ASSIGNMENT : The Eddie Bauer “A” case focuses on turnaround


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ASSIGNMENT: The Eddie Bauer “A” case focuses on turnaround strategy after a Chapter 11 bankruptcy filing. Topics emphasized in the case include: How is strategy reflected in financial forecasts? How is the success of a strategy reflected in actual financial results? How does the market value firms emerging from bankruptcy? Read the case and complete the following four-part Assignment. Before Spring Break, we covered all of the material that you need to know to complete the assignment. PART 1: (1-3 pages of text) Conduct a qualitative assessment of Eddie Bauer’s turnaround strategy. Use any framework that you think appropriate. Common frameworks include SWOT analysis (see Exhibit 1) and Porter’s Five Forces (see Exhibit 2).: PART 2: (1-2 pages of text, 1 table that summarizes relevant ratios) Evaluate management’s turnaround forecasts. To do this, conduct a DuPont Model analysis, as well as calculating any additional ratios that you believe may be informative. (Many relevant ratios have already been calculated for you in Exhibit 5d.) Are the forecasts reasonable? In other words, if management’s strategy is successful, is it reasonable that the DuPont Model ratios implied by the forecasts would be the result? PART 3 (1-2 pages of text, Four tables: 1) FCFE estimates; 2) Terminal Values; 3) Price Per Share valuations, and 4) Sensitivity analyses.) Value Eddie Bauer using the forecasts that management provides in Exhibits 5a, 5b, and 5c. To simplify your calculations, assume that the company emerged from bankruptcy on December 31, 2004 and has a December fiscal year-end. To complete this requirement, you will need to: Use the forecasts in Exhibits 5a, 5b, and 5c to calculate Free Cash Flow to Equity over what you believe to be an appropriate forecast horizon, T. Create a table that summarizes your calculations. In the body of the paper, explain your selection of the forecast horizon, T. (Hint: you will need to make assumptions about the appropriate amount of cash needed in operations each period. You should also discuss your assumptions about Cash needs in the body of the paper.) Calculate Terminal Values for Eddie Bauer using both market multiples and growing perpetuity approaches. For the market multiples approach, you will need to choose appropriate peer firms. (Hint: Data in the case exhibits will be useful.) For the growing perpetuity approach, you will need to choose an appropriate g, as well as calculate FCFE in period T+1. In the body of the paper, explain your choice of peer firms and your choice of g. Create two tables that summarize your market multiple and growing perpetuity calculations and, respectively. Estimate an appropriate cost of equity. (Hint: there is quite a bit of information in the case to help you do this.) Value the price of one Eddie Bauer share and summarize your valuations in a table. Include:Price per share based on your Market Multiples Terminal Value; and Price per share based on your Growing Perpetuity Terminal Value How do your estimates of value compare to the market price per share of Eddie Bauer stock when Eddie Bauer emerged from bankruptcy? PART 4: (1-2 pages of text, Table with ratios) Evaluate the success of Eddie Bauer’s turnaround strategy. Using data available for fiscal years 2007-2009 on Edgar (i.e., www.sec.gov, Company Filings), calculate the DuPont Model ratios and any additional ratios that you believe to be informative. Report your ratios in a Table. Was the strategy successful? Explain your answer. If the strategy was not successful, explain why. Were stock returns (i.e., changes in the share price) over the 2007-2009 period consistent with the success (or lack of success) of Eddie Bauer’s strategy? NOTE: During Chapter 11, debtors are often given equity in exchange for the debt because the firm lacks the cash flow to make the debt payments. If ownership changes during the Chapter 11 process, which is often the case, the firm adopts Fresh-Start accounting. The motivation for Fre

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