In November 2008, the Belgian InBev S.A. completed the acquisition of US-based Anheuser-Busch. The brewer acquired Anheuser-Busch for close to E40 billion, of which it classified approximately E25 billion as goodwill. At

the end of the fiscal year ending on December 31, 2008, Anheuser-Busch InBev’s (AB InBev) net assets amounted to E61,357 million, consisting of E64,183 million in non-current assets and –E2,826 million in working capital. The company’s book value of equity amounted to E16,126 million.

Early May, 2009, when AB Inbev’s 1,593 million common shares trade at about E24 per share, an analyst pro- duces the following forecasts for the company and issues an ‘‘overweight’’ (buy) recommendation.

Depreciation and

Forecasts (E millions)	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Sales	28,475	26,688	27,909	29,047	30,089	31,011	31,810	32,470	32,311	32,658
NOPAT	6,169	6,294	6,729	7,003	7,254	7,476	7,669	7,828	7,790	7,874
amortization	2,297	2,158	2,228	2,318	2,402	2,475	2,539	2,592	2,579	2,607
current assets	-1,529	-1,441	1,549	-1,743	-1,805	-1,860	-1,909	-1,948	-1,939	-1,959
Investment in working
capital	485	580	669	435	451	465	477	487	485	490
Free cash flow to
debt and equity	7,425	7,590	8,077	8,014	8,301	8,556	8,777	8,958	8,915	9,011

Investment in non-

1. 1). The analyst estimates that AB InBev’s weighted average cost of capital is 9 percent and assumes that the free cash flow to debt and equity grows indefinitely at a rate of 1 percent after 2018. Show that under these assumptions, the equity value per share estimate exceeds AB InBev’s share price.

2. 2). Calculate AB InBev’s expected abnormal NOPATs between 2009 and 2018 based on the above information. How does the implied trend in abnormal NOPAT compare with the general trends in the economy?

3. 3). Estimate AB InBev’s equity value using the abnormal NOPAT model (under the assumption that the WACC is 9 percent and the terminal growth rate is 1 percent). Why do the discounted cash flow model and the abnor- mal NOPAT model yield different outcomes?

4. 4). What adjustments to the forecasts are needed to make the two valuation models consistent?

Answer rating: 100% (QA)

The weighted average cost of capital WACC represents a firms average cost of capital from all sources including common stock preferred stock bonds and other forms of debt The weighted average cost of ... View the full answer