Calaveras Vineyards 1.

Executive Summary As a smaller producer in the California wine industry, Calaveras Vineyards is somewhat complicated to compare to other, larger, producers. In analyzing the company we estimated the value of the company to be $9.972 million dollars. Its growth rate of 6.67% is considerably smaller than that of identified competitors. The liquidation value of the company is estimated at $18.277 million dollars; almost double that of its estimated value. Many of the values of the company are greatly influenced by the market to book ratio of its equity. Although the book value of equity is listed at $1 million, the market value is thought to be much higher, at $2.62 million. This estimate is greatly influenced by the market to book ratio of equity of competitors. 2. Information Sources No outside information was used in this analysis. All information was obtained from within company data including information on the competition, industry, and financial market. 3. Business description Calaveras Vineyards occupied 80% of a total 200 acres in Alameda Valley, California. Calaveras Vineyards was founded in 1883 by Esteban Calaveras whose family continued to own the vineyard until the 1970s. The winery and the vineyard provided table wines for sale to retailers and restaurants. Dramatic growth in demand for California wines and the entry of large corporations in the production of California wines has resulted in the constant changes in ownership and marketing of the Calaveras Vineyards since 1986. In spite of the many changes in marketing and ownership, Calaveras has improved on its brand image and market position so the owners aimed at the premium brand segment of the market. As Calaveras executed its strategy of introducing premium wines with higher average prices, sales increased from $2.4 million in 1990 to $2.8 million in 1991 and 1992. However sales dropped to $2.5 million in 1993 due in part to their lack of representation by a sales organization. Most recently, Stout PLC, a british conglomerate, acquired Calaveras Vineyards in purchase of a portfolio of vineyards from another conglomerate. Stout decided to sell Calaveras to focus on large, well-known wine and spirits brands. 4. Industry The wine industry was to segment demand by price, ranging from Low Price, Economy, Popular, Premium, and Ultra Premium. Competition in the super premium and premium wine segments was fragmented. Through the 1960s and 1970s, demand for California wines grew and the entry of large corporations in the production of California wines increased with this growth. However, starting from the 1990s, nationwide demand for alcoholic beverages stagnated, and unit sales of spirits declined. However, wine sales in supermarkets had grown 7.4% in part because the operators increased in their selections of quality wines with higher price points. In recent years, domestic sales of table wines were fueled by premium California varietals. American consumers have increasingly been moving away from the generic wines popular in the 1970s to the higher quality varietal wines. 5. Financial Statements 6.1. Income Statement The Calaveras case provides following five years forecasts of incomes and expenditures. Depending on the table below as correct data, we used EBIT to calculate the companys free

cash flow in the Report. 6.2. Balance Sheet In addition, the Calaveras case gives forecasted balance sheets, which states depreciations and working capitals from 1994 to 1998. Based on different working capitals over years, we gain changeable working capital which should be absent as one part of the free cash flow. Combined those factors free cash flow requires, we gain it in the Report. 6. Business Valuation Approaches and Methods 7.3. Discounted Cash Flow To calculate the value of the company, we started by calculating the weighted average cost of capital. This is the discount rate which we will use to value the company. We first analyzed the debt of the company. We calculated the debt as long term debt plus the current portion of long term debt payments due on long term debt during the fiscal year. We did this especially because the valuation is taking place early in the fiscal year and therefore the data may be skewed if the debt valued fails to include upcoming payments. The book value of equity was straightforward but, the market value has to be used in order to provide an accurate debt to equity ratio. Although the amount of debt did not reflect market value, its proportion in relation to market equity reflected the appropriate valuation. This method was also useful as using the actual amount of debt allowed an accurate representation of the cost of debt by using the rate which the bank was offering on new financing and its rate stated 25 basis points lower than existing financing, therefore depicting a reasonable estimation. The cost of equity reflects the risk free rate plus beta. The risk free rate is the rate of return an investor could expect from a safe investment. We increase this by beta as it is the representation of risk and volatility relative to that of the market. Beta, in this case is the average of unlevered beta of the comparables relevered to reflect the debt to equity effect of Calaveras. We calculated free cash flow to represent the true profit of the company using historical trends. This includes estimation of the growth rate of the company which is used in determining the future cash flow as well. This figure is then discounted to represent what it is worth at the present time. Terminal value shows the profit which is expected for the foreseeable future. This figure is discounted based on the weighted average cost of capital. By combining the discounted free cash flow and the discounted terminal value we can estimate the overall value for the company. 7.4. Liquidation Value The liquidation value is calculated by first comparing the multiples. By analyzing the weight of specific values relative to the net worth of the average company in the industry, we are able to see what the values as multiples of overall worth represent. None of the multiple values were extremely similar in weight for the industry average vs. that of Calaveras. We used the average multiple of the competition compared to that of Calaveras Vineyards to calculate its liquidation value. As industry averages are a reasonable estimation of true value, the average of the multiple values should communicate a market price.