Senior VP Anne Clemens of Goldengate Capital has received a loan proposal from Calaveras Vineyards. She must determine whether the company is credit-worthy. By looking at key reports such as the WACC, DCF model, and forecasted balance and income statements, Clemens should be able to arrive at a decision. Should she accept or reject the deal?
Robert F. Bruner
Harvard Business Review (UV0255-PDF-ENG)
April 11, 1995
Case questions answered:
Case study questions answered in the first solution:
- What is the value of Calaveras Vineyards? Is the proposed purchase price for Calaveras Vineyards appropriate?
- Would Calaveras be a credit-worthy borrower?
- What should Anne Clemens do?
Case study questions answered in the second solution:
- Perform a discounted cashflow valuation for Calaveras Vineyards.
- Would you advise Dr. Martinez to purchase Calaveras’ at the proposed price? Why or why not?
- Does Dr. Martinez have any particular competitive advantage in running Calaveras relative to others, including the current owners?
- If Dr. Martinez buys the company, how would her incentives change? Does that impact your answer to C above?
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Case answers for Calaveras Vineyards
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Executive Summary – Calaveras Vineyards
Anne Clemens needs to figure out whether or not to give a loan out to Calaveras Vineyards. Clemens needs to determine the overall value of the vineyard, as well as how the winery will be able to finance this 4.5 million dollar loan. By looking at key reports such as the WACC, DCF model, and forecasted balance and income statements, Clemens should be able to accept or reject the deal.
New management at Calaveras Vineyards is very optimistic about future revenue and has an excellent track record regarding the growth of past wineries acquired. Anne Clemens should not accept this loan. Although Martinez has a great resume, alcohol sales are projected to be stagnant in the coming years.
With the model Calaveras Vineyards used, I expected revenue is a little too optimistic. Also, the lack of equity the vineyard has upfront is also worrisome as well as at the gross margins being 40% as alcohol sales tend to be stagnant as of now.
Senior VP Anne Clemens of Goldengate Capital has received a loan proposal from the vineyard. Calaveras Vineyards is a vineyard with around 220 acres of land that consist of mostly grapevines with some storage rooms, guest rooms, wine tasting rooms, and an area to sell their product.
Calaveras Vineyards sells an abundance of different wines that range from high-end wines to generic wines. The company is trying to change its market segment into a higher revenue area, which is the premier wine category. The company is also acquiring a new marketing company to increase sales and brand recognition, hopefully, but was risky because of its credit risk.
As the consumption of alcohol has become stagnant in the United States, wine being sold at supermarkets has increased by 7.4%. This may be due to new health benefits being found out about red wines such as reducing heart diseases by nearly 50%.
Calaveras Vineyards produces 65,000 cases per year and is looking to increase with new manager Lynna Martinez buying 85% of the company. Martinez has had great success in revenue with wineries acquired before and is hoping to do the same now. Clemens needs to determine if the vineyard can take on more debt without defaulting as well as whether or not to give the company the funds required.
Statement of Problem(s)
Those involved with this loan need to find out the necessary information about Calaveras Vineyards. First would be determining the value of the vineyard.
Another problem is determining whether or not the company will be able to pay off the loan based on forecasted cash flows and looking at alternatives to pay to reduce debt. Another problem is if Anne Clemens should accept the loan proposed by the company.
Let’s start with figuring out the net working capital. From 1994-1998, those numbers per year are 2585.45, 2887.44, 3088.24, 3303.71, 3455.19 (thousands). With the expected returns being high, the forecasted statement looks…