Tetley brand valuation spreadsheets Solution 2024 25 1 DCF method

Brand valuation using the DCF method

Case data 1 2 3 4 5 6 7 8 9 10
Assumed Year 1999 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Calculated
Sales 323,198 332,894 342,881 353,167 363,762 374,675 385,915 397,493 409,418 421,700 434,351
Operating earnings 24,991 34,926 35,974 37,053 38,165 39,310 40,489 41,703 42,955 44,243 45,570

Sales Growth 3%
Average sales/operating earnings of past 3 years 9.53

Tangible capital employed 61,337 51,404 52,946 54,534 56,170 57,856 59,591 61,379 63,220 65,117 67,070
Average sales/tangible capital of past 3 years 6.5
Tangible capital rate of return 7%
Charge for capital 4,294 3,598 3,706 3,817 3,932 4,050 4,171 4,297 4,425 4,558 4,695

Intangible earnings 20,697 31,328 32,268 33,236 34,233 35,260 36,317 37,407 38,529 39,685 40,876
Brand contribution index 80%
Brand earnings 16,558 25,062 25,814 26,588 27,386 28,208 29,054 29,926 30,823 31,748 32,700

Tax paid 7,497 10,478 10,792 11,116 11,449 11,793 12,147 12,511 12,886 13,273 13,671
Post-tax brand earnings 9,061 14,584 15,022 15,473 15,937 16,415 16,907 17,415 17,937 18,475 19,029

Discount factor 1.09 1.19 1.30 1.41 1.54 1.68 1.83 1.99 2.17 2.37
Discounted cash-flow 9,061 13,380 12,644 11,948 11,290 10,669 10,081 9,526 9,002 8,506 8,038

Perpetuity
value from
NPV to year 10 114,145 50% Perpetuity from year 10 on 296,313 277,284 year 11 on
NPV of
perpetuity
NPV of Perpetuity Value 114,831 50% Discount rate 9% 107,457 value
Brand value (£'000) 228,976 Growth rate at perpetuity 2% 221,602 Brand value
Time horizon (years) infinite

Assumptions
Net Sales are expressed in constant year 0 money. Sales grow by 3% for 10 years and then grow at GDP growth rate (2% to 5%).
Ratios Sales:Operating earnings and sales:tangible capital are average of past 3 years and stay constant
Tangible capital employed includes fixed and working capital at current value = here assumed to be total assets
Tangible capital charge is the (opportunity) rate of return that would be achieved on tangible assets
For consumer packaged good, risk premium = 2%, risk-free rate = 5%, return on tangible assets = 7%
Brand contribution index is 80% (Beer is at 85%)
UK Corporation tax is 30%.
To compute perpetuity, see that Brand value = (post-tax brand earnings)*[(1+sales growth)/(1+discount rate)]^t
Using the formula on the sum to infinity of a geometric series with annual growth = (1+sales growth/1+discount rate),
Perpetuity = (year 10 post-tax earnings)*(1+discount rate)/(discount rate - growth rate)
Discount rate = risk free rate (5%) + brand premium (.5% minimum, 7% average, 4% here because Tetley has low volatility)