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Adjusting Enterprise Operations

Adjusting Enterprise Operations. Module 11. Wendy’s Overview. One of the largest quick-service restaurants in the hamburger sandwich segment Operates 6,542 restaurants in 26 countries 1,418 company owned restaurants 5,124 franchises Delicious food. Mod Background.

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Adjusting Enterprise Operations

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  1. Adjusting Enterprise Operations Module 11

  2. Wendy’s Overview • One of the largest quick-service restaurants in the hamburger sandwich segment • Operates 6,542 restaurants in 26 countries • 1,418 company owned restaurants • 5,124 franchises • Delicious food

  3. Mod Background • Adjust for better comparability between years or between companies • Inventory • Operating leases • Share-based compensation

  4. Inventory Adjustment • Inventory should be adjusted to reflect FIFO values when possible • Wendy’s 10-K does not specify an inventory method • Inventory adjustment will be exempted from valuation process • Will minimally impact forecast for two reasons:

  5. Reason #1 • Wendy’s advertises its “Fresh never frozen” food • Indicates [food] inventory cannot be held for more than a short period • Numbers support this • Days sales inventory is ~ 2.4 days • Difference between LIFO and FIFO inventory values should be minimal

  6. Reason #2 • Inventory value is negligible relative to NEA • Inventory represents 0.36% of NEA • 2013 inventory value: $10m • 2013 NEA: $2.8b

  7. Operating Leases • Operating leases are a form of off-balance-sheet financing • These operating leases can be allocated to NEA, EPAT, and FEAT to enable greater forecasting accuracy

  8. Operating Leases • Step One: Determine the discount rate • Implied interest rate (derived from capital leases) • Two adjustments must be made from the capital lease obligations stated in the 10-K: • Annualize the obligations through 2018 • Annualize the obligations after 2018

  9. Annualized Obligations Through 2018 • Obligations are grouped in two-year portions (2015-2016 & 2017-2018) • No clear trend in capital lease obligations • Evenly split two-year obligations into each associated year

  10. Annualized Obligations After 2018 • Standard approach is to assume annual lease obligations after 2018 are equal to 2018 obligation • Implies ~13 additional years of obligations • 10-K specifies annual lease obligations after 2018 run through 2042 • Implies 24 additional years of obligations • My Approach • Compute implied discount rate under each scenario and take the average

  11. Discount Rate • 9.08% • Average captures two relevant items • Obligations are likely greater in earlier years beyond 2018 • Obligations exist through 2042

  12. Operating Leases • Step Two: Compute the present value of future operating lease payments • Obligations are grouped in two-year portions (2015-2016 & 2017-2018) • No clear trend in operating lease obligations • Evenly split two-year obligations into each associated year

  13. Present Value of Operating Leases • $531.2m

  14. Operating Leases • Step Three: Adjust the Balance Sheet • NEA increases by $531.2m to include the additional enterprise asset (PP&E) • Financing liabilities increase by $531.2m • Current: $21.67m • 2014 payment less interest estimate • 69.9m – (531.2m * 9.08%) = 21.67m • Noncurrent: $509.53m • 531.2 - 21.67

  15. Operating Leases • Step Four: Adjust EPAT and FEAT • Remove rent expense from operating expense and add depreciation expense • [69.9m – (1,042.2m ÷ 17.94yrs)] × (1 - .37) = 7.44m • Positive $7.44m adjustment to EPAT • Add interest expense as a financing expense • [531.2m × .0908] × (1 - .37) = 30.39m • Positive $30.39m adjustment to FEAT

  16. Shared-Based Comp Overview • Changes in the value of the stock options between the grant date and exercise date are not included in financial statements • Measuring the liability in this interim period allows for better forecasting

  17. Share-Based Compensation • Step One: Compute the value of options outstanding at BOY using BOY share price

  18. Share-Based Compensation • Step Two: Compute value of options outstanding at BOY using EOY share price

  19. Share-Based Compensation • Step Three: Estimate the value of ESOs exercised during current year using average share price

  20. Share-Based Compensation • Step Four: Estimate the value of ESOs cancelled during the current year using the average share price

  21. Share-Based Compensation • Step Five: Compute value of options outstanding at EOY using EOY share price

  22. Share-Based Compensation • Step Six: Compute estimate of additional share based compensation

  23. Share-Based Compensation • Step Seven: Adjust NFL, CSE, EPAT, and FEAT using computed information • Increase NFL by $43.94m [5] • Decrease CSE by same amount • Value of options outstanding at EOY using EOY share price • Increase EPAT by $21.98m • Share based compensation decreased • Increase FEAT by $104.47m

  24. End

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