809.25 $3,328.85

* All dollar amounts in the above table are in millions of dollars


17

III.B]

Liquidity Ratio Calculations

Ratios 2006 2005

Current Assets $1,829.50 $1,758.70

÷ Current Liabilities $2,246.10 $1,982.60

Current Ratio 0.81 0.89

Cash $219.20 $225.80

+ Marketable securities $195.20 $197.00

+ Accounts receivable $720.20 $681.40


Quick Ratio 0.51 0.56

Cash $219.20 $225.80

+ Marketable securities $195.20 $197.00


Cash Ratio 0.18 0.21

Cash flow from operations $2709.4 $2701.9


Cash flow from operations Ratio 1.21 1.36

* All dollar amounts in the above table are in millions of dollars except per share values

III.C]

Capital Structure Calculations


Total Debt $7,653.50 $7,972.10

Total Shareholder's equity $3,938.70 $3,679.80

+ Total Debt $7,653.50 $7,972.10

Total Capital $11,592.20 $11,651.90 * All dollar amounts in the above table are in millions of dollars


18

Enterprise Value Calculations

Components 2006

Common stock price per share $49.20

x No. of shares outstanding 777.5

Market Capital $38,253.00

+ Fair value of all stock options* $1,170.00

Common Equity at equity value $39,423.00

Total Debt $7,653.50

÷ Market value of Debt $102.00

Total Debt at market value $7,806.57

Minority Interest at market value -

Associated company at market value -

Preferred Equity at market value -

Cash and Cash Equivalents ($219.20)

Enterprise Value $47,010.37 *All stock options (in the money and out of the money) calculated using Black-Scholes Option Pricing Formula with the data given in the footnotes.

Enterprise Value = common equity at value

+ debt at market value

+ minority interest at market value, if any

- associate company at market value

+ preferred equity at market value

- cash and cash equivalents

III.D]

Depreciation Ratio Calculations

Components 2006

Ending investment $18,710.60

÷ Depreciation Expense $988.70

Average total life span 18.9244462

Accumulated depriciation ($9,794.50)

÷ Depreciation Expense $988.70

Average Age 9.9064428

Accumulated depriciation ($9,794.50)

÷ Ending investment $18,710.60

Relative age 52.347% * All dollar amounts in the above table are in millions of dollars


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IV. B]

Calculations of EBIT , EBITDA and CapEx


Operating Income $2,752.30 $2,887.11 $3,023.10

+ Non-operating items ($15.00) $24.00 $14.00

EBIT $2,737.30 $2,911.11 $3,037.10

+ Restructuring Expenses $8.50 $13.00 $17.00 + Depreciation and amortization $1,013.42 $1,038.75 $1,064.72

EBITDA $3,759.22 $3,962.87 $4,118.82

Total Capital Expenditure $845.00 $925.00 $1,050.00

x 0.35

Maintainance CapEx 295.75 323.75 367.50 * All dollar amounts in the above table are in millions of dollars

IV. C]

Calculations for Fixed Charges


Interest Expense $461.23 $471.38 $481.75

+ Maintainence CapEx $295.75 $323.75 $367.50

+ Dividends $80.81 $85.26 $88.51

+ Principal debt repayments $24.60 $19.50 $21.80

+ Operating lease rent expense $17.50 $13.30 $15.60

Fixed Charge $879.89 $913.18 $975.16 * All dollar amounts in the above table are in millions of dollars

EBITDAR Calculation


EBITDA $3,759.22 $3,962.87 $4,118.82 + Operating lease rent expense $17.50 $13.30 $15.60

EBITDAR $3,776.72 $3,976.17 $4,134.42

*EBITDAR Earnings before interest, taxes, depreciation, amortization and rent expense.

Calculations for Fixed Charge Coverage


EBITDAR $3,776.72 $3,976.17 $4,134.42

÷ Fixed Charge $879.89 $913.18 $975.16

Fixed Charge Coverage Ratio 4.29 4.35 4.24 * All dollar amounts in the above table are in millions of dollars


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V. C]

Calculations of EBIT , EBITDA and CapEx


Operating Income $2,467.17 $2,270.72 $2,155.14

+/- Non-operating items ($15.00) $24.00 $14.00

EBIT $2,452.17 $2,294.72 $2,169.14

Depreciation and amortization $1,013.42 $1,038.75 $1,064.72

Restructuring Charges $8.50 $13.00 $17.00

EBITDA $3,474.09 $3,346.47 $3,250.86

Total Capital Expenditure $845.00 $925.00 $1,050.00

x 0.35

Maintainance CapEx $295.75 $323.75 $367.50 * All dollar amounts in the above table are in millions of dollars

VI. A] Calculations for capitalization of operating leases

Present Value

2006

Years Payment Discount Present

(adjusted) Factor Value

1 $44.00 0.92593 $40.74

2 $29.50 0.85734 $25.29

3 $29.50 0.79383 $23.42

4 $21.50 0.73503 $15.80

5 $21.50 0.68058 $14.63

6 $90.33 0.63017 $56.93

7 $90.33 0.58349 $52.71

8 $90.33 0.54027 $48.80

Total $417.00 $176.81

Using the payment function in Excel, we calculate the average annual payment for the

lease to be -$30.77 million.


21

Calculating the interest payments

Years Opening Liability Interest Principal Ending Liability

0 $176.81

1 $176.81 $14.14 $16.62 $160.19

2 $160.19 $12.82 $17.95 $142.24

3 $142.24 $11.38 $19.39 $122.85

4 $122.85 $9.83 $20.94 $101.91

5 $101.91 $8.15 $22.62 $79.29

6 $79.29 $6.34 $24.42 $54.87

7 $54.87 $4.39 $26.38 $28.49

8 $28.49 $2.28 $28.49 $0.00

Operating Lease to Capital Lease

Operating

Depreciations Interest Total Expense Total Expense

Rent

$44.00 $22.10 $14.14 $36.25

$59.00 $44.20 $12.82 $57.02

$43.00 $44.20 $11.38 $55.58

$271.00 $88.41 $9.83 $98.23 * Assuming no salvage value

2005

Years Payment Discount Present

(adjusted) Factor Value

1 $45.00 0.92593 $41.67

2 $30.50 0.85734 $26.15

3 $30.50 0.79383 $24.21

4 $24.50 0.73503 $18.01

5 $24.50 0.68058 $16.67

6 $131.00 0.63017 $82.55

7 $131.00 0.58349 $76.44

8 $131.00 0.54027 $70.78

Total $548.00 $209.26

Using the payment function in Excel, we calculate the average annual payment for the

lease to be -$36.41 million.


22

Calculating the interest payments

Years Opening Liability Interest Principal

Ending Liability

0 $209.26

1 $209.26 $16.74 $14.03 $195.24

2 $195.24 $15.62 $15.15 $180.09

3 $180.09 $14.41 $16.36 $163.73

4 $163.73 $13.10 $17.67 $146.06

5 $146.06 $11.68 $19.08 $126.97

6 $126.97 $10.16 $20.61 $106.36

7 $106.36 $8.51 $22.26 $84.10

8 $84.10 $6.73 $24.04 $60.06

Operating Lease to Capital Lease

Operating

Depreciations Interest Total Expense Total Expense

Rent

$44.00 $22.10 $16.74 $38.84

$59.00 $44.20 $15.62 $59.82

$43.00 $44.20 $14.41 $58.61

$271.00 $88.41 $13.10 $101.50 * Assuming no salvage value

The point of these calculations is to get the interest and depreciation value of the capital

lease which would affect the income statement based on our assumptions.

VI. C]

Calculations for ROE and ROA

Components Non GAAP GAAP

Net Income $1,965.20 $1,977.76

÷ Total Equity $3,938.70 $3,938.70

Return on Equity 0.4989 0.5021

Net Income $1,965.20 $1,977.76

÷ Total Assets $16,377.20 $16,377.20

Return on Assets 0.1200 0.1208


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VIII. REFERENCES

Cover page:

http://www.psfk.com/wp-content/uploads/s19031.gridserver.com/wp-

content/uploads/psfk.com/anheuser_busch_beer.jpg

http://rimkus.com/images/Business-Interruption.jpg

Anheuser-Busch logo:

http://www.fuhrerwholesale.com/images/AB3%20copy.gif

Stuart School of Business logo:

www.stuart.iit.edu

Other Web References:

http://thegazz.com/gblogs/beerstoyou/files/2007/08/beer-growth.jpg

http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf

http://www.beerservesamerica.com/economic/index.phtml

Text Reference:

1) White, Sondhi, Fried – The Analysis and Use of Financial Statements, 3rd

edition

2) Needles et al. – Principles of Accounting, 7th edition

http://www.psfk.com/wp-content/uploads/s19031.gridserver.com/wp-content/uploads/psfk.com/anheuser_busch_beer.jpg

http://www.psfk.com/wp-content/uploads/s19031.gridserver.com/wp-content/uploads/psfk.com/anheuser_busch_beer.jpg

http://rimkus.com/images/Business-Interruption.jpg

http://www.fuhrerwholesale.com/images/AB3%20copy.gif

http://www.stuart.iit.edu/

http://thegazz.com/gblogs/beerstoyou/files/2007/08/beer-growth.jpg

http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf

http://www.beerservesamerica.com/economic/index.phtml

equity valuation - anheuser busch

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