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Module 6: cost of capital & Valuation Company: chipotle

Module 6: cost of capital & Valuation Company: chipotle. Matt Ramirez. Chipotle background. Mexican grill that focuses on serving quality food while maintaining speed and efficiency Found in 1993 by Steve Ells in Denver, Colorado

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Module 6: cost of capital & Valuation Company: chipotle

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  1. Module 6: cost of capital & ValuationCompany: chipotle Matt Ramirez

  2. Chipotle background • Mexican grill that focuses on serving quality food while maintaining speed and efficiency • Found in 1993 by Steve Ells in Denver, Colorado • Considered a “fast-casual” restaurant: food that is served fast without the “fast food” methods or ambiance, allows customers to eat “on the go” or in a nicer restaurant environment • Not franchised, centrally-owned

  3. Cost of capital

  4. Risk elements Sources of Risk

  5. Risk elements • Risk of Equity: driven by inherent riskiness of enterprise (management, market, etc.) and cost of debt (debt holders have first claim on FCFs) • Enterprise Capital: estimated as a weighted average of estimated cost of debt and estimated cost of equity capital • rent= (rd x Vd/Vent) + (req x Veq/Vent)

  6. Beta estimation

  7. Regression analysis (previous 60 months) rEqt – rrft = α + β(rMkt – rrft) + et

  8. Regression interpretation • α: relatively large (estimates around 3% excess return in addition to CAPM calculation) but unstable (large range), meaning it could be null or have an even larger effect • β: large (greater than most analyst estimates), unstable (large range) meaning change in market could have even smaller effect than expected or be much more significant • Standard errors: Large gaps- 95% of confidence for α is between .007 and .059 and for β between .44 and 1.3 • Overall: not confident with results

  9. Financial site Beta estimates • Google Finance .60 • NASDAQ .70 • MSN Money .60 • Reuters .82 • Yahoo! Finance .85 • NYSE .82 • Firstrade .85 • E-Trade .80 • Comcast Finance .82 • Zacks .60 • AVERAGE= .746

  10. Bloomberg beta estimate (raw beta chosen)

  11. Cost of equity

  12. Capital Asset pricing model (capm) • req = rrf + β(rmkt – rrf) • req = cost of equity capital • rrf = risk-free rate of return (30-year Treasury Bill) • rmkt = expected market return • β = beta coefficient • rmkt – rrf = market risk premium

  13. Capm values • rrf = 3.69% (from treasury.gov) • rmkt = 8.69% • β = .58 (Bloomberg raw beta) • rmkt – rrf = 5% (estimate)

  14. Cost of equity (capm) calculation

  15. Cost of debt

  16. Method 1: rnfl • RNFL= FEAT/avg(NFL)

  17. Method 2: borrowing rate • Cost of Debt= pretax borrowing rate x (1 – tax rate)

  18. Cost of debt comments • RNFL used: relatively steady values (around 0) throughout the years, small (as expected) • Borrowing rate: difficult to calculate for Chipotle (virtually no debt), -61%? (not comfortable using this value)

  19. Cost of enterprise capital/wacc

  20. Wacc calculation • rent= (rd x Vd/Vent) + (req x Veq/Vent)

  21. Bloomberg’s wacc

  22. Dcf’s with new wacc

  23. Dcf: calculated wacc

  24. Dcf: bloomberg’swacc

  25. Final thoughts • Calculated DCF provides a much closer result to enterprise value than original • Debt must be analyzed further: seemingly no debt within Chipotle’s financials • Difference between calculated DCF and Bloomberg’s (roughly 1 ½ %)- what is attributed to this?

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