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Week 6 Case Study – American Greeting

Han Chen

Wilmington University
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Week 6 Case Study – American Greeting

Valuation refers to the process of determining the present value of a company, investment

or an asset. Analysts who want to place a value on an asset normally look at the prospective

future earning potential of that company or asset (Schmidt, n.d.).

The basic framework for business valuation concludes the steps. Analyze the business

model, financial structure, growth potential, market position, industry trends, competitive

landscape, and legal environment. Gather financial data (e.g., balance sheets, income statements,

cash flow statements), economic data, and relevant market or industry data. Select one or

multiple valuation approaches depending on the business's nature, the available information, and

industry standards. Apply the chosen method(s) to derive an estimate of the business's value.

Adjust the value for factors such as control premiums, minority discounts, liquidity, and risk

specific to the business.

Book value is a company's equity value as reported in its financial statements. The book

value figure is typically viewed in relation to the company's stock value (market capitalization)

and is determined by taking the total value of a company's assets and subtracting any of the

liabilities the company still owes. Book value is considered important in terms of valuation
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because it represents a fair and accurate picture of a company’s worth. The figure is determined

using historical company data and isn’t typically a subjective figure. It means that investors and

market analysts get a reasonable idea of the company’s worth. The formula of this approach is

very simple, which is the total assets subtracted by total liabilities. The Book Value Approach

works best for asset-heavy businesses but may not capture the full economic value of a company

in industries driven by intellectual property or intangible assets.

Market value of traded securities approach in business valuation is a valuation method

used to determine the appraisal value of a business, intangible asset, business ownership interest,

or security by considering the market prices of comparable assets or businesses that have been

sold recently or those that are still available. To calculate the market value of traded securities,

just simply multiply stock price with shares outstanding. This method reflects real-time investor

sentiment about the company. It is straightforward for publicly traded firms but limited for

private businesses that don't have easily accessible market data. However, it is difficult to apply

to private companies or illiquid stocks and may not capture intrinsic value when market prices

are over- or undervalued.

Market multiple valuation method involves comparing the business to similar firms

within the industry and applying relevant valuation multiples (such as price-to-earnings or price-

to-sales ratios) to key financial metrics like revenue, earnings, or cash flow. The most common

multiples are P/E ratio and enterprise value to EBITDA. A multiple summarizes in a single

number the relationship between the market value of a company’s stock (or of its total capital)

and some fundamental quantity, such as earnings, sales, or book value (owners’ equity based on

accounting values).
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Discounted cash flow (DCF) is a valuation method that estimates the value of an

investment using its expected future cash flows. Analysts use DCF to determine the value of an

investment today, based on projections of how much money that investment will generate in the

future (Fernando, 2024). In this method, we first forecast the company’s free cash flows over a

defined period. The estimate the business’s value beyond the forecast period. Use the company’s

weighted average cost of capital (WACC) or another appropriate rate to discount future cash

flows and the add up the present value of all forecasted cash flows and the terminal value to get

the business’s total value.

To develop a free cash flow forecast, it's essential to understand the company’s

operations, growth drivers, cost structure, competitive position, and industry trends. First of all,

we need to estimate the revenue. Then estimate the cost of goods sold (COGS), operating

expenses, and selling, general & administrative expenses (SG&A). Use the formula

“EBIT=Revenue−COGS−Operating Expenses” to calculate the earnings before interest and

taxes. Apply the effective tax rate to EBIT to calculate the after-tax operating income (NOPAT)

with this formula: NOPAT=EBIT×(1−Tax Rate). If there is depreciation and amortization, we

need to adjust the after-tax operation income with the following formula: EBITDA = EBIT +

Depreciation and Amortization. At last, subtract the capital expenditures (CapEx) with this

formula: Free Cash Flow=EBITDA−CapEx.

Terminal value (TV) is the estimated value of an asset, business, or project beyond the

forecast period. It's a key financial metric that's used to help predict future cash flows. Terminal

value is a financial concept used in discounted cash flow (DCF) analysis and depreciation to

account for the value of an asset at the end of its useful life or of a business that's past some

projection period. Most companies don't assume that they'll stop operations after a few years.
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They expect business to continue forever or at least for a very long time. Terminal value is an

attempt to anticipate a company's future value and apply it to present prices through discounting.

To determine terminal value, we use this formula: Terminal Value = FCF in Final Year *

(1+Terminal Growth Rate)/(r-g). Here r is discount rate and g is long-term growth rate.

The discount rate reflects the risk associated with a business's future cash flows and

represents the return an investor would require to invest in the business. The most common

discount rate used is the Weighted Average Cost of Capital (WACC), which accounts for both

the cost of equity and the cost of debt.

For early-stage company valuation, we need to use shorter-term projections (3–5 years)

rather than the traditional 5–10 years for more established businesses. Focus on the company’s

ability to survive the early growth phase and reach stability. Apply a higher discount rate to

account for the elevated risks associated with early-stage companies. Be conservative with the

terminal growth rate and consider using multiples (such as EV/Revenue or EV/EBITDA) that are

more appropriate for later-stage businesses when the company achieves stability.

Valuing late-stage companies requires adjustments to traditional valuation methods to

account for their more established financial track record, reduced risk, and closer proximity to a

liquidity event. Unlike the method for early-stage companies, it's common to use a 5 to 10-year

forecast period, as they often have better visibility into future performance. Their growth rates

will likely taper off during this time, transitioning from high growth to more stable, mature

growth. Late-stage companies often have reliable historical data to build more accurate Free

Cash Flow (FCF) forecasts. Late-stage companies face fewer risks than early-stage ones, so the

discount rate (WACC) should reflect this lower risk. The cost of equity will be lower due to

reduced uncertainty.
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The EBITDA multiple allows for comparisons across companies of different sizes or

capital structures within the same industry. A higher multiple typically suggests that the market

expects higher growth, profitability, or lower risk, while a lower multiple could indicate slower

growth, higher risk, or underperformance. Here is some example range of EBITDA multiples in

terms of industry types:

Technology (SaaS): 10x–20x

Healthcare: 7x–15x

Manufacturing: 5x–8x

Retail: 5x–10x

Telecommunications: 6x–10x

Energy and Utilities: 5x–7x

EBITDA has shown little to no growth in recent years. The company is undervalued

because the prospects and plans of American Greetings growth has been shifted into technology

and that the EBITDA multiple should be closer to 5x.

With the current 3.5 EBITDA multiple, and 204 million in EBITDA, the value of the

company is 204*3.5=714 million. With outstanding of 38.3 million shares, the stock price would

be 714/38.8 = 18.6 per share.

A pro forma table generated according to the figure in the case study for bullish and

bearish scenarios respectively.

bullish scenario
2011 2012 2013 2014 2015
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Growth rate 1.01 1.015 1.02 1.025

1719.17 1797.39
revenue 1677 1693.77 7 1753.56 9
Margin rate 0.09 0.09 0.09 0.09
operating 152.439 154.725 157.820 161.765
margin 3 9 4 9

bearish scenario
2011 2012 2013 2014 2015
Growth rate 1 1 1 1
revenue 1677 1677 1677 1677 1677
Margin rate 0.08 0.07 0.06 0.05
operating
margin 134.16 117.39 100.62 83.85

The implied enterprise value of American Greetings would be higher than the value given

in the case study. I would choose the EBIDA multiple 5 instead of 3.5, which indicates the value

of business would be 204 million *5 = 1020 million dollars. With 38.3 million of shares

outstanding, the stock price should be 1020/38.3 = 26.63 per share.

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Reference

Fernando, (2024). Discounted Cash Flow (DCF) Explained with Formula and Examples.

retrieved from Investopedia.

Schmidt, (n.d.). Valuation Overview, retrieved from:

https://corporatefinanceinstitute.com/resources/valuation/valuation/