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Module 7 – Valuation using the residual enterprise income valuation model

Module 7 – Valuation using the residual enterprise income valuation model. Wilbur Benitez February 17, 2014 . Cabela’s Overview. Was founded in 1961 and has been a leader in outdoor gear since Leading retailer in hunting, fishing and outdoor gear Went public in June 2004 Market Cap of 4.5B

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Module 7 – Valuation using the residual enterprise income valuation model

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  1. Module 7 – Valuation using the residual enterprise income valuation model Wilbur Benitez February 17, 2014

  2. Cabela’s Overview • Was founded in 1961 and has been a leader in outdoor gear since • Leading retailer in hunting, fishing and outdoor gear • Went public in June 2004 • Market Cap of 4.5B • Total revenues of 3.1M in 2012 • Two main segments • Merchandise sales and financial services • Currently seeking to expand with smaller stores • Traditionally has operated using large “Legacy” stores

  3. Current Expansion • Current retail segment consists of 48 stores • 2013: Seven next generation stores were opened • New stores are more productive and generate higher returns on invested capital • 12.5% increase in retail space (5.8 million square feet in 2013) • Future plans • 2014: fourteen next generation stores are scheduled to open • 2015: three next generation stores have been announced

  4. Industry Risk • Decline in discretionary consumer spending (non-essential goods) • Unseasonal weather conditions • Difficult economic conditions • Consumer spending, oil prices, unemployment rates, etc. • Cyber security breaches (Target) • Decreased consumer confidence • Political and economic uncertainty in foreign countries • Many vendors are located in countries such as China, Mexico and various Eastern Asian and European countries • Political unrest, wars, work stoppages etc. • Current and future government regulations (firearms) • Laws and regulations related to hunting and fishing licenses • State and Federal regulations related to items such as firearms and ammunition

  5. Introduction to Residual Vale • Illustration of the use of accounting information to determine enterprise value • Residual enterprise income (REIt) is the residual earnings in excess of the expected return on net enterprise assets

  6. Going Forward Assumptions • WAAC = 10.60% • Perpetual growth rate: 2% • EPAT and NEA are based on previous computation • Forecast • Total 2013 sales were estimated by using Q1-Q3 sales • Initially sales, financial services revenue and other revenue each have different growth rates • Additional two year forecast is needed in order to allow NEA to properly adjust for the fluctuation in growth rates

  7. Multiyear Forecast of Sales, EPAT and NEA

  8. Residual Enterprise Valuation

  9. Discounted Cash Flow

  10. Final Comments • Regardless of the method used if performed properly, enterprise value should be the same • Accounting information can be used in valuation of the enterprise profit after taxes(EPAT) adjusted for the change in net enterprise assets (NEA)

  11. Questions?

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