652551494.

xls margin premium method

Brand valuation using the margin premium method

Wholesale price estimations (From case Ex. 8, p.17)

Tetleys Retail Prices (£/kg) in UK Private label retail prices (£/kg) in UK

Assumptions
Drawstring 40 Premium 160 Prices in other countries are comparable
Drawstring 80 Premium 240 Retail margin = 20% of retail price
Softpack 160 Premium 40 Tesco's prices per pound in UK are representative of worldwide prices.
Softpack 240 Premium 80 Price and quality differential between Tetley and private label are similar to UK
Softpack 40 Light 80 No weighting according to sales
Softpack 80 Value 80
Average retail price Average retail price

Average wholesale price (£/kg)

Compute Revenue and Margin Premium

Gross revenue premium Tetley Private label

Sales volume 1999 (tons) #DIV/0! #DIV/0!
Average wholesale price (£/kg) (as above) 0.00 0.00
Total revenues (£'000)
Gross revenue premium in 1999 (£'000) 0

Brand margin valuation Tetley Private label*

Sales volume 1999 (tons) #DIV/0! #DIV/0!
Average wholesale price (£/kg) 0.00 0.00
Average cost (£/kg) (70.07% of wholesale price) 0.00 0.00
Marketing and administrative costs
Total net profits (£'000) #DIV/0! #DIV/0!

taxes (30% in UK) #DIV/0! #DIV/0!

Net margin premium in 1999 (£'000) #DIV/0!

Lifetime brand value (£'000) #DIV/0!

Discount rate
Growth rate
Time horizon (years) Infinite

Value under different scenarios #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Discount rate
Growth rate
Time horizon (years) Infinite Infinite Infinite Infinite Infinite Infinite Infinite

Sources and assumptions

Private Label (PL) sales in value = UK: 1.07 (case p. 5)* Tetley sales in UK; Elsewhere: 70% of sales of Tetley elsewhere (case p. 5)
UK represents 54% of Tetley sales (case p. 6), so PL sales worldwide are: Tetley sales (£323.2; case Ex. 6, p. 14)*(1.07*.54+.7*.46).
COGS for Tetley is 70.7% (228.5/323.2) of wholesale price (see Ex. 6 case p. 14).
COGS for private label are 17% less than for Tetley because of lower packaging costs and economies of scale.
For Tetley, the marketing costs are selling and distribution costs + administrative expenses (case Ex. 6, p. 14)
For PL, the administrative costs are a thid of Tetley's administrative expenses and there are no marketing costs
Assuming no change, lifetime brand value = Σ (Net annual margin premium)*[(1+r)/(1+d)]^t
Where r is the annual growth rate and d is discount rate of future earnings
General formula, brand value = (Net annual margin premium)*(1-q)^n/(1-q)
Where n is the life of the brand and q = (1+r)/(1+d)
Assuming infinite life, simplified formula for brand value = (Net annual margin premium)*(1+d)/(d-r)
 652551494.xls 2 DCF method

Brand valuation using the DCF method

1 2 3 4 5 6 7 8 9 10
Year 1999 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Sales 323,198 332,894 342,881 353,167 363,762 374,675 385,915 397,493 409,418 421,700 434,351
Operating earnings 24,991 34,968 36,017 37,097 38,210 39,357 40,537 41,753 43,006 44,296 45,625

Sales Growth 3%
Average sales/operating earnings of past 3 years 9.52

Tangible capital employed 61,337 51,373 52,914 54,501 56,136 57,820 59,555 61,341 63,182 65,077 67,029
Average sales/tangible capital of past 3 years 6.48
Tangible capital rate of return 7%
Charge for capital 4,294 3,596 3,704 3,815 3,930 4,047 4,169 4,294 4,423 4,555 4,692

Intangible earnings 20,697 31,372 32,313 33,282 34,281 35,309 36,368 37,460 38,583 39,741 40,933
Brand contribution index 80%
Brand earnings 16,558 25,097 25,850 26,626 27,425 28,247 29,095 29,968 30,867 31,793 32,746

Tax paid 7,497 10,490 10,805 11,129 11,463 11,807 12,161 12,526 12,902 13,289 13,688
Post-tax brand earnings 9,061 14,607 15,045 15,497 15,962 16,440 16,934 17,442 17,965 18,504 19,059

Discount factor 1.09 1.19 1.30 1.41 1.54 1.68 1.83 1.99 2.17 2.37
Discounted cash-flow 13,401 12,663 11,966 11,308 10,685 10,097 9,541 9,016 8,520 8,051

NPV to year 10 105,248 48% Perpetuity 296,774

NPV of Perpetuity Value 115,010 52% Discount rate 9%
Brand value (£'000) 220,257 Growth rate at perpetuity 2%
Time horizon (years) infinite

Value under different scenarios #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Growth rate years 1 to 10
Charge for capital
Brand contribution index
NPV to year 10
Value at year 10
Discount rate
Growth rate at perpetuity
Time horizon (years) Infinite Infinite Infinite Infinite Infinite

Assumptions
Net Sales are expressed in constant year 0 money. Sales grow by 3% for 10 years and then grow at GDP growth rate (2% to 5%).
Ratios Sales:Operating earnings and sales:tangible capital are average of past 3 years and stay constant
Tangible capital employed includes fixed and working capital at current value = here assumed to be total assets
Tangible capital charge is the (opportunity) rate of return that would be achieved on tangible assets
For consumer packaged good, risk premium = 2%, risk-free rate = 5%, return on tangible assets = 7%
Brand contribution index is 80% (Beer is at 85%)
UK Corporation tax is 30%.
To compute perpetuity, see that Brand value = (post-tax brand earnings)*[(1+sales growth)/(1+discount rate)]^t
Using the formula on the sum to infinity of a geometric series with annual growth = (1+sales growth/1+discount rate),
Perpetuity = (year 10 post-tax earnings)*(1+discount rate)/(discount rate - growth rate)
Discount rate = risk free rate (5%) + brand premium (.5% minimum, 7% average, 4% here because Tetley has low volatility)