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Hasbro Valuation Project
Analysis Group
Diana Duran [email protected]
Marianne Francis [email protected]
Ben Gergen [email protected]
Stephen Milkowski [email protected]
1
Table of Contents
Executive Summary 3
Business and Industry Analysis 8
Company Overview 8
Industry Overview 10
Five Forces Model 11
Rivalry among Existing Firms 12
Threat of New Entrants 17
Threat of Substitute Products 19
Bargaining Power of Buyers 21
Bargaining Power of Suppliers 22
Analysis of Key Success Factors 24
Differentiation 24
Firm Competitive Advantage Analysis 28
Historical Competitive Analysis 28
Accounting Analysis 33
Key Accounting Policies 33
Accounting Flexibility 38
Actual Accounting Strategy 41
Qualitative Analysis of Disclosure 43
Quantitative Analysis of Disclosure 44
Potential Red Flags 51
Undo Accounting Distortions 52
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Ratio Analysis, Forecast Financials, and Cost of Capital Estimation 61
Liquidity Analysis 61
Profitability Analysis 69
Capital Structure Analysis 77
Internal Growth Rate and Sustainable Growth Rate Analysis 81
Financial Statement Forecasting 83
Income Statement 83
Balance Sheet 87
Statement of Cash Flows 91
Cost of Capital Estimation 94
Valuation Analysis 99
Method of Comparables 99
Intrinsic Valuations 106
Analyst’s Recommendation 117
Appendix 118
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Executive Summary
Investment Recommendation: Overvalued, Sell April 1, 2004
PUT Z-SCORES IN
HAS- NASDAQ 4/1/08 $29.27 Altman's Z-Score 2003 2004 2005 2006 200752 Week Range $21.57-$35.99 2.19 2.84 3.03 3.115 3.356Revenue (billion) 3.92$ Valuation EstimatesMarket Capitalization (billion) 5.14$ Actual Price 4/1/08 $29.27Shares Outstanding (million) 142.31Percentage Institutonal Ownership 11% Financial Based Valuations Initial Revised
Trailing P/E 28.69$ 29.16$ Forward P/E 28.90$ 28.94$
Book Value Per Share 9.58$ P/B 19.97$ 22.32$ ROE 21.65% D/P 18.66$ 18.66$ ROA 10.75% PEG 22.58$ 22.90$
P/EBITDA 37.10$ 37.10$ Cost of Capital P/FCF 45.17$ 45.67$ Estimated R-squared Beta Ke EV/EBITDA 36.06$ 35.98$ 3 Month 0.4047 1.50 15.59%6 Month 0.4054 1.50 15.59% Intrinsic Valuations Revised2 Year 0.4079 1.51 15.67% Discount Dividend 2.72$ 5 Year 0.4076 1.50 15.59% Free Cash Flow 29.10$ 10 Year 0.4062 1.49 15.51% Residual Income 10.42$
Abnormal Earnings Growth 9.00$ Published Beta 1.59 Long Run RI Perp 12.22$ Cost of Debt (BT) 5.89%Cost of Debt (AT) 3.65%WACC (BT) 10.07%WACC (AT) 8.85%
http://moneycentral.msn.com
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Industry Analysis
Hasbro is a toy company and is one of the top leaders in the toys and games
industry. The company was organized in 1926 in Rhode Island and has products under
brand names such as Playskool, Tonka, Milton Bradley, Scrabble, Jenga, Mr. Potato
Head, Easy Bake, etc. The target market is mainly young children under the age of 12
and Hasbro is experiencing what it deems to be the “children growing older younger”
effect as is much of the toy and games industry. The industry as a whole is losing some
young customers to the video/computer games industry, one that is fundamentally
different (no action figures, board games, or dolls) but, one that reflects a change in
consumer culture. Rivalry among existing firms is quite low as there are many barriers
to entry and exit. The industry is dominated by Mattel, followed closely by Hasbro,
there is not much else or much excitement in the industry past these two. This is quite
a concentrated market despite what is disclosed in Hasbro’s 10-k which takes the
opposite opinion. The only other competitor below these two is JAKKS which produces
educational toys and games, if this were a competitive market then children love
educational toys and games. Among Hasbro and Mattel, the product lines are diverse,
have brand images, and are well known to everyone that is young or a parent. Entering
a market such as these is difficult, the two top firms are known to buy out emerging toy
and game makers to add to their portfolio of products they currently sell. There is
however, the threat of substitute products since everyone can sell dolls and action
figures but, in order to land the rights to produce the action figures or dolls for the next
upcoming movie you’re out of luck; those go to Mattel or Hasbro, because no other firm
could compete. The threat of substitute products is average at best. Key performance
measures or Key Success Factors were Brand Image, Cost Control, and good R&D
expenditures. Industry growth is something to look out for as the credit crunch and
inflation pressures are hurting the U.S. consumer, that is high gas prices, high diesel
prices that push up transportation costs, and burdening grocery bills. The Wall Street
Journal has reported that “Hasbro Inc.'s (HAS) first-quarter net income rose 14% as the
international business returned to profitability and more than offset declining domestic
earnings.” This small bit of information about the international nature of the industry
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certainly displays the ability of firms to offset losses in the credit crunch among other
areas of the world. The growth potential of this industry is not grounded in the U.S.
anymore; the next big market may be Latin America or India and that shows an
international industry in a global economy that has enormous profit potential.
Accounting Analysis
To view the true economic and financial position of the firm in its industry an
analysis in accounting measures should display the accounting methods used by the
firm and should convey its distortions. The Key Success Factors identified earlier and
the accounting policies on that subject are targeted for examination. A better economic
and financial position should be shown by undoing these distortions to display how well
the firm is meeting its Key Success Factors.
The firm Hasbro had a number of distortions from accounting practices
pertaining to Key Success Factors which are both common in the industry and a
requirement by GAAP.
The Key Success Factor, brand Image, would be shown under advertising
expenses. These are not capitalized into any intangible asset such as brand names or
well known products, however this was reasonable given the unpredictability with a
successful marketing expenditure and GAAP requirements are correct.
The operating lease arrangement is standard industry practice and allowable
under GAAP rules however, this does not show an accurate view of the firm economic
or financial because of the ability to inflate key ratios like return on assets and debt-to-
equity that measure performance. These leases were capitalized with information given
in Hasbro’s 10-Ks and the result displayed more assets and liabilities than Hasbro would
have preferred to disclose. Net income showed no net change overall but did show a
gain or loss in specific years. These new numbers to the bottom line made a forecast
more troubling and were not included in a restatement but were shown separately to
show the effect on the balance sheet and income statement. The capitalization did
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show a net reduction in new leases and displays the firm’s commitment to efficiency
through cost control, a Key Success Factor.
R&D expenditures are expensed under GAAP however; they were capitalized to
give a different view of the firm not shown in the financials. The capitalization displayed
a benefit to net income in the most recent of the past years after amortizing the R&D
“assets”. The result showed a strong commitment to a Key Success Factor and meeting
that with good expenditures initially with a benefit after capitalization.
Financial Analysis, Forecast Financials, and Cost of Capital
Estimation
When valuing a firm it was necessary to look at the ratios of liquidity, profitability
and capital structure. With the liquidity ratios we decided that the past three years was
more reasonable then the past five years because the calculations were approximately
the same. When considering profitability ratios, the operating profit margin for Hasbro
were at a steady increase over the past years but still similar to the industry. This
shows its ability in creating profit after deducting operating expenses. As for capital
structure ratios, Hasbro is outperforming in the debt to service margin ratio which
shows their ability to pay short term notes with operating cash flows.
After determining the ratios for Hasbro as well as its competitors we were able to
determine what would be best to forecast. This is also important in valuing the firm
and in our calculations we forecasted the statements out a total of 10 years. Major
forecasts include net income, CFFO, CFFI, retained earnings, and book value of equity.
Also included are other parts of the financial statements such as total assets were we
used an asset turnover rate of 1.25. This number was determined by looking at the
asset turnover ratios from the past five years and seeing that there was a steady
increase. Also, retained earnings and stockholder’s equity were adjusted each year by
the amount of net income earned and the amount of dividends paid. Cash flows were
forecast based on an average CFFO/sales ratio of 13.67%.
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To find the cost of capital, we need to find the cost of equity and the cost of
debt. In order to find our cost of equity, we need to find our beta, which is found by
doing different regression analysis. We found out that by using the 2 year treasury
constant maturity rate at 36 months gives us the highest adjusted R^2 of .4079
causing our beta to be 1.51, which says that Hasbro is a volatile company. By getting
out beta, we plugged that into our cost of equity formula and got 15.67% for our cost
of equity. To find our cost of debt, we used the 3 month AA commercial paper rate. We
ended up with a cost of debt of 5.89%. With these two pieces of information, we came up with
a before tax weighted average cost of capital of 10.07% and an after tax weighted average cost
of capital of 8.85%.
Valuations
The purpose of these valuations is to see if your company is overvalued,
undervalued, or fairly valued. We have to remember that we are valuing our company
as of April1, 2008, so we used that share price of $29.27 throughout these valuations.
The first valuations we did were methods of comparables. Doing these eight
comparables, the only thing we can conclude is that Hasbro is not a fairly valued
company. The only two ratios that showed that it is fairly valued is the trailing price to
book and the forward price to book ratios. There was a tie between the last six
comparables. Three ratios, price to book, dividend to price, and the price earnings
growth, came out to be overvalued and the last three ratios, price to EBITDA, price to
future cash flow, and enterprise value to EBITDA, came to show that our Hasbro is
undervalued. Our share prices ranged from $18.66- $45.17, so you can see that these
methods of comparables are all over the place. The second and more accurate
valuation models we used were called intrinsic valuation models. Here we used five
different models to value Hasbro: dividend discount model, free cash flow model,
residual income model, abnormal earnings growth model, and the long run residual
income perpetuity model. Even though we had uncertainty with the methods of
comparables, we can conclude that by using the intrinsic models that Hasbro is an
overvalued company with using our 15% market error. First of all, the dividend discount
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model was mostly overvalued, but came out with fairly valued prices. The free cash
flow model was the only model that came out to be undervalued with a few fairly
valued and overvalued prices. The residual income model, abnormal growth model, and
the long run residual income model all had nothing but overvalued values, with their
highest share prices of almost $15.
Business and Industry Analysis
Company Overview
Hasbro is one of the top leaders in the toys and games industry. They produce
hundreds of thousands of toys a year having a total revenue of $3151.5 million in 2006,
as stated in Hasbro’s 10-K. The company was organized in 1926 in Rhode Island and is
still to this day located there.
Hasbro’s target market is mainly young children under the age of 12 and they
offer a variety of products. As stated in the 10-k, they manufacture a broad variety of
games including traditional board, card, hand-held electronic, trading card, role-playing,
plug and play and DVD games, as well as electronic learning aids and puzzles. Hasbro
also offers its products under brand names such as Playskool, Tonka, Milton Bradley,
Scrabble, Jenga, Mr. Potato Head, Easy Bake, etc. (finance.yahoo.com) This is a highly
competitive market so they are determined to meet the customer’s needs. They
distribute their products in a variety of ways by offering their products to different
distributors, wholesalers, and department stores; they also offer catalogs, mail house
orders and internet sales. They have also reached an agreement with Thorley
Industries to launch two new products in 2008. (WSJ) This could help with their
distribution and their target market.
Hasbro’s main facility is in the United Sates but they are internationally located
as well. In the 10-K they divide the regions into two different segments, North America
and International. North America includes the United States, Canada, and Mexico
where as Europe, the Asian Pacific, and Latin and South America are considered to be
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International. However, from 2005 to 2006 there was a drop of 3% in revenues from
the International segment. The weakened U.S. dollar played a large role but in past
years they have had a subtle increase.
With all their different locations Hasbro needs a sufficient amount of employees.
They had approximately 5,800 employees worldwide and approximately 3,200 in the
United States alone. However, in recent news the Wall Street Journal stated, “Hasbro
Games said it will cut about 200 manufacturing and support jobs and invest $40 million
in its East Longmeadow, Mass.” This is difficult for the employees but will be good for
the company in order to modernize their equipment and production.
Hasbro’s stock is up by more than 2%, currently trading at $25.87. Also in the
WSJ, it is stated that Hasbro’s board of directors has authorized the company to
repurchase an additional $500 million in common stock. This will help add value for
their shareholders.
Total Assets Net Sales Sales Growth
2002 3142.88 2816.23 -1.4%
2003 3163.38 3138.66 11.4%
2004 3240.66 2997.51 -4.7%
2005 3301.14 3087.63 3.0%
2006 3096.91 3151.48 2.1%
(www.moneycentral.msn.com)
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Industry Overview
The toy and game industry is a part of the consumer goods sector of the U.S.
economy. “The toy manufacturing industry includes about 900 companies with
combined annual revenue of $5 billion. Major companies include Mattel, Hasbro, and
JAKKS Pacific.” (mindbranch.com). Many of the firms in the industry have sourced their
manufacturing to places with low labor costs like China, while failing to oversee the
production process or their suppliers. A massive lead paint toy recall has been
underway as of recently due to current industry standards. The industry even has its
own association, Toy Industry Association, to promote government advocacy, to keep
the public informed, and to encourage the government to recognize the needs of the
toy industry. This “not-for-profit trade association for producers and importers of toys
and youth entertainment products sold in North America, representing over 500
companies who account for approximately 85% of domestic toy sales”
(toyassociation.org). The industry itself has unique characteristics which are high
concentration, low competition, brand names, and an international supply chain
network. The major players in the industry are dependent on free trade, are sensitive to
trade barriers, and currency risk given the international reach of the firms in the
industry. The two major competitors appear to be Hasbro and Mattel. Both have a wide
variety of popular trademark toys and board games. They are also highly capitalized,
well known, and are dependent to consumer confidence and strong purchasing power
among the public. Although current income, sales, and growth have shown signs of
weakness, the toy and games industry will continue to serve customers into the future.
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Five Forces Model
The five forces model used in this report will explain the industry profitability by
assessing the degree of actual and potential competition and by determining the
bargaining power in input and output markets. From this model and through the
subcategories of rivalry among existing firms, the threat of new entrants, and the threat
of substitute products can the degree of competition be determined for the industry
that Hasbro engages in with its competitors. Determining industry competition will
reveal the price which consumer’s are willing to pay for the products and services within
the industry. The model will also show in detail the industry’s relationship with suppliers
and customers and how this affects profit structure of the industry firms.
Consumer goods industry; toys and games – Short overview
1: Rivalry among existing firms LOW
2: Threat of new entrants LOW
3: Threat of substitute products AVERAGE
4: Bargaining power of buyers AVERAGE
5: Bargaining power of suppliers HIGH
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Rivalry among existing firms
Under this section, the topics of (a) industry growth, (b) concentration and
balance of competitors, (c) degree of differentiation and switching costs, (d)
scale/learning economies and the ratio of fixed to variable costs, and (e) excess
capacity and exit barriers are discussed.
Industry growth
As this chart below demonstrates, the toy and games industry shows some less than
spectacular growth. It shows a decline in growth overall for the year 2005. It is
important to note that although the chart is dated it may show a trend. It should be
mentioned that an expected recession is on the way as “U.S. gross domestic product
rose just 0.6% in the fourth quarter, while growth in personal consumption
expenditures slowed to 2% from 2.8% a quarter earlier” (money.cnn.com). The Wall
Street Journal has picked up on this recently under titles like “U.S. consumer woes hit
economy”, while noting that there are “fresh signs that consumer spending is slowing”.
The NPD Group has reported “a decline of only 2 percent” of retail sales of toys
between 2007 and 2006 stating “The strong performance of two key super-categories
helped to offset losses. Sales of Action Figures & Accessories were up 8 percent over
2006, while Vehicles experienced a 6 percent increase over the same time period”. With
inflation fears, low consumer spending, slower than expected growth, and consumer
confidence down in January of 2008; the growth rate of the toy and game industry
could see a dent in the near future. On the optimistic side, the sales figures reported by
NPD Group in 2005 were most disheartening in the action figures and accessories and
vehicles categories than the 2007 numbers. Growth in this industry 2007 onward will
depend on how resilient firms are to a very weak dollar, high gas prices, and grocery
bills. As MSNBC has reported, “Food vendors are forced to explain higher prices; poor
squeezed” or “U.S. seeing worst food inflation in 17 years”, it would be hard to continue
to forecast something less than a rough ride for the firms in the industry past 2007.
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www.conference-board.org
U.S. Toy Industry Sales Figures
Category $ Toy Sales 2005 (USD) % Change from Prior Year Action Figures and Accessories $1.3 billion +4% Arts and Crafts $2.4 billion -4% Building Sets $695.2 million +16% Dolls $2.7 billion -2% Games/Puzzles $2.4 billion -9% Infant and Preschool $3.1 billion -1% Learning and Exploration $392.0 million +5% Outdoor and Sports Toys $2.7 billion -3% Plush $1.3 billion -15% Vehicles $1.8 billion -8% All Other Toys $2.5 billion -4% Total Traditional Toy Industry $21.3 billion -4% Total Video Games $10.5 billion +6% Source: The NPD Group February 2006
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Concentration and balance of competitors
The toy and game industry is unique in that there are trademark products that
different firms own and license out that they have researched and developed or
purchased from others. This enables firms to carve out a niche and acquire market
share with their trademark products and provides for some flexibility in pricing as the
products belong to the firm with which it originated. This has an ability to lock out
others in producing the same toy or game and prevents more than just replicating the
cosmetic features of a product such as the Monopoly board game. Reproducing that
same idea may get you sued. A balance of competitors does not exist in the industry
and competition appears to be tight with only two major firms. Hasbro and Mattel are
dominating the industry and appear to be unrivaled. To prove the point the chart below
shows a big gap in revenue for the top three firms and the firms below. What is
interesting is the electronics or video/computer gaming industry which is drawing
children from this industry “toy and games” to video/computer games. This is known as
“children getting older younger”. Although the video/computer game industry will take
away young consumers from this industry, it will lead to further concentration in the
future of firms to compete over a dwindling consumer base, young children. In
conclusion even though there are many firms here, there are really only two major
competitors given their original product line; this is a concentrated market with uneven
competition slanted in Mattel and Hasbro’s favor and will continue to be.
Leaders in Total Revenue (ttm) Source: yahoo! finance MATTEL INC [MAT] $5.9 BHASBRO INC [HAS] $3.7 BINTL GAME TECH [IGT] $2.6 BJAKKS PACIFIC INC [JAKK] $810.3 MRC2 CORPORATION [RCRC] $505.0 MLEAPFROG ENTERPRISES [LF] $443.8 MRUSS BERRIE CO INC [RUS] $320.6 ME X X INC CL A [EXX-A] $132.4 MMAD CATZ INTERACTIVE [MCZ] $87.2 MCORGI INTL ADR NEW [CRGI] $67.4 M
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Degree of differentiation
Given the nature of monopolistic competition this industry finds itself in, the
differentiation of the product lines of these firms can be quite diverse. For example,
Hasbro owns the rights to the board game Monopoly and Mr. Potato head, while Mattel
owns the rights to Barbie and Hot Wheels. Since these firms carve out a niche for
themselves by acquiring ownership rights or by developing a unique product line, these
firms can “lock out” the competition from the same unique ideas.
Switching costs
Given the brand names of the products themselves and the unique nature of the
products offered, the consumer will find difficulty in switching from one product to the
other because of the diverse nature of the industry. In other words you can only get
Monopoly from Hasbro and Barbie from Mattel which makes switching costs for the
consumer high. Differentiation, clever marketing, and the “must have” attitude of many
young children contribute to a high switching cost phenomena present in the industry.
Scale/learning economies and the ratio of fixed to variable costs
In an industry where size is an important factor for firms and their success, there
will be competition for market share. In this case the size is determined by market
capitalization and it is shown that there are two major competitors in terms of size.
Given sourcing opportunities, fixed to variable costs are expected to be high and
therefore firms have some incentive to reduce price. It should be noted that
International Game Technology (IGT) was omitted over disagreement with our Yahoo!
Finance source on the grounds that their business was significantly different than the
firms mentioned above.
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Excess capacity and exit barriers
The assets of the firms include many unique products whose trademarks are
worth quite a bit. This investment of the firms in their unique assets is a barrier to exit
however, buying and selling the rights to these unique products alleviates this to some
considerable effect as many of those assets may be sold for a margin which is profitable
depending on R&D costs or acquisition costs. Under these circumstances, if a firm
decides to leave, the exit barriers may at times prohibit excess capacity to be
exacerbated. But in conclusion, given the investment on assets and future return on
them, a departing firm should expect the process to be a costly decision. Exit barriers
are high and excess capacity will be exacerbated in the process.
Conclusion
The concentration of the firms in this industry is quite intense given the diverse
product line and the “lock out” ability it can have. The balance of competitors showing
only three or perhaps four major firms and market capitalization showing only two
major firms shows how concentrated the industry really is. The switching costs of the
consumer were a considerable factor in showing the differentiation in product lines and
the monopoly status of the firms in the industry. This is a low competition, highly
concentrated industry.
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Threat of new entrants
Examining the threat of new entrants affects the pricing of the firms within the
industry and the ease of entry affects profitability of these firms as well. The factors
used to determine the threat of entrants and barriers to them are (a) economies of
scale, (b) first mover advantage, (c) access to channels of distribution, and (d) legal
barriers.
Economies of scale
The acquisition costs or R&D costs of the product lines will be considerably high
for the firms in the industry and therefore the firms will have to spread their fixed costs
over a large sales volume. To create a brand from scratch requires advertising costs on
top of these R&D costs; a major barrier is created preventing aspiring firms to enter this
industry and existing firms are shielded from them.
First mover advantage
There are first mover advantages to this particular industry since the existing
firms will have the resources available to acquire the rights to new or upcoming
products and “lock out” any entrants. For the existing firms it is especially important to
be the first to find and acquire these products or their respective companies before an
existing firm can snap them up. These firms will also strive to be first in other similar
markets such as the video game industry as the Wall Street Journal notes, “In an effort
to tap the fastest-growing segment of the videogame market, Electronic Arts Inc. and
Hasbro Inc. have formed a broad alliance to create electronic versions of Monopoly,
Scrabble and an array of other Hasbro board games and toys.” The press release titled
“Hasbro Closes Acquisition of Cranium, Inc.” (Hasbro, Inc.) should convey the point
about snapping up new products; firms aggressively seek anything that may return a
profit before their competitors do. Any new entrant could not possibly have this
advantage that existing participant’s do, although Cranium was a new entrant, they
were also bought out.
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Access to channels of distribution and relationships
Relationships with firms like Wal-Mart, Target, and others would be necessary to
effectively gain a return for any firm in this industry as well as relationships with
suppliers where production is sourced to, at times overseas. This provides many
obstacles to any firm that wishes to enter into this industry because carving out access
to distribution channels through establishing strong relationships will be tough. An
unusual and infrequent example is the firm Cranium, Inc. establishing a relationship
with Starbucks Corp to advertise a board game through a close relationship with its
CEO. As a note, “it was the first board game ever sold at Starbucks” (USA Today) and
appears to be an infrequent occurrence, it was also snapped up by Hasbro, Inc.
Legal barriers
While there are many legal barriers at the federal, state and local level, these
barriers become too diverse at the state and local level to be mentioned and may be a
trivial barrier to a new entrant to this industry. A new entrant may accidentally infringe
on copyright law, but given the chances there does not appear to be any major legal
barriers worth mentioning which are specific to this industry. Also, according to the Wall
Street Journal, “Congress is promoting new legislation to crack down on companies
selling products said to be defective or dangerous.” With the many recalls taking place
in the U.S. now-a-days from foreign-made toys, this is hurting everyone involved in the
industry. Congress wants to make sure this doesn’t happen again, because all of these
“defective or dangerous” products are hurting the industry and most importantly the
customers buying these products.
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Conclusion
The threat of new entrants into the toy and game industry appears to be low.
There may not be many legal barriers but given the economies of scale factor and the
first mover advantage factor, the threat of entrants will not be significant in this
industry. Although as a side note the definition of the “toy and games” is in the
traditional sense of what we would normally consider toys or games for this report.
Take this gem from the 2007 financial statement from Hasbro, Inc., “In addition to
contending with competition from other toy and game companies, in our business we
must deal with the phenomena that many children have been moving away from
traditional toys and games at a younger age. We refer to this as "children getting older
younger." As a result, our products not only compete with the offerings of other toy and
game manufacturers, but we must compete, particularly in meeting the demands of
older children, with the entertainment offerings of many other companies, such as
makers of video games and consumer electronic products.” The industry mentioned
previously could be more appropriately called the video/computer game industry. In this
traditional sense the firm faces few threats when marketing to children of a young age
but in a changing environment and culture it faces many threats.
Threat of substitute products
The definition of substitute products does not necessarily mean that the products
in question have the same form but, fulfill the same consumer need or in other words,
the two products perform the same function. For this industry, a product that performs
the same function depends on the price of the two in order to determine whether or not
there is a real threat. The customer’s willingness to switch between products and the
relative price and performance of a firm, are key to determining the threat of substitute
products.
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Relative price and performance
The price of individual products produced by the firms within the industry is hard
to compare as the product line introduced to the market by each firm is relatively
diverse. Although toy products can be similar, it appears that effective marketing
campaigns are made by the firms tend to help command a premium if the toy brand in
particular is popular. For instance toys under the “dolls” category could include the
products “Barbie”, “Cabbage Patch Kids”, or “Bratz”. While the products are under the
same category, the firms within the industry tend to put an emphasis on differentiation
and by marketing effectively to build a loyal consumer base. Within this industry, firms
can command a premium price from their respective consumer base. A competing firm
or new entrant may have a substitute for the toy brand “Bratz” at a lower price, but the
challenge itself would be difficult given existing consumer loyalty or a lawsuit. There are
instances of good substitutes like the “Lego’s” product or “Linkin’ Logs” that keep prices
from being ridiculous.
Buyer’s willingness to switch
In some instances, it’s not going to happen. These firms market to some very
young children and build a devout following among these groups. The switching costs
for the parent, the actual buyer, say during Christmas time, may be disastrous. Given
the marketing techniques used and the fact that these firms will compete to buy the
rights to the next best thing for an exclusive monopoly, the buyer’s willingness to switch
is very low. In contrast with the above example of “Lego’s” versus “Linkin’ Logs”, the
buyer’s willingness to switch is high.
Conclusion
When competing in this industry there are many ways to defend against
substitute products. Effective marketing can work at reducing switching costs and
buying ownership rights can give an exclusive monopoly to achieve the same goal. Both
strategies lead to a price premium charged by the firms. The threat of substitute
products for this industry is average because there are price premiums, ownership
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rights, and some effective marketing techniques but, some goods are comparable in
performance or function.
Bargaining power of buyers
The overall profitability of a firm has a relationship to the bargaining power of
consumers attracted to the industry. There are two factors which determine this power
these are: Price sensitivity of the buyer and relative bargaining power.
Price sensitivity
Within the toy and game industry, the price sensitivity of the buyer is average.
The products are differentiated to some degree even when the products offered fall
under the category “dolls”. This does not suggest that these are luxury goods but, the
buyer is not in the best position to find substitutes for a “Buzz Lightyear” action figure.
If the products are in demand, a premium will appear and emerging firms cannot
necessarily offer the same product to bring the premium down. There is ownership
rights within the toy and game industry, substitutes may not appear and a big part of
revenue for these firms within the industry would be well known brands. Considering
switching costs and differentiation of certain products, consumers are not entirely
sensitive to price but, many may still find substitutes.
Relative bargaining power
The bargaining position of the consumer for the toy and game industry can rest
on the cost of not doing business. With marketing techniques and somewhat exclusive
monopolies that present the consumer show that they are not in the best position to
switch because these costs can be high. The cost of not doing business could also be
quite low because there are still substitutes to be found, for example, there are always
plenty of board games to choose from. The relative bargaining power of the consumer
is average.
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Conclusion
While there are some “hot” products out there by competing firms not all of
them are without substitutes. The price sensitivity of the consumer can diminish when
products are in demand and substitutes cannot be found but, this is not always the
case with other products offered by the firms within the industry. Switching costs are
therefore averaged out as well as price sensitivity and bargaining power.
Bargaining power of suppliers
In every industry you have to deal with suppliers, just like you have to deal with
customers. Dealing with suppliers will always effect how a company works. According to
Business Analysis & Valuation by Palepu & Healy they say that “suppliers are powerful
when there are only a few companies and few substitutes available to their customers.”
This is true for the toy and game industry. There are two factors that also determine
this power: price sensitivity and relative bargaining power.
Price sensitivity
In the toy and game industry, the price of sensitivity is high. Since there aren’t
many companies in this industry to compete against, the price of sensitivity for the
suppliers will be more powerful than for the buyers. There are a limited number of
suppliers, so they are going to be concerned about the prices. If suppliers make prices
too high, then customers won’t buy them, and they might not do well in the market.
Also, these toy and game companies in this industry are known for some products that
no one can create substitutes for, so dealing with prices with the suppliers are
important to maintain. In some cases, smaller firms can create substitutes for products,
but they might not have that loyalty from the consumer, so that won’t get them
anywhere. When people see the brand names like “Mattel” and “Hasbro” on the boxes,
those are well-known names that make well-known products, so consumers know they
can count on those companies to give them good quality products.
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Relative bargaining power
In the toy and game industry, suppliers play an important role in the industry.
With there being many popular items like “Barbie” and “Monopoly,” from large firms in
the industry, it is important to create a good relationship with the suppliers. Firms with
a high bargaining power are able to work with the suppliers and get the prices they
want, because their business is very important to suppliers. There aren’t many
companies in this industry, so they have that high bargaining power with the suppliers,
because the suppliers need their business to continue on in the market.
Conclusion
Dealing with suppliers is an important aspect in the toy and game industry. With
there being only a few companies, suppliers want their business. Even though there
are some products you can create substitutes for, many consumers will stick with the
brand name product they know that’s been around for a long time. This is good for
suppliers, because they know that they will be in the market for a while with this typical
industry.
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Analysis of Key Success Factors
Within the toy industry there is a large amount of competition. It is imperative
for a company to devise successful strategies in order to capitalize on its consumers.
These strategies will determine the successfulness of the company as well as improve
the value of the firm. There are two strategies firms use in general: cost leadership
and differentiation. The majority of the strategies used in this industry can be
characterized as differentiation. One of the only forms of cost leadership present in the
toy industry is efficient production through the use of outsourcing.
Differentiation
Differentiation is the most important strategy that competitors in the toy industry
employ. This strategy is defined by offering consumers a product that is unique while
remaining affordable. The two main competitors in this industry include Mattel and
Hasbro, however there are a number of smaller companies that also use these
strategies to gain a competitive advantage. Children do not necessarily focus on the
cost of the product; they want to be satisfied with the toy itself. This is why
differentiation is extremely important. There are a couple ways this strategy is used in
the industry including providing product quality, product variety, flexible delivery, brand
image and creativity and innovation.
Superior Product Quality
The quality of products has always been an important part in the toy industry.
One of the best ways of improving the image of the company, quality is always in the
forefront of a company’s strategy. Product quality has become increasingly important
as of late. With more companies using outsourcing as a way to produce their products,
toy companies are under pressure to make sure their products are built well and are
safe to be used by our children. Unfortunately there has been a lot of news lately
referring to the presence of lead in prominent toy brands. According to ToysRus CEO
Gerald L. Storch, the main source of this problem can be attributed to substandard
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housing in China, the location of most outsourced toy production. Nevertheless toy
sales have not faltered as much as expected. Parents are still interested in purchasing
the hot new toys that their kids are asking for.
Superior Product Variety
Providing a variety of products is important to ensure that the consumers keep
returning to purchase another item. Companies will stretch out a product line as long
as it remains popular. Larger companies will take this strategy to another level by
offering a variety of products with limited availability. Referred to as the “Rolling Mix”,
companies will design a line of products and after a certain amount of time reduce or
even eliminate certain products and bring in a new set of toys. One example of this is
the Hot Wheels line of toy cars made by Mattel. Mattel will design a set of about eight
cars and slowly rotate them on and off the shelves of retailers. This is very effective in
bringing children back into stores looking for the newest and most exciting toy car. It is
important that these toy companies keep the attention of children. This is one way in
which companies find a way to keep children coming back.
Flexible Delivery
Flexible delivery is imperative in determining whether a line of toys will sell well
or miss its best opportunity to get into the hands of children. There are a number of
ways that flexible delivery strategies are used in the toy industry. One use of this
strategy is meeting specific dates. Many toys rely on outside factors in order to be
successful. For example, Hasbro used the release of the new Star Wars films to its
advantage by developing a line of Star Wars action figures. They decided they would
wait while the movie builds popularity through advertising and hype in general from the
many fans. Only a couple weeks before the movie was set to open, Hasbro released its
line of action figures. The timing was perfect as they sold a tremendous amount of
toys. The delivery was important because one day late would result in thousands of
toys that remain on store shelves. Having a delivery catastrophe and not releasing the
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action figures until a week after the movie was released would have resulted in a
disaster.
Another way toy firms use flexible delivery is to control the amount of toys in the
stores. The majority of toys are sold in November and December because of the
holiday season. Many times, these few weeks determine whether a company will have
a successful year or end up filing for bankruptcy. It is extremely important that the
toys are released at the right time.
Depending on the line of toys, companies must be careful not to flood the
market with too many deliveries. If a company spots an opportunity to profit from a
new idea, the company must decide whether or not the toy will be considered a long
term project or a short term money maker. If the line of toys is based off a new
television show that has not gained a lot of popularity yet, for example, the company
must carefully release only a small amount of toys. Too many toys would result in a
loss of interest. This can backfire and cost the company a large sum of money. Eric
Johnson, a professor of operations management in Dartmouth, mentions the
Teletubbies line of toys as an example of this. When they were first released in
England, the company made the mistake of releasing too many toys too quickly. This
resulted in many toys sitting in retail stores instead of households. They reduced the
amount of toys and began only providing a limited amount to consumers. Months later,
popularity rose and finally exploded as people rushed into stores looking for these toys.
Investments in Brand Image
The toy industry employs brand imaging to help market and sell their product. It
is crucial that the brand name becomes engrained in the minds of children and their
parents. Companies put forth a lot of time and effort into developing a brand image. If
a brand has a history of being successful the brand name will sell itself with little
advertising. A quality brand name can be an invaluable asset, especially in the toy
industry.
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Creativity and Innovation
There is a lot of importance in creativity and innovation. Children are known to
have short attention spans and this carries over into their preference for entertainment.
Over the years, toy companies have learned that it is extremely risky to develop a new
toy without observing what is popular among children. Nowadays companies will look
into what children wish for and design and create toys and games to meet these
expectations. This dramatically reduces the risk of a new idea becoming undesirable.
With the advent a new technology the toy industry has put a lot of time and
effort into developing innovative toys that use advanced technology. This provides
companies with the opportunity to develop new and exciting toys that engage children
in a way that was not possible a couple years ago. Technology in toys is primarily used
to mimic gadgets and high tech toys that adults love to invest in. Cameras, music
players and other interactive devices are highly demanded by children. However,
companies are currently not fighting with the high tech gadgets but rather finding ways
to fuse play patterns into these gadgets according to the Mattel design vice president
Evelyn Viohl. This will remain a current issue in the toy industry for the immediate
future and the companies that develop new innovative ways of grasping the
imagination of children will succeed.
Cost Leadership
The strategies used in the cost leadership approach are to provide a
similar product as one’s competitors but at a reduced price. This is accomplished by
reducing costs in production and distribution. The toy industry does not use too many
cost leadership strategies because generally children are not worried about the cost of a
toy and parents want to satisfy their children’s desires. Nevertheless, companies in this
industry have outsourced the production of toys for many years. Toys became much
less expensive while not sacrificing quality.
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Firm Competitive Advantage Analysis
Hasbro is the second largest firm in the toy industry. With total revenue of $3.2
billion dollars and $376 million of that turning into profit, Hasbro has been in the
business of providing toys and games since the 1920s. The firm has grown and
developed throughout the years, allowing it to develop a competitive advantage in the
toy industry. Differentiation strategies such as product variety, flexible delivery, brand
image and a large amount of creativity and innovation are the reasons why Hasbro is a
successful company.
Historical Competitive Advantage Analysis
In 1923 Henry and Helal Hassenfeld founded Hasbro in Rhode Island. Originally
a textile remanent seller, they began producing pencil boxes and school supplies soon
afterward. The brothers began the Playskool line of toys in 1928 when two former
schoolteachers felt it was important for preschool aged children to learn at home with
the help of educational toys. From that point on innovation was a major key success
factor in the growth of Hasbro.
Early Innovations
Hasbro produced many successful toys in the first few decades of its existence.
The Monopoly board game was introduced in 1935 is still considered the best selling
board game ever. Tonka trucks, Candyland and Scrabble are popular games that were
developed in the 1940s. Mr. Potato head in 1952 became the first widely successful toy
made by Hasbro and also made history as being the first ever toy to be advertised on
television. In 1956 Play-Doh was discovered and became the most well known form of
modeling clay. The most well known toy that was to be developed by Hasbro in the
1960s is the J.I. Joe. Hasbro labeled this toy the “world’s first action figure”. Hasbro
felt that boys at the time did not want to play with a toy that was considered a doll and
created this label. It has since turned into an entire category of toys with hundreds of
variations and styles. It is apparent that Hasbro used innovation to create toys and
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games that would grab the attention of children and it proved to be a very successful
strategy.
Modern Innovations
One of the things that have drastically morphed the industry since the Hassenfeld’s
founded Hasbro in 1923 is the emergence of video games and electronic, interactive
toys. What once was a market dominated by dolls and action figures is now one where
customers are more and more frequently opting for video and computer games.
Customers are now given the choice at the checkout line of whether to buy an action
figure, which stimulates a child’s imagination, or an X-Box game which can be played
for days upon months without getting tiring. While today’s children are more frequently
playing high quality video games, G.I. Joe and Mr. Potato-Head have been relegated to
their final resting place on the top shelf of many closets, out of sight and out of mind.
With this swiftly changing market innovation in the present and into the future becomes
more important than ever. In 2004 Hasbro developed the VIDEONOW COLOR player
which quickly became one of the industry’s top innovations, and one of toy retailers’
strongest performers. “VIDEONOW COLOR has raised the bar in the world of electronic
entertainment for kids, with a vast collection of great content at a price that offers
tremendous value, its sure to be an item kids are asking for,” said Jim Silver, publisher
of Toy Wishes Magazine. This portable, personal video player with a color LCD screen
features some of the hottest titles for today’s children such as SpongeBob Square Pants
and Jimmy Neutron. Though the Hassenfelds could never have imagined something of
this nature when they founded Hasbro, it is this continued innovation which is
imperative to gaining a competitive advantage over rivals such as Mattel.
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Superior Product Quality
Hasbro has played a leading role in providing products to its consumers that
meet and exceed quality expectations. The toy industry has been under a lot of
scrutiny regarding lead paint and other health concerns. Hasbro’s CEO Alfred
Verrecchia has reported to the public that “none of our toys or games [were] affected
by the recent recalls related to lead paint.” (cafemom.com) The successfulness and
growth of Hasbro is directly related to decades of supplying products that meet quality
standards. Hasbro’s Playskoool brand is very popular among parents. This popularity
exists because of the time and effort that the company puts into making sure those
toys will be safe to very young and vulnerable children.
Hasbro has a quality assurance plan that spans over 20 pages. Within these
safety and reliability specifications the toy company has mapped out every possible
safety issue that could occur. The firm then clearly explains what makes a product
suitable for consumers and what attributes make an item stay in the production plant.
These qualifications are looked after with the help of Hasbro’s Quality Assurance
Department as well as third party labs. Hasbro strives to meet and exceed the
regulations and laws enforced by the Consumer Product Safety Commission. The
company is also open to comments or concerns the public might have regarding
product safety and makes sure there is plenty of contact information on item packaging
and the company website.
Superior Product Variety
Hasbro’s product variety is astounding. With over a hundred different brands
each providing many different products, Hasbro is able to offer it’s consumers with a
wide range of toys and games. During the 2005 Toy Fair in New York, CEO Alfred
Verrecchia said that, “today’s consumers can be entertained in so many different
ways…as the marketplace evolves, it is Hasbro's job to stay ahead of the curve, and our
2005 product line is reflective of our strategy to provide consumers with the right toys,
games and lifestyle products that are relevant and fun…” (Business Wire) It is
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important for toy companies to provide for different age groups. This will give the firm
a larger amount of consumers. Hasbro capitalizes on toddlers up to teenagers. One
can say that their line of board games can be aimed at the children’s heart found in
adults as well.
Flexible Delivery
Flexible delivery has been and continues to be one of the main tools used by
companies in the industry to increase sales. Flexible delivery methods help companies
save money on advertising while at the same time relying on outside advertising to
increase the hype for their product. Using Spider-Man as an example, Hasbro waited till
the trailer and many commercials advertising the movie built up hype for the movie.
After this they chose to release the Spider-Man product line in stores and all of the
consumers who had been prepared for the movie by the endless advertising were given
the chance to buy the product before the movie even came out in theatres. Another
flexible delivery method that is very popular in the industry is releasing the bulk of
products in the months of November and December before the holidays. This is when
most of the products in this industry are sold and as a result by releasing the majority
of their products into stores at this time of the year, it helps keep inventory down at
other times of the year when sales are lower. This also makes the majority of
company’s products available to consumers when the consumers are most likely to buy.
Due to this as mentioned previously, the holiday season is when always have and in the
future will always continue to realize their profits or losses for a year.
Investments in Brand Image
In the 1920s before the era of television shows and movies, toys such as Mr.
Potato-Head and the G.I. Joe flew off the shelves faster than they could be put up in
most cases. At this time there was more of an emphasis on research, development and
creativity in order to create the next hottest toy that every child had to own. Making
the most unique product was often times the key to building a successful corporation
and Hasbro excelled at making unique, creative toys and board games that competitors
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couldn’t produce. As society evolved and television and movies became a bigger part of
children’s everyday lives, Mr. Potato-Head and the more unique products on the shelves
were being neglected in favor of toys which portrayed children’s favorite movie and TV
show heroes. This created a giant niche in the market for company’s to provide
authentic, licensed action figures portraying children’s favorite characters from Star
Wars, Batman, Superman, etc. With this came the need to purchase licensing rights
from corporations such as Disney and Warner Brothers for the right to produce
authentic characters. This is why today there aren’t too many giant corporations in the
toy industry. With companies such as Hasbro and Mattel purchasing licensing rights,
the smaller producers could no longer be competitive with their generic action figures
when children could have a Superman or Batman toy identical to their heroes on
television and in theatres. Having licensing rights for entire toy lines such as Star Wars
and Transformers reflects very positively on Hasbro’s brand image as a whole. Though
many children are unfamiliar with what company makes their products, they all know
the high quality of not only their action figures but also board games such as Monopoly,
most popular board game of all time. These all become commonplace in households
throughout the country and their quality reflects on the quality of the name Hasbro.
Cost Leadership
Though product differentiation is what provides Hasbro’s biggest competitive
advantage, it is impossible to disregard the importance of providing quality products at
not only affordable prices, but prices lower than that of competitors. The reason cost
leadership is not more important is because by being the only one to sell Monopoly and
Star Wars figurines, Hasbro isn’t worried about Mattel producing a cheaper Monopoly
game. In the effort to produce the most affordable products, the industry has begun
outsourcing many parts of the production process outside of the US to countries such
as China. Though this is much less expensive and leads to cheaper prices on the
shelves, this has also sacrificed some of the quality. Recently there were massive
recalls in the industry because Chinese factories were using lead paint and chemicals
found in date rape drugs in children’s toys. As a result companies that produce there
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toys in America and charge a higher price on the shelf are actually gaining the
competitive advantage because parents are beginning to look and see where there
child’s toy was made and if it was made in China are more and more suspicious and
many times are buying a substitute product made in America.
Accounting Analysis
The goal of accounting analysis in this report is to determine the accuracy or
truthfulness in accounting that a firm uses to disclose the economic and financial
picture. In addition to evaluating the appropriateness of the accounting policies of the
firm; any distortions can be discovered in the firm’s accounting numbers and will be
adjusted. The structure of the accounting analysis used in this report is a six step
process to evaluate the firm’s accounting quality from an industry perspective. The first
step is to identify key accounting policies based on the industry characteristics and the
firm’s key success factors. The next step will be to assess accounting flexibility to
determine any constraints by standards and the consequences of such constraints.
Following this step will be an evaluation of accounting strategy to determine the firm’s
true performance which may be hidden underneath any manipulation. The fourth step
would be to determine the quality of disclosure and whether or not managers are only
meeting minimum disclosure requirements. The next step would be to use a quality
analysis approach to unmask any questionable accounting, the goal being to indicate
any “red flags” to the reader. The final step after determining any misleading
information discovered would be to undo the accounting distortions and restate all false
information to the fullest extent possible.
Key accounting policies
This section serves as a link between that accounting analysis to the outcomes of
the five forces classification and the key success factors determined previously. The
accounting numbers will indicate how well the business is managing its key success
factors within its business strategy. The key success factors for the firms in this industry
were brand image, cost leadership, and research and development or differentiation.
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Measuring these key success factors (especially R&D) accurately by the quality of the
manager’s accounting policies is a must.
Research and development
Research and development is important for any firm in the toy and games
industry and when it comes to the accounting numbers it should be expected to see
some solid investment in this area. On the subject of research and development, the
firm Hasbro, Inc. reports its expenses and reiterates previous year’s expenses on the
same item. The firm also gives an explanation on the driver of the expense figures.
Under the section titled selected financial data the firm states that “research and
product development expense increased in 2006 to $171,358 or 5.4% of net revenues
from $150,586 or 4.9% of net revenues in 2005. This increase is the result of
development expenses related to the MARVEL line of products as well as increased
investment in the PLAYSKOOL line” (2007 10-k Hasbro, Inc.). The numbers below are
the reported figures in the income statement for Hasbro, Inc.
2007 2006 2005 2004
R&D expense $167,194 $171,358 $150,586 $157,162
(2007 10-k Hasbro, Inc. in thousands)
The drivers of the figures from 2004 to 2005 are adequately disclosed as the
drivers from 2005 to 2006. In the 2007 10-k under the section titled selected financial
data, it is stated that “The decrease reflected increased efficiencies in the product
development of certain toy lines resulting from a realignment in 2004. This realignment
streamlined the workforce of these toy lines and moved certain product development
activity outside of the U.S.” The focus on research and development is key for this
industry and the company remarks on this by stating that “while the company strives to
incur these costs in the most efficient manner possible, investment in research and
product development costs is an important component to the company's strategy to
grow core brands and to create new and innovative toy and game products.” This piece
of information is critical to investors since we would expect expenses to be incurred as
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an indication of future profits from such investments. All in all, what was outlined above
shows what would be expected to be seen in any firm in the industry, that they are
making appropriate investments and are disclosing such information. Accounting
transparency over and above GAAP requirements is very much desirable in this area. On
the topic of GAAP there is the constraint of viewing all R&D as expenses when it
certainly could be an asset. To accurately view a firm in this industry, R&D to some
extent ought to be taken out of GAAP and capitalized to get a grasp of potential future
profits. On the topic of disclosure in R&D “expenses”, Hasbro, Inc. sufficiently discloses
one of its key success factors in the toy and game industry.
Pensions
Hasbro has pensions and other postretirement plans, like health and life
insurance, for their full-time employees “who retire under any of its United States
defined benefit plans and meet certain age and length service requirements” (Hasbro’s
2007 10-K). They are recognized as liabilities. As it is stated above, Hasbro has a
defined benefit plans. They use “expected return on assets, expected compensation
increases and applicable discount rates” (Hasbro’s 2007 10-K) to compute their
benefits. Below it shows how these percentages have determined the benefit cost of
the pension plans.
2003 2004 2005 2006 2007
Discount Rate 6.50% 6.0% 5.75% 5.50% 5.83%
Rate of future
compensation increases
4.00% 4.00% 4.00% 4.00% 4.00%
Long term rate of
return on plan assets
8.75% 8.75% 8.75% 8.75% 8.75%
(Hasbro’s 2007 10-K)
The table shows that the rate of future compensation increase and rate of returns on
plan assets haven’t changed at all during the years, so these won’t produce a large
change in the pension expenses. The change will come from the discount rates.
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Hasbro’s discount rates are close to each other year after year, but there is still some
movement going on which affects the pension expenses. “A lower discount rate will
result in a higher pension expense and vice versa.” In Hasbro’s case if their rate keeps
rising then they will be more aggressive then conservative sometime in the future.
Currency Risk and Political Uncertainty
The toy and games industry includes many multinational corporations with
facilities spread out over many nations. Many firms have the manufacturing duties
sourced to Far East Asia such as China. Currency risk results from many of these firms
during any phase of operations since the world is on a system of “dirty floats” or free
floating currencies. As one currency may rise in value over another many firms could be
negatively affected in their earnings, there is no compensation for taking on this kind of
risk. The competitiveness of a firm can slide dramatically in domestic and international
markets. If a nation is unstable the monetary authorities in that country could devalue
the monetary unit, for example the United States has an issue with inflation given the
housing market mess and the resulting credit crunch. This would indirectly and
negatively impact the accounting numbers reported and quite possibly the health of the
firm.
Operating vs. Capital Leases
Under GAAP there are two ways to account for leases which are common in the
toy and games industry. An operating lease transfers the right to use the property over
a fixed period. The lessee does not have to endure any risks of ownership so the lease
affects the income statement not the balance sheet. Capital leases affect the balance
sheet and are depreciated with an interest expense component on payments each year.
Operating leases are common in this industry since firms prefer to keep leases off the
books and expenses can be deferred if it is an operating lease.
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Brand Image
The firm Hasbro discloses quite a bit about what are deemed “core brands” these
are highly visible products to the public, meaning that they are well known. In the 2008
10-k it was disclosed that “The Company remains focused on growing core owned and
controlled brands” and even disclosed its strategy quoted below:
“In 2007, the Company had significant sales of products related to the Company’s license with
Marvel Entertainment, Inc. and Marvel Characters, Inc. (collectively “Marvel”), primarily due to
the theatrical release of SPIDERMAN-3 in May of 2007. Given the strength of its core brands,
the Company may also seek to drive product-related revenues by increasing the visibility of its
core brands through entertainment-based theatrical venues. As an example of this, in July of
2007, the TRANSFORMERS motion picture was released and the Company developed and
marketed products based on the motion picture. As a result of pairing this core brand with this
type of entertainment, both the movie and the product line benefited.”
On the next page is the accounting numbers for advertising expenses as a
percentage of sales for the past eight years. This clearly shows that strong expenditures
for Hasbro are an important key success factor.
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Accounting Flexibility
Accounting flexibility is constrained by the Generally Accepted Accounting
Principles for firms in the toy and games industry. These principles can change over
time and companies are required to keep their statements up to date on these matters.
Accounting standards put forth by FASB may not accurately reflect economic reality for
a firm and may not allow flexibility in reporting their picture. An example is research
and development expenditures that can only be expensed in financial statements even
though at times during the development process it may be more logical economically to
record under current or long term assets. For this industry, that means at any stage of
research and development can no expenditure be capitalized. When managers have
flexibility in accounting standards, the accounting numbers may give a better picture of
the economic health of the firm and will be more informative. Where managers are
constrained an accurate view of the company may not be reported. It is important to
determine the level of accuracy in GAAP to make sense of items in the financial
statements in order to get a good idea of a company’s value.
Goodwill
The most recent change in GAAP that affected many companies and investors
concerns goodwill. On January 1, 2002 the GAAP was changed under the SFAS 142,
stating that goodwill and other identifiable intangible assets that have indefinite useful
lives are to no longer be amortized. Companies have to reduce goodwill if fair value is
less than carrying value by using the present value of future cash flows. As it was put
by Dr. Stanley Jay Feldman, “The introduction of 141 removed the use of pooling when
accounting for acquisitions in favor of the purchase method. FAS142 provides guidance
for determining whether tangible and intangible assets and goodwill have lost market
value, or in the language of the FASB have been impaired, subsequent to their
purchase. Both 141 and 142 break new ground since they focus on the “fair market
values” rather than book values of acquired assets, liabilities and goodwill” (Axiom
Valuations). The amortization was a concession over the removal of the pooling
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method. Below is an industry comparison of the carrying amount of goodwill for each
major firm.
2007 2006 2005 2004
Mattel $845,649 $845,324 $718,069 N/A
Hasbro $471,180 $469,938 $467,061 $469,726
JAKKS $353,340 $338,00 $269,300 $258,330
LeapFrog N/A N/A N/A N/A
(Source: 10-k’s from respective firms, in thousands)
In the game and toy industry, goodwill commonly arises from a merger. For
example, let’s say Hasbro, Inc. purchased Cranium Inc. for $77.5 million, $77.5 million
being the overall value, but there may be only $60 million worth of net assets. This
means $17.5 million in goodwill that will be booked by Hasbro, Inc. on the balance
sheet.
Research and development
Investments in this area under GAAP will not be shown in the assets section of
the balance sheet given the required rules put forth by FASB under the SEC. Under the
matching principle revenues have to be matched with expenses and an investment
under research and development in the toy and games industry is the development of a
particular product that could bring about future profits. Since the revenues may not be
likely the expenses from R&D cannot be spread over the course of potential revenues.
At any point of the R&D process not a single expenditure can be capitalized. At times to
get an accurate view of the economic picture it would be a good idea to at least
capitalize some R&D, this is because R&D is a critical success factor and is a good
indicator of potential future profits from products being developed. An inaccurate view
may be shown under GAAP. To tie this all in consider the goodwill example, Cranium
Inc. could have R&D expenses of its own on an upcoming product nearly weeks away
for sale that is near the end of its R&D process. “When an acquisition is completed, the
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acquiring company must identify and allocate goodwill to the acquired assets. If an
acquired company is conducting research and development on a new product, but that
product is not yet being sold, GAAP requires that any premium in the purchase price
over book value attributed to that product be expensed. This scenario is referred to as
in-process research and development” (Investopedia.com). Remember Cranium Inc.
was purchased by Hasbro, Inc. for $77.5 million. Hasbro, Inc. may determine the
product to be worth $10 million of the purchase price and GAAP requires that to be
expensed as opposed to being treated as goodwill. The goodwill that Hasbro, Inc. has
to record to investors appears as $7.5 million not the $17.5 million as previously
thought. Earnings will suffer because of the expense, but this does not mean that the
merger was a bad deal, what resulted was a constraint in GAAP requirements. GAAP
methods and requirements or constraints and inflexibility are not our friend in
determining the future value of a firm given its R&D or an acquisition. This inflexibility
doesn’t give an accurate economic view for firms in this industry.
Pensions
There is flexibility in pension and post retirement plans. The company gets to
pick important aspects like how old the employees can be until they can retire, at what
age do they start qualifying for these plans, and how long they have been of service at
the company to be qualified for these plans; no two companies are the same. Also, the
company has to pick a correct discount rate for their plans and rate of return on plan
assets. These numbers that the companies pick can either understate or overstate the
expenses. Recently, the FASB issued “SFAS No. 158” which states that “the Company is
required to recognize on its balance sheet actuarial gains and losses and prior service
costs that have not yet been included in income as an adjustment of equity through
other comprehensive earnings with a corresponding adjustment to prepaid pension
expense or the accrued pension liability” (Hasbro 2007 10-K). This has caused an
increase in the pension liability. Now Hasbro has to show these items on their books to
show all the costs that were recognized and unrecognized.
41
Operating vs. Capital lease
Leases are very common in the toy and games industry and there is flexibility in
determining on how to account for the two. The choice offered by GAAP on how to
account for the lease would be to classify the lease as an operating lease or a capital
lease. The financial accounting standards board states only one of four criteria has to
be met to be treated as a capital lease. The criteria are as follows:
(a) The lease life exceeds 75% of the life of the asset
(b) There is a transfer of ownership to the lessee at the end of the lease term
(c) There is an option to purchase the asset at a "bargain price" at the end of the lease
term.
(d) The present value of the lease payments, discounted at an appropriate discount
rate, exceeds 90% of the fair market value of the asset.
(Source: pages.stern.nyu.edu)
This demonstrates that there is some flexibility in GAAP to allow for what should be a
capital lease to be treated as an operating lease. Since there is an incentive to use
operating leases it is important to understand the impact of this accounting choice.
“Since operating leases keep substantial liabilities away from plain sight, they have the
added benefit of boosting--artificially, critics say--key performance measures such as
return-on-assets and debt-to-capital ratios” (investopedia.com).
Actual Accounting Strategy
In analyzing a company it is necessary to determine the firm’s actual accounting
strategy. Managers determine the use of an aggressive or conservative accounting
strategy to communicate the financial statements. However, this can lead to a distortion
of the true performance of the company while still meeting the requirements as stated
by GAAP. Another important factor when assessing the potential of the firm is to
42
determine the level of disclosure. A high level of disclosure allows a true picture of the
firm while a low level forces assumptions and can be misleading at times.
Disclosure information is required for a firm to report. However, the level of
disclosure is determined by management. As in investor the more information disclosed
can help determine the performance of the company. Hasbro overall disclosure is good
and informing of the company’s financials. With research and development, royalties,
and licensing the company has to make assumptions and predictions on the customer’s
acceptance of the products. This can lead to many risks and uncertainty in the
financials causing an overstatement or understatement and as stated in the 10-K
Hasbro is under no obligation to make revisions after the filing date. Also the timing
between expenses and revenues makes them borrow more in order to meet their cash
flow requirements. This can lead to some confusion in the financials and would not be
known until a new filing.
With disclosure, managers have a say at what is stated and what is written
down, as well as using guidelines stated by GAAP. However, Hasbro uses a more of an
aggressive accounting strategy when it comes to goodwill and other intangible assets.
As Hasbro stated in their 10K, they determine goodwill is the amount by which the cost
of an acquisition accounted for by using the purchase method. However, GAAP
requires that goodwill be periodically evaluated for impairment, rather than amortized.
At the end of 2007, 14.6% or approximately $471,177 of total assets represented
goodwill, a change from 2006 which was approximately $469,938 or 15.2%. (Hasbro’s
10K’s) Due to the change of evaluating goodwill on the fair value of reporting this
resulted in a write down of goodwill. This could also be harmful for the financial
statements by reducing net income.
Hasbro is open with disclosing their financial information unlike some of their
competitors. They want you to know about the company and try to include as much
information that makes them look profitable. However, managers could end up
manipulating the books in order to increase shareholders wealth. So they disclose
information based on the outcome of the company and in accordance to GAAP. Given
what was discussed earlier about things like operating leases, its consequences, and
43
how common the practice is in this industry; it would be important to undo these
operating lease distortions on the financial statements and in numerous ratios like
return-on-assets.
Qualitative Analysis of Disclosure A 10-K is each company’s own way of disclosing their financial information to
potential investors. With the 10-K being their own way, key word being “own,”
sometimes company’s have a tendency to have either almost full disclosure, making
company decisions transparent to investors, or limited disclosure, which makes
investors guess for themselves as to what goes on behind the books of the company.
Compared to other company’s in the industry, with specific comparisons to
Mattel’s 10-K, Hasbro has a very high level of disclosure. After reviewing the 10-K there
is not much information that a potential investor is left wondering because it is
presented very clearly. As other companies have high levels of disclosure but tend to
hide things in their 10-K, making it very difficult for a common investor to find, Hasbro
has a very easy to read, transparent 10-K. One of the things which stood out in the 10-
K, as aforementioned, was the distortions in operating leases. Also numerous ratios
seemed to fluctuate more than the industry average which is a sign that manager’s
might be making the books look better to make the company seem more profitable
than it is in order to attract investors and maximize shareholder wealth.
As Hasbro is under no obligation to go back and revise their 10-K, it benefits
from being able to capitalize things such as research and development and licensing
rights and fees. It is up to Hasbro and companies in this industry to decide how much
they think the licensing rights for Spider-Man, as an example, will produce revenue in
the future. If they believe that a product under research and development will be a big
money generator for years to come, such as Monopoly, capitalizing research and
development and licensing expenses is a good way for the managers to overstate Net
Income and make the company appear more profitable to investors.
Hasbro makes it very clear to investors exactly what is being spent to fund
licensing rights and fees as well as the costs of research and development. This and
44
how they portray the future expected earnings based on current research and
development and coming from licensing rights are what makes the level of disclosure in
Hasbro’s 10-K so much higher and more clear to investors than other’s in the industry
such as Mattel which really makes it difficult to see this information.
Quantitative Analysis of Disclosure A very good way to compare the levels of disclosure and in most cases distortions
between companies in this industry is by examining revenue diagnostic ratios. If there
seem to be inconsistencies in the ratios it can go a long ways in showing if managers
are in fact inflating such things as revenue and net income to make their company
seem more attractive to investors and more profitable to shareholders. In the next
5graphs we attempted to show discrepancies in sales among Hasbro and its three
competitors by comparing Net Sales/ Cash from Sales, Net Sales/ Net Accounts
Recievables, Net Sales/ Warranty Liabilities, Net Sales/ Unearned Revenue, and Net
Sales/ Inventory.
45
Net Sales / Cash from Sales
Net Sales/ Cash from Sales
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
2003 2004 2005 2006 2007
Year
Net
Sal
es/ C
ash
from
Sal
es
HasbroMattelJakksMarvel
Net Sales / Cash from Sales shows how much of a company’s sales in a period
are collected in cash as apposed to on account, or in other words accounts receivables.
This graph shows that for the most part the majority of sales are collected in cash.
Though Marvel becomes a huge outlier in 2007 and Hasbro goes above 10 in both
2003, and 2004, for the most part the industry average is right around 0-1, which
means for every dollar of sales, one dollar is collected in cash. This makes perfect
sense because people buy toys and board games with cash and credit/debit cards and
there are not notes payable and long term loans for products they are selling.
46
Net Sales/ Net Accounts Receivables
Net Sales/ Net Accounts Recievables
-10
0
10
20
30
40
50
60
2003 2004 2005 2006 2007
Year
Net
Sal
es/ N
et A
ccou
nts
Rec
ieva
bles
HasbroMattelJakksMarvel
Net Sales / Net Accounts Receivable shows what percentages of sales were
credit transactions as opposed to cash transactions. It is better to have lower ratios
here because accounts receivables are interest free loans and it takes longer to collect
on the outstanding receivables. The ratios in this industry are relatively low which is
good because you do not want the majority of your sales to be accounts receivables.
Despite a large drop in receivables in 2005 by Mattel they returned to their average in
2006 which means there are no real red flags in the industry because despite small
increases and decreases the ratios all returned to their norms in subsequent years.
47
Net Sales / Inventory
Net Sales/ Inventory
-20
-15
-10
-5
0
5
10
15
20
25
30
2003 2004 2005 2006 2007
Year
Net
Sal
es/ I
nven
tory
HasbroMattelJakksMarvel
Net Sales/ Inventory is a ratio which shows how much a company’s inventory
levels contributes to their revenues. The higher the ratio is means that a company has
lower inventory costs coupled with high sales while lower ratios signify the opposite,
high inventory costs with low sales. Inventory costs are higher in this industry because
inventory holding periods are higher than most other industries. Through the flexible
delivery system these holding periods are kept lower but this is why these ratios are so
low. There were no real red flags which popped up because all firms maintained their
normal levels despite minor downs and ups. Marvel might seem like it manipulated its
sales however its large drop and gain still kept it right around its average which means
they probably changed their inventory system between 2004 and 2005 in order for it to
get back to normal levels in 2007.
48
Net Sales / Warranty Liabilities
Net Sales / Warranty Liabilities
-10
-5
0
5
10
15
20
25
2003 2004 2005 2006 2007
Year
Net
Sal
es /
War
rant
y Li
abili
ties
HasbroMattelJakksMarvel
There are very little warranty liabilities in this industry because there are no
warranties on most toys, board games, etc. This is the reason why these ratios are so
low. Again there are some moderate fluctuations from one year to the next especially
by Hasbro and it never really returns to its average which should be red flagged cause
it seems like Hasbro and Mattel might have manipulated their sales by underestimating
their warranty liabilities.
49
Net Sales / Unearned Revenues
Net Sales / Unearned Revenue
-2
-1
0
1
2
3
4
5
2003 2004 2005 2006 2007
Year
Net
Sal
es /
Une
arne
d R
even
ue
HasbroMattelJakksMarvel
Unearned Revenues are very low in this industry because there are very little
sales on credit and as seen before their accounts receivables are much lower in
proportion to their sales in cash. There were some serious fluctuations in Net Sales /
Unearned Revenues between two years however in each case it returned to the
average which means there are no real red flags suggesting that a firm manipulated its
sales by underestimating their unearned revenues.
50
Net Sales/Cash from Sales
2003 2004 2005 2006 2007 Hasbro 12.7 -0.69 0.41 -0.28 11.61
Mattel -0.48 2.27 6.75
Jakks 0.12 4.43 1.37 -1.87 1.11
Marvel -2.3 0.96 0.68 -4.96 -74.44
Net Sales/ Net Accounts Recievable
2003 2004 2005 2006 2007 Hasbro 6.14 4.89 -1.62 1.93 6.97
Mattel 1.41 0.66 47.63 2.57 6.75
Jakks 0.22 15.96 -5.77 1.58 2.93
Marvel 5.51 7.61 8.48 -0.84 -2.05
Net Sales/ Unearned Revenues
2003 2004 2005 2006 2007 Hasbro 1.4 -1.3 1.9 1.6 2.5
Mattel 2.4 3.1 3.2 3.8 4
Jakks 0.81 1.2 2.4 1.5 1.7
Marvel 0.61 1.2 -0.43 -0.35 1.8
Net Sales/ Warranty Liabilities
2003 2004 2005 2006 2007 Hasbro 4.16 -3.56 6.23 3.65 12.43
Mattel 5.1 7.5 7.4 17.4 20.1
Jakks 0.94 8.3 5.3 9.1 4.8
Marvel 3.5 8.2 -4.7 -1.3 9.2
Net Sales/ Inventory
2003 2004 2005 2006 2007 Hasbro 1.91 -0.72 0.5 0.31 2.65
Mattel 0.19 0.34 0.2 1.23 0.75
Jakks 0.13 5.17 1.31 1.35 0.83
Marvel 3.75 25.14 -13.37 -3.79 12.52
51
Potential Red Flags
In analyzing Hasbro, there were no significant changes in the ratios presenting a
red flag. However, the inventory turnover ratio had a minor decline from 2006 to 2007.
This is caused by having too much inventory on hand, causing the days’ supply of
inventory to increase. This could be due to recent events in the economy where people
aren’t spending as much on enjoyable items. There is a fear that this ratio will keep
declining in the future years, because of a possible recession that might occur. Another
possible red flag would be the amount of goodwill on the books. On Hasbro’s current
balance sheet they have $471 million of goodwill; this is in large part of the company’s
acquisition of Milton Bradley and Tonka. These two products have “indefinite life” and
have to go through impairment. This shows that not every item is reported as goodwill
and they are separated into other intangible assets, such as rights, patents, and
trademarks. Therefore, according to their financial records, Hasbro hasn’t shown a
significant increase or decrease in their statements.
52
Undo Accounting Distortions
Because many of the accounting numbers may be misleading or may not show
the true economic view of the firm, Hasbro, Inc., this section of the report will attempt
to undo some of these distortions to show a different view. Although not every
distortion can be perfectly undone, the changes made here are a rough estimate or a
different view than that provided by the firm or GAAP.
Research and development
The following happens to be Hasbro’s R&D expenses from their 10-k and after
are adjustments of R&D expenses for the past eight years. The outlays are amortized
over a three year period using the straight-line method and half a year’s amortization is
taken on last year’s spending.
Hasbro
The following page displays how the calculations were done on capitalizing and
expensing Hasbro’s research and development.
53
The adjustments:
R&D assets
2008 2007
Year R&D Proportion Capitalized Asset Proportion Capitalized Asset
2008 $167,194 (1-.33/2) 139607
2007 171,358 (1-.33/2-.33) 85536 (1-.33/2) 143,084
2006 150,586 (1-.33/2-.67) 24,847 (1-.33/2-.33) 76,046
2005 157,162 (1-.33/2-.67) 25,932
Total 250989 245,062
(In dollars, in thousands)
R&D amortization expense
2008 2007
Year R&D Proportion amortized Expense Proportion amortized Expense
2008 $167,194 .33/2 27,587
2007 171,358 .33 56,548 .33/2 28,274
2006 150,586 .33 49,693 .33 49,693
2005 157,162 .33/2 25,932 .33 51,863
2004 153,775 .33/2 23,625
Total 159,760 153,456
(In dollars, in thousands)
54
The entire picture for the firm Hasbro over the past eight years using the above
method on the previous page is shown below.
Balance Sheet & Income Statement
55
Note: The adjustment will give rise to a Deferred Tax Liability; we assume a 35%
marginal tax rate.
Not all R&D would bring in future revenue but it is safe to assume that some of it
will. The above numbers are a best case scenario, even if all R&D didn’t become
profitable it would not be as bad as the accounting numbers under GAAP. The graph
shows that net income gets a boost in later years as total expenses decrease. The
profitability picture of Hasbro changes dramatically. These numbers calculated will be
included in the restatement of financials for the forecasts, ratios, and valuations to
show a better economic view of Hasbro given the capitalization of research and
development.
Goodwill
On Hasbro’s balance sheet there has not been any major increase or decrease in
the amount of goodwill reported. The reported numbers do not demand to be redone
since they are relatively reasonable.
56
Pensions
As previously mentioned the rate of future compensation increase and rate of
returns on plan assets haven’t changed at all during the years, so these won’t produce
a large change in the pension expenses.
Operating leases
The weighted average discount rates disclosed in Hasbro’s 10-k in their
respective years over the past eight years were used to estimate the payments when
capitalizing operating leases. The effect on income should be the focus as there is a
benefit in the first couple of years that are offset in later years. Below are the results of
the discounting, all numbers in thousands.
57
58
The changes brought to the income and balance sheet to the firm Hasbro are
shown below and a tax rate of 35% is assumed, all numbers in thousands.
59
While these numbers show a benefit to Hasbro’s bottom line, the next eight
years not shown above but on the discounted payment pages before under the title
“effect on income” show a decrease. The effect is neutral overall when looking at the
whole time span beyond the past eight years, there is no net change to net income in
the end. In other words, the result shows no better or worse economic position when it
comes to the bottom line. However, this makes the past eight years look good but the
next eight years much worse and may effect forecasting. It should also be noted that
lease commitments are decreasing as the years go by, Hasbro may be terminating old
lease contracts but the firm is not replacing them. This shows that firm growth may be
impaired in some way or may be following a more profitable strategy. All capitalization
of leases really did was show was the related debt not previously shown before and the
new assets operated by Hasbro. It also broke apart the lease expense account and
allocated them into depreciation expense and interest expense. Although the return on
60
assets and debt to capital ratios would be inflated, the new numbers will not be shown
in the forecasts, ratios, or valuations as it would distort in a negative way with future
estimations, specifically forecasts without giving any better economic view of the firm
than before. This is because of the effect on income which shows a benefit in the past
eight years and a drag in the future. Below demonstrates the neutral effect on income
overall from the capitalization of the 2001 operating lease information from Hasbro’s
10-k, it is highlighted in yellow.
As can be seen the total is zero. All the previous discounting shows a benefit
upfront and a drag in what will be the forecasted years, accommodating this would be
difficult for us but it is important to know the effect on assets and liabilities on the
balance sheet after capitalization going forward, the leases magically appear.
61
Ratio Analysis, Forecast Financials, and Cost of
Capital Estimation
Ratio Analysis
LIQUIDITY ANALYSIS
The following ratios show how able a company is to meet their short term debt
obligations. These ratios are very significant because if the company does not have enough
current assets to meet its short term debt it could pose a default risk and make it a risk for
lenders and also a risk to promptly pay off outstanding accounts payable. This leads to higher
interest rates and less ability to finance R&D, PP&E expansion among other things. As shown in
the following financial statement analysis debt financing is very important in this industry and a
company being unable to meet its short term debt obligations is a red flag for not only potential
investors but also potential lenders. Ratios differ from industry to industry and that is why it is
most effective to compare ratios between competitors in the same industry which is what we
have done.
62
Current Ratio
Current Ratio
0
1
2
3
4
5
6
2003 2004 2005 2006 2007
Year
Cur
rent
Rat
io HasbroMattelJakksMarvel
Current Ratio is a company’s current assets divided by their current liabilities. As seen
above in the graph it is very important for that ratio to be above one because that enables
them to meet its short term requirements and also make the company more likely to receive
loans at lower interest rates. The higher the ratio the more liquid a company is and the lower
the ratio the less liquid it is. Hasbro is right on the industry average with a current ratio
fluctuating between 1.5 and just over 2. One of the reasons why this industry has higher ratios
is because these companies and the industry as a whole have many current assets including
inventory for an example. From 2003 to 2004 there was a decreasing trend in the industry but
over the past four years apart from Marvel, the industry has seen an increasing trend in their
current ratios.
63
Quick Asset Ratio
Quick Asset Ratio
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
2003 2004 2005 2006 2007
Year
Qui
ck A
sset
Rat
io
HasbroMattelJakksMarvel
Accounts receivables, securities, and cash make up quick assets and thus this ratio is a
little better indication of how liquid a company is as it does not take into account current assets.
Again Hasbro’s quick asset ratio is right in line with the industry average and has remained
relatively stable over the past 5 years while companies such as Marvel have seen their ratios dip
and become almost severe outliers. The quick ratio is a better indicator than the current ratio
of what position a company is in to meet its debt obligations. The reason this is more effective
than current ratio is because it excludes inventory. In this industry, where there is lots of
inventory which cannot be readily converted into cash, the quick asset ratio does a much more
effective job of representing the true position a company is in should it have to quickly fulfill its
debt obligations.
64
Inventory Turnover
Inventory Turnover
0
5
10
15
20
25
30
2003 2004 2005 2006 2007
Year
Inve
ntor
y Tu
rnov
er
HasbroMattelJakksMarvel
Inventory Turnover is a very important ratio for this industry because this industry
utilizes the flexible delivery system in order to keep inventory low and avoid having a lot of their
cash tied up in inventory. Again Hasbro is right in line with the industry average at right around
7 which means that they along with the rest of the companies do a relatively good job of
avoiding overproducing and having lots of excess inventory in their factories and as a result
have more free cash for investment, which helps relate to their quick asset ratio being where it
is. The inventory turnover has remained relatively stable as there is no clear upward or
downward trend.
65
Days Supply of Inventory
Days Supply of Inventory
0
10
20
30
40
50
60
70
80
90
2003 2004 2005 2006 2007
Year
Day
s Su
pply
of I
nven
tory
HasbroMattelJakksMarvel
Days supply of inventory measures the inventory hold period of a firm, or how long it
takes a company to turn its inventory into cash. As a result of the large amount of inventory
held by companies in the industry, this ratio is consequently pretty large with an average of
right around 55. Hasbro is almost right on the industry average while Marvel in 2004 and 2006
did the best in converting their inventory into cash. There was a decreasing trend in the
industry from 2003-2004 before going upward from 2005 till the present.
66
Receivables Turnover
Recievables Turnover
0
2
4
6
8
10
12
14
2003 2004 2005 2006 2007
Year
Rec
ieva
bles
Tur
nove
r
Hasbro MattelJakksMarvel
Accounts receivables turnover represents a company’s total sales divided by their
accounts receivables. As you can see in the graph the ratios for the company’s in the industry
are relatively low because many of their sales are not in cash and therefore they have a larger
portion of accounts receivables. As a result of this these low ratios do not show cause for
concern because Hasbro is right in line with the rest of the industry. The reason why the
accounts receivables make up such a large portion of a company’s sales in the industry is
because the stores that sell these company’s products purchase large numbers of inventory and
for the most part pay entirely on credit. The purpose of this ratio is to show how effective a
firm is at extending credit and collecting on its debts. Having a higher ratio is very important
because it means the company is effectively able to collect its accounts receivable. In 2006
Marvel’s ratio was much lower than its competitors and it is clear that Marvel reassessed its
policy on credit because by 2007 its ratio was the highest in the industry. The reason it is
important to collect the receivables in a quick manner is because the firms are not earning any
67
interest on this money and by collecting them they invest the cash in research and development
and other money making activities.
Days Sales Outstanding
Days Supply of Recievables
0.00
20.00
40.00
60.00
80.00
100.00
120.00
2003 2004 2005 2006 2007
Year
Day
s Su
pply
of R
ecie
vabl
es
HasbroMattelJakksMarvel
Day’s sales outstanding represent how long it takes to convert a company’s accounts
receivables into cash. As the accounts receivables turnover in the industry is so low, it makes
sense that the days supply of receivables would be as high as the bulk of sales are done on
credit and therefore take much longer to convert to cash then obviously cash sales would take.
The only downside to the higher length of time that it takes to turn accounts receivables to
cash is that it prevents the company from using the cash to reinvest. This is important because
it is an issue of the liquidity and efficiency of a firm because as mentioned previously,
68
outstanding accounts receivables are zero interest loans, and by having them outstanding for a
long period it could mean that should a firm be faced with having to quickly pay off its debt
obligations, it would not be able to because of its inability to collect its outstanding receivables.
Working Capital Turnover
Working Capital Turnover
-50.00
-40.00
-30.00
-20.00
-10.00
0.00
10.00
2003 2004 2005 2006 2007
Year
Wor
king
Cap
ital T
urno
ver
Hasbro MattelJakksMarvel
Working capital turnover measures how effectively a company uses its working capital to
generate sales. The higher the working capital turnover means that a company is generating
more money from sales than the money it is using to fund the actual sales themselves. This is
a very important ratio because it tells investors how well a company utilizes their working
capital to turn a profit. Marvel’s working capital turnover of -40 definitely sticks out in 2005 as
the industry average is right around 5. This could be attributed to them investing heavily in
R&D or PP&E in 2005. There is a relatively stable trend in the industry apart from Marvel’s
sudden drop in 2005. Working capital turnover is very important because a firm uses working
capital to fund its operations and also to purchase inventory which in turn generates sales
revenue for the firm.
69
Conclusion
The liquidity ratios are very important because they are used to show a company’s
ability to pay off its short term debt. This ability to pay off their short term debt is very
important because it shows how risky a company is for creditors when extending credit. After
analyzing the liquidity ratios of this industry it shows that the firms in the industry present little
risk to creditors as they do a good job at turning inventory into cash and collecting on their
outstanding receivables.
PROFITABILITY ANALYSIS
In this section ratios were used to show how successful Hasbro is at generating profit.
In the gross profit margin, operating profit margin, net profit margin, return on assets and
return on equity graphs it shows how Hasbro utilizes its assets to be productive and stay
competitive in the industry while comparing it to the only other competitors in its industry.
Gross profit margin, operating profit margin, and net profit margin are profitability ratios and
show how profitable companies in the industry are while the other ratios measure the
companies productivity and all of the graphs are very important in determining how efficient,
profitable, and productive a company is.
70
Gross Profit Margin
Gross Profit Margin
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2003 2004 2005 2006 2007
Year
Gro
ss P
rofit
Mar
gin
HasbroMattelJakksMarvel
Gross profit margin compares a company’s gross profit to its sales. It is good to have
high gross profit margins because that means that the company has a higher proportion of
money left over from their revenues after covering their cost of goods sold. Hasbro does a
good job of keeping their cost of goods low while reaping the rewards of high selling prices for
the same goods. This is a very good tool for evaluation competitors in an industry because the
more efficient companies have the higher gross profit margins.
71
Operating Profit Margin
Operating Profit Margin
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
2003 2004 2005 2006 2007
Year
Ope
ratin
g Pr
ofit
Mar
gin
HasbroMattelJakksMarvel
Operating Profit Margin takes into account how what percentage of sales can be
attributed solely to a company’s operating income, or how profitable are a firm’s day to day
operations. The higher the operating profit margin the better because it means that the
company is keeping their fixed costs low and generating more sales off of fewer operating
income. Hasbro is right in line with Jakks and Mattel but Marvel has by far the highest ratio in
the industry at well over 40% in 4 out of 5 years. This means that Mattel has been increasing
their sales while at the same time keeping their fixed costs and operating expenses stable.
72
Net Profit Margin
Net Profit Margin
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2003 2004 2005 2006 2007
Year
Net
Pro
fit M
argi
n
HasbroMattelJakksMarvel
Net Profit Margin is similar to operating profit margin except for that it divides sales by
net income. Again it is more beneficial to have a higher net profit margin and again Marvel
leads the industry while Hasbro for once has the lowest net profit margin. This is an important
graph because it shows which company does the best job of keeping costs under control. The
higher the net profit margin means a firm has better control over its costs in comparison to its
competitors. This is also an important margin because it shows directly how profitable a
company is because it measures out of every dollar how much is kept by a company in its
earnings.
73
Asset Turnover
Asset Turnover
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
2003 2004 2005 2006 2007
Year
Ass
et T
urno
ver
HasbroMattelJakksMarvel
Asset turnover measures how productive a company is in using their assets to generate
revenue. More directly it shows the amount of sales generated for every dollar’s worth of
assets. It is important to have a high asset turnover because it shows a firm’s efficiency at
using its assets to generate sales or revenue. This turnover also conversely relates to net profit
margin because companies with high net profit margins tend to have lower asset turnovers and
vice versa. It is a good sign for the industry that there is an increasing trend in asset turnover
since 2003 and with an industry average of approximately one, it means that for every dollar of
assets in the industry, there is one dollar of revenue produced.
74
Return on Assets
Return on Assets
0.00
0.05
0.10
0.15
0.20
0.25
2003 2004 2005 2006 2007
Year
Ret
urn
on A
sset
s
HasbroMattelJakksMarvel
Return on assets measures how a company’s assets in the previous year translated into
their net income in the following year. This, like asset turnover, measures how productive a
company’s assets are, or how much revenue a company can generate from their assets. This
higher the ratio the more profitable a company’s investments in assets have been and can make
the company very attractive to potential investors. Once again Marvel seems to be making the
most profitable investments in their assets while Hasbro is one of the lowest returns in the
industry, almost 5 percent on average below the industry average. Apart from Mattel there is
an increasing trend among the firms in the industry in Return on Assets which is a very positive
sign for the industry as a whole because it means the company’s are doing a very good job
each year of increasing the productivity of their assets.
75
Return on Equity
Return on Equity
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
2003 2004 2005 2006 2007
Year
Ret
urn
on E
quity
Hasbro MattelJakksMarvel
Like return on assets, return on equity divides the current years net income by the
previous years equity. This is an important ratio because it lets investors get a sense of how
much of a company’s net income is generated by debt as opposed to equity. Marvel leads the
industry and finances their operations with the most debt while Hasbro is just below the
industry average and does a good job of financing their operations mainly from equity. The
more a company finances with equity the higher return that they will get and it is very
productive for Hasbro to not rely on debt financing as much as Marvel. The industry trend
remained relatively stable and in 2006 it began a small upward movement.
76
Conclusion
Not only do the graphs in this section show the efficiency and profitability of each
individual company, but they do a very important job in comparing firms in the industry in order
to show which firm is indeed the most efficient, productive, and profitable. After reviewing
these graphs it is clear that Hasbro is right in line with the industry average, and the industry as
a whole is showing an upward trend in almost all of the charts, which means good things for
the industry not only now but in the future.
77
CAPITAL STRUCTURE ANALYSIS
Capital structure analysis shows how well a firm finances its overall operations and
growth by using a mix of different sources of funds. These different sources are long and short
term debt, and common and preferred equity. These ratios show how risky a company is as
they show how much a company finances through debt, which makes the company a riskier bet
for investors and creditors alike.
Debt to Equity Ratio
Debt to Equity Ratio
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
2003 2004 2005 2006 2007
Year
Deb
t to
Equi
ty R
atio
HasbroMattelJakksMarvel
A firm’s debt to equity ratio shows what proportion of debt and equity the company is
using to finance its operations and assets. The higher the ratio the more heavily a company is
financing its growth through debt. This is not necessarily a bad thing because some firms could
see increased earnings from this debt financing while as if they didn’t finance with debt they
would not realize the same earnings. The key to this is that as long as a company is seeing
increased earnings higher than the interest they are paying on their debt, than it is a smart
78
move. The ratio shows that the industry trend has remained relatively stable at around .75.
Hasbro’s ratio like the rest of the industry has increased slightly since 2006 which means that
they are using debt financing to increase their scope of operations and hopefully to bolster
earnings in the future.
Debt Service Margin
Debt Service Margin
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
2003 2004 2005 2006 2007
Year
Deb
t Ser
vice
Mar
gin
HasbroMattelJakksMarvel
Debt service margin shows how much of a company’s cash flow from operations is
accounts for the current portion of their long term debt. Hasbro’s margin of 4 remains steady
and means that there are 4 dollars of cash from operations to pay for every dollar of long term
debt that is about to mature. The industry average is approximately 4 which is right where
Hasbro falls. This is a good measure of how much of a default risk a company is and Hasbro’s
79
ratio is very solid and shows that they are not much of a default risk whereas Jakks Pacific
would be a red flag for banks and lenders.
Altman’s Z-Score Credit Analysis
Altman Z-Scores
0
0.5
1
1.5
2
2.5
3
3.5
4
2003 2004 2005 2006 2007
Year
Z-Sc
ore Hasbro
MattelJakksMarvel
Altman’s z-score is analyzed by creditors in order to determine if the firm they are
lending to is a default risk. Altman’s z-score is determined by multiplying the weights of 5
variables by five different financial ratios.
80
1.2 (Net Working Capital / Total Assets)
+ 1.4(Retained Earnings / Total Assets)
+ 3.3 (EBIT / Total Assets)
+ 0.6 (Market Value of Equity / Book Value of Total Liabilities)
+ 1.0 (Sales / Total Assets)
By using this model it helps tell creditors what area the firm they are lending to falls under and
what that means when relating to their default risk. If a firm has a z-score under 1.81 then it is
predicted that they will go bankrupt. There is an unknown area between 1.81 and 2.67 where
the Altman z-score model is undetermined. However any firm with a z-score above 2.67 has
almost zero risk of default and bankruptcy and therefore is a safe bet to banks and creditors.
Altman Z-scores
2003 2004 2005 2006 2007
Hasbro 2.19 2.84 3.03 3.115 3.356
Mattel 3.299 3.26 3.328 3.313 3.367
Jakks 3.67 3.64 3.58 3.52 3.71
Marvel 2.59 2.91 3.04 3.45 3.51
Despite falling in the unknown area between 1.81 and 2.67 during 2003, Hasbro rebounded to
the safety of a z-score above 2.67 from 2004 until the present making them a safe option for
banks and lenders wishing to extend them credit. These z-scores were all above 2.67 except
for Marvel and Hasbro in 2003 which is a very good sign for the industry as the four biggest
competitors are all safely above the mark needed to qualify them as a risk of bankruptcy.
81
Internal Growth Rate and Sustainable Growth Rate Analysis
Internal Growth Rate
IGR
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
2003 2004 2005 2006 2007
Year
Inte
rnal
Gro
wth
Rat
e
HasbroMattelJakksMarvel
A firm’s internal growth is calculated by dividing its retained earnings by its total assets.
It measures the highest level of growth achievable for a firm without obtaining outside
financing (investopedia.com). This level of growth is generated through a company’s cash
flows and from looking at the chart the industry average is approximately 58% which means
that the industry has room to grow 58% without obtaining outside financing. Hasbro and
Mattel are both the lowest among their competitors and this can be attributed to the fact that
they already control the largest market share and thus have less room for growth than Jakks
and Marvel, two smaller competitors.
82
Sustainable Growth Rate
SGR
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2003 2004 2005 2006 2007
Year
Sust
aina
ble
Gro
wth
Rat
e
HasbroMattelJakksMarvel
A firm’s sustainable growth rate is calculated by multiplying its Return on Equity by one
minus the dividend payout ratio (EPS/DPS). The sustainable growth rate measures how much
room a firm has to grow before it has to borrow more money from another source to facilitate
its growth (investopedia.com). It is important to note that both Jakks Pacific and Marvel
Enterprises did not pay dividends in the last 5 years and thus their sustainable growth rates
were equivalent to their return on equity. That being said Hasbro has the least room to grow
before it has to rely on outside sources to facilitate its growth and moreover as an industry
there is really not very much room for growth as the industry average is approximately 16%.
83
Conclusion
After doing a complete capital structure analysis of Hasbro and its three competitors it is
clear that Hasbro has not only plenty of room for growth in the future but is also right on line
with the rest of the industry. It should be re-assuring that Hasbro is not a default risk and
neither are any of the other firms in the industry. Hasbro had no outliers in any of the graphs
and in all of the charts remained relatively stable.
Financial Statement Forecast
When analyzing a firm, it is necessary to forecast the financial statements in the
future and we have included a forecast of Hasbro’s financials for the next ten years.
There are many assumptions to be made in forecasting, but if you are thorough in our
assumptions, you can get a clear picture of the firm’s value. The forecasting process
begins with collecting five years of historical data, including the income statement,
balance sheet and statement of cash flows. We then proceeded to calculate a
common-sized statement in order to help make the results more realistic. This is all
done in order to link the financial statements together and to help predict how Hasbro
will perform in the next coming years.
Income Statement Analysis
In looking through our financial statements we decided that for the past three
years there is more of a steady relationship between the amounts. Therefore we based
our forecast on the past three years. With the income statement it was important to
use sales to help determine the industries average.
As we reviewed the data of Hasbro, we decided on our own sales growth to
forecast rather then the average calculated. We calculated the change in sales growth
from 2006 to 2007 to be approximately 21.77%, which was a drastic increase from the
previous years. Therefore, we decided to go with a 3% sales growth in order to
forecast a more accurate picture. This big increase was in part due to the new release
84
movies of Spider-Man 3 and Transformers. These box office hits helped Hasbro boost
their sales and reveal such a big sales growth. Another factor could have been the
modernization of new products using technological advances. For these reasons, we
didn’t go with the average growth rate.
Next we forecasted cost of revenue. We used our common sized income
statement to determine the change in the past five years. We determined the
percentage of cost of revenue and gross profit by averaging the past years since the
numbers were all closely related. We found cost of revenue to be 41.38% and gross
profit to be 58.62%. This will always total one because cost of revenue and gross profit
must equal total revenue.
We determined that research and development didn’t have a direct impact on
revenues. However, it does have an impact on the change in net income. As you can
see in the restated income statement, the amortization of research and development
had a slight increase in operating income, which in turn, a higher forecast was
determined.
We also evaluated net income as a percentage of total revenue over the past five
years. There was a steady increase over the past years so we decided to continue on
with the trend. We found the percentage of sales to be 9%. As a result, our forecast
shows a steady increase in the next ten years.
85
HASBRO'S INCOME STATEMENTin millions 2003 2004 2005 2006 2007 AVERAGE ASSUME 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue 3,138.66 2,997.51 3,087.63 3,151.48 3,837.56 3% 3,952.69 4,071.27 4,193.41 4,319.21 4,448.78 4,582.25 4,719.71 4,861.31 5,007.15 5,157.36 Total Revenue 3,138.66 2,997.51 3,087.63 3,151.48 3,837.56
Cost of Revenue, Total 1,287.96 1,251.66 1,286.27 1,303.89 1,576.62 1,635.69 1,684.76 1,735.30 1,787.36 1,840.98 1,896.21 1,953.10 2,011.69 2,072.04 2,134.20 Gross Profit 1,850.70 1,745.85 1,801.36 1,847.60 2,260.94 2,317.00 2,386.51 2,458.10 2,531.84 2,607.80 2,686.03 2,766.62 2,849.61 2,935.10 3,023.16
Selling/General/Administrative Expenses, Total 1,286.84 1,225.12 1,238.21 1,220.94 1,506.68 1,580.89 1,628.31 1,677.16 1,727.48 1,779.30 1,832.68 1,887.66 1,944.29 2,002.62 2,062.70 Research & Development 143.18 157.16 150.59 171.36 167.19 193.49 199.30 205.28 211.44 217.78 224.31 231.04 237.97 245.11 252.46 Depreciation/Amortization 76.05 70.56 102.04 78.93 67.72 97.64 100.57 103.59 106.69 109.89 113.19 116.59 120.08 123.69 127.40 Operating Income 344.62 293.01 310.52 376.36 519.35 444.97 458.32 472.07 486.24 500.82 515.85 531.32 547.26 563.68 580.59
Interest Income (Expense), Net Non-Operating (52.46) (23.97) (6.38) 0.09 (4.65) (5.93) (6.11) (6.29) (6.48) (6.67) (6.87) (7.08) (7.29) (7.51) (7.74) Other, Net (48.09) (8.96) 6.77 (34.98) (52.32) (39.53) (40.71) (41.93) (43.19) (44.49) (45.82) (47.20) (48.61) (50.07) (51.57) Income Before Tax 244.06 260.09 310.91 341.47 462.38 484.20 498.73 513.69 529.10 544.98 561.33 578.17 595.51 613.38 631.78
Income Tax - Total 69.05 64.11 98.84 111.42 129.38 118.58 122.14 125.80 129.58 133.46 137.47 141.59 145.84 150.21 154.72 Income After Tax 175.02 195.98 212.08 230.06 333.00 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16
Net Income Before Extra. Items 175.02 195.98 212.08 230.06 333.00 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16
Total Extraordinary Items (17.35) 0.00 0.00 0.00 0.00 - - - - - - - - - - Accounting Change (17.35) 0.00 0.00 0.00 0.00 - - - - - - - - - - Net Income 157.66 195.98 212.08 230.06 333.00 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16
Income Statement - Common Size2003 2004 2005 2006 2007 AVERAGE ASSUME
Sales Growth Percent -4.50% 3.01% 2.07% 21.77% 0.03Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Total Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Revenue, Total 41.04% 41.76% 41.66% 41.37% 41.08% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38%Gross Profit 58.96% 58.24% 58.34% 58.63% 58.92% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62%
Selling/General/Administrative Expenses, Total 41.00% 40.87% 40.10% 38.74% 39.26% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00%Research & Development 4.56% 5.24% 4.88% 5.44% 4.36% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90%Depreciation/Amortization 2.42% 2.35% 3.30% 2.50% 1.76% 2.47% 2.47% 2.47% 2.47% 2.47% 2.47% 2.47% 2.47% 2.47% 2.47% 2.47%Operating Income 10.98% 9.78% 10.06% 11.94% 13.53% 11.26% 11.26% 11.26% 11.26% 11.26% 11.26% 11.26% 11.26% 11.26% 11.26% 11.26%
Interest Income (Expense), Net Non-Operating -1.67% -0.80% -0.21% 0.00% -0.12% -0.56% -0.15% -0.15% -0.15% -0.15% -0.15% -0.15% -0.15% -0.15% -0.15% -0.15%Other, Net -1.53% -0.30% 0.22% -1.11% -1.36% -0.82% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00%Income Before Tax 7.78% 8.68% 10.07% 10.84% 12.05% 9.88% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25%
Income Tax - Total 2.20% 2.14% 3.20% 3.54% 3.37% 2.89% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%Income After Tax 5.58% 6.54% 6.87% 7.30% 8.68% 6.99% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Net Income Before Extra. Items 5.58% 6.54% 6.87% 7.30% 8.68% 6.99% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Total Extraordinary Items -0.55% 0.00% 0.00% 0.00% 0.00% -0.11%Accounting Change -0.55% 0.00% 0.00% 0.00% 0.00% -0.11%Net Income 5.02% 6.54% 6.87% 7.30% 8.68% 6.88% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Actual Accounting Financials Forecast Financial Statements
Actual Accounting Financials
86
HASBRO'S INCOME STATEMENT RESTATEDin millions 2003 2004 2005 2006 2007 AVERAGE ASSUME 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue 3,138.66 2,997.51 3,087.63 3,151.48 3,837.56 3% 3,952.7 4,071.3 4,193.4 4,319.2 4,448.8 4,582.2 4,719.7 4,861.3 5,007.1 5,157.4 Total Revenue 3,138.66 2,997.51 3,087.63 3,151.48 3,837.56
Cost of Revenue, Total 1,287.96 1,251.66 1,286.27 1,303.89 1,576.62 1,635.7 1,684.8 1,735.3 1,787.4 1,841.0 1,896.2 1,953.1 2,011.7 2,072.0 2,134.2 Gross Profit 1,850.70 1,745.85 1,801.36 1,847.60 2,260.94 2,317.0 2,386.5 2,458.1 2,531.8 2,607.8 2,686.0 2,766.6 2,849.6 2,935.1 3,023.2
Selling/General/Administrative Expenses, Total 1,286.84 1,225.12 1,238.21 1,220.94 1,506.68 1,580.9 1,628.3 1,677.2 1,727.5 1,779.3 1,832.7 1,887.7 1,944.3 2,002.6 2,062.7 Research & Development 0.00 0.00 0.00 0.00 0.00 - - - - - - - - - - Depreciation/Amortization 226.28 215.24 251.37 232.39 227.48 283.27 291.77 300.52 309.54 318.82 328.39 338.24 348.39 358.84 369.61 Operating Income 337.58 305.50 311.78 394.27 526.78 452.84 466.42 480.42 494.83 509.67 524.97 540.71 556.94 573.64 590.85
Interest Income (Expense), Net Non-Operating (52.46) (23.97) (6.38) 0.09 (4.65) (5.93) (6.11) (6.29) (6.48) (6.67) (6.87) (7.08) (7.29) (7.51) (7.74) Other, Net (48.09) (8.96) 6.77 (34.98) (52.32) (39.53) (40.71) (41.93) (43.19) (44.49) (45.82) (47.20) (48.61) (50.07) (51.57) Income Before Tax 244.06 260.09 310.91 341.47 462.38 484.20 498.73 513.69 529.10 544.98 561.33 578.17 595.51 613.38 631.78
Income Tax - Total 71.52 59.73 98.40 105.19 126.78 118.58 122.14 125.80 129.58 133.46 137.47 141.59 145.84 150.21 154.72 Income After Tax 172.54 200.36 212.51 236.28 335.60 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16
Net Income Before Extra. Items 172.54 200.36 212.51 236.28 335.60 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16
Total Extraordinary Items (17.35) 0.00 0.00 0.00 0.00 - - - - - - - - - - Accounting Change (17.35) 0.00 0.00 0.00 0.00 - - - - - - - - - - Net Income 137.84 200.36 212.51 236.28 335.60 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16
Income Statement - Common Size2003 2004 2005 2006 2007 AVERAGE ASSUME
Sales Growth Percent -4.50% 3.01% 2.07% 21.77% 0.03Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Total Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Revenue, Total 41.04% 41.76% 41.66% 41.37% 41.08% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38% 41.38%Gross Profit 58.96% 58.24% 58.34% 58.63% 58.92% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62% 58.62%
Selling/General/Administrative Expenses, Total 41.00% 40.87% 40.10% 38.74% 39.26% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00%Research & Development 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Depreciation/Amortization 7.21% 7.18% 8.14% 7.37% 5.93% 7.17% 7.17% 7.17% 7.17% 7.17% 7.17% 7.17% 7.17% 7.17% 7.17% 7.17%Operating Income 10.76% 10.19% 10.10% 12.51% 13.73% 11.46% 11.46% 11.46% 11.46% 11.46% 11.46% 11.46% 11.46% 11.46% 11.46% 11.46%
Interest Income (Expense), Net Non-Operating -1.67% -0.80% -0.21% 0.00% -0.12% -0.56% -0.15% -0.15% -0.15% -0.15% -0.15% -0.15% -0.15% -0.15% -0.15% -0.15%Other, Net -1.53% -0.30% 0.22% -1.11% -1.36% -0.82% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00%Income Before Tax 7.78% 8.68% 10.07% 10.84% 12.05% 9.88% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25%
Income Tax - Total 2.28% 1.99% 3.19% 3.34% 3.30% 2.82% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%Income After Tax 5.50% 6.68% 6.88% 7.50% 8.75% 7.06% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Net Income Before Extra. Items 5.50% 6.68% 6.88% 7.50% 8.75% 7.06% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Total Extraordinary Items -0.55% 0.00% 0.00% 0.00% 0.00% -0.11%Accounting Change -0.55% 0.00% 0.00% 0.00% 0.00% -0.11%Net Income 4.39% 6.68% 6.88% 7.50% 8.75% 6.84% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Actual Accounting Financials Forecast Financial Statements
Actual Accounting Financials
87
Balance Sheet Analysis
The next financial statement that needs to be forecasted is the balance sheet.
We first forecasted total assets using an asset turnover asset ratio of 1.25% which is
has been a steady increase since 2003. We calculated that Hasbro would have
approximately $4.1 Billion dollars in 2017.
Next we forecasted accounts receivables. We decided to use the past three
years to get an average from the common size statement. This was done because
there was an increase from 2005 so we decided to continue on with the trend and use
20.5%.
We went on to determine current assets and non-current assets and then
calculated total assets by using the asset turnover ratio. We then used owner’s equity
and total assets to find total liabilities by taking total assets minus total equity. Overall
total assets will gradually increase at a small rate due to new technology and new
development of products. Therefore, because balance sheets have to balance total
liabilities and owner’s equity equal the sum of total assets. However, we believe that
this could be a good assumption about there financials in the future but there could still
be error in these numbers because of assumptions.
88
HASBRO'S BALANCE SHEETin millions 2003 2004 2005 2006 2007 AVERAGE ASSUME 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017ASSETSCash and cash equivalents 520.75 725.00 942.27 715.40 774.46 0.24 960.33 1,190.81 1,476.60 1,830.98 2,270.42 2,815.32 3,491.00 4,328.84 5,367.76 6,656.02 Accounts receivable 607.56 578.71 523.23 556.29 654.79 18.22 0.205 789.02 950.77 1,145.68 1,380.54 1,663.55 2,004.58 2,415.52 2,910.70 3,507.40 4,226.41 Inventories 168.98 194.78 179.40 203.34 259.08 6.27 0.07 277.22 296.62 317.39 339.60 363.37 388.81 416.03 445.15 476.31 509.65 Prepaid expenses and other current assets 211.98 219.74 185.30 243.29 199.91
Total current assets 1,509.26 1,718.22 1,830.20 1,718.32 1,888.24 1,893.18 1,949.97 2,008.47 2,068.73 2,130.79 2,194.71 2,260.55 2,328.37 2,398.22 2,470.17 Property, plant and equipment, net 199.85 206.93 164.05 181.73 187.96
Other assetsGoodwill 463.68 469.73 467.06 469.94 471.18 0.1461 540.02 618.91 709.34 812.97 931.74 1,067.87 1,223.89 1,402.70 1,607.63 1,842.51 Other intangibles, net 710.64 637.93 613.43 532.26 486.23 0.19 578.62 688.55 819.38 975.06 1,160.32 1,380.78 1,643.13 1,955.33 2,326.84 2,768.94 Other 279.94 207.85 226.41 194.67 203.45
Total other assets 1,454.26 1,315.50 1,306.90 1,196.86 1,160.86 40.13% 1,268.97 1,307.04 1,346.25 1,386.64 1,428.24 1,471.08 1,515.22 1,560.67 1,607.49 1,655.72
Total assets 3,163.38 3,240.66 3,301.14 3,096.91 3,237.06 ato: 1.25 3,162.15 3,257.01 3,354.72 3,455.37 3,559.03 3,665.80 3,775.77 3,889.04 4,005.72 4,125.89
LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesShort-term borrowings 23.35 17.96 14.68 10.58 10.20Current portion of long-term debt 1.33 324.12 32.77 0.00 135.35Accounts payable 158.97 167.59 152.47 160.02 186.20Accrued liabilities 746.40 638.94 710.81 735.30 555.92
Total current liabilities 930.06 1,148.61 910.73 905.89 887.67 1.83 0.0201 905.51 923.71 942.28 961.22 980.54 1,000.25 1,020.35 1,040.86 1,061.79 1,083.13 Long-term debt, excluding current portion 686.87 302.70 495.62 494.92 709.72Other liabilities 141.21 149.63 171.32 158.21 254.58
Total liabilities 1,758.14 1,600.94 1,577.67 1,559.02 1,851.97 1,524.83 1,367.14 1,212.69 1,062.37 917.19 778.26 646.84 524.31 412.22 312.30
Shareholders equityPreference stockCommon stock 104.85 104.85 104.85 104.85 104.85Additional paid-in capital 397.88 380.75 358.20 322.25 369.09Deferred compensation (0.68) (0.10) (0.02)Retained earnings 1,567.69 1,721.21 1,869.01 2,020.35 2,261.56 2,513.79 2,766.35 3,018.51 3,269.46 3,518.30 3,764.00 4,005.40 4,241.21 4,469.97 4,690.06Accumulated other comprehensive earnings 30.48 82.39 15.35 11.19 74.94Treasury stock (694.98) (649.37) (623.90) (920.75) (1,425.35)
Total shareholders equity 1,405.24 1,639.72 1,723.48 1,537.89 1,385.09 1,637.32 1,889.88 2,142.04 2,392.99 2,641.83 2,887.53 3,128.93 3,364.74 3,593.50 3,813.59
Total liabilities and shareholders equity 3,163.38 3,240.66 3,301.14 3,096.91 3,237.06 0.0125 3,162.15 3,257.01 3,354.72 3,455.37 3,559.03 3,665.80 3,775.77 3,889.04 4,005.72 4,125.89
Proof of Retained EarningsBeginning Balance of retained earnings 1,567.69 1,721.21 1,869.01 2,020.35 2,261.56 2,513.79 2,766.35 3,018.51 3,269.46 3,518.30 3,764.00 4,005.40 4,241.21 4,469.97Add Net income for year 195.98 212.08 230.06 333.00 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16 less total dividends for year -37.09 -58.9 -75.28 -94.1 (103.51) (113.86) (125.25) (137.77) (151.55) (166.70) (183.37) (201.71) (221.88) (244.07) Ending Balance of Retained Earnings 1,726.58 1,874.39 2,023.79 2,259.25 2,513.79 2,766.35 3,018.51 3,269.46 3,518.30 3,764.00 4,005.40 4,241.21 4,469.97 4,690.06
5.37 5.38 3.44 (2.31)Proof of Book Value of EquityBeginning Balance of Book Value of Equity 1,385.09 1,637.32 1,889.88 2,142.04 2,392.99 2,641.83 2,887.53 3,128.93 3,364.74 3,593.50 Add Net income for year 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16 less total dividends for year (103.51) (113.86) (125.25) (137.77) (151.55) (166.70) (183.37) (201.71) (221.88) (244.07) Ending Balance of Book Value of Equity 1,637.32 1,889.88 2,142.04 2,392.99 2,641.83 2,887.53 3,128.93 3,364.74 3,593.50 3,813.59
Actual Accounting Financials Forecast Financial Statements
89
Balance Sheet - Common Size2003 2004 2005 2006 2007 AVERAGE ASSUME
ASSETSCash and cash equivalents 16.46% 22.37% 28.54% 23.10% 23.92% 22.88% 0.24Accounts receivable 19.21% 17.86% 15.85% 17.96% 20.23% 18.22% 0.205Inventories 5.34% 6.01% 5.43% 6.57% 8.00% 6.27% 0.07Prepaid expenses and other current assets 6.70% 6.78% 5.61% 7.86% 6.18% 6.63% 0.07
Total current assets 47.71% 53.02% 55.44% 55.48% 58.33% 54.00% 0.59Property, plant and equipment, net 6.32% 6.39% 4.97% 5.87% 5.81% 5.87% 0.0587
Other assetsGoodwill 14.66% 14.49% 14.15% 15.17% 14.56% 14.61% 0.1461Other intangibles, net 22.46% 19.69% 18.58% 17.19% 15.02% 18.59% 0.19Other 8.85% 6.41% 6.86% 6.29% 6.29% 6.94% 0.065
Total other assets 45.97% 40.59% 39.59% 38.65% 35.86% 40.13% 0.4013
Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesShort-term borrowings 1.33% 1.12% 0.93% 0.68% 0.55% 0.92%Current portion of long-term debt 0.08% 20.25% 2.08% 0.00% 7.31% 5.94%Accounts payable 9.04% 10.47% 9.66% 10.26% 10.05% 9.90%Accrued liabilities 42.45% 39.91% 45.05% 47.16% 30.02% 40.92%
Total current liabilities 52.90% 71.75% 57.73% 58.11% 47.93% 57.68% 55.00%Long-term debt, excluding current portion 39.07% 18.91% 31.41% 31.75% 38.32% 31.89%Other liabilities 8.03% 9.35% 10.86% 10.15% 13.75% 10.43%
Total liabilities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Shareholders equityPreference stockCommon stock 7.46% 6.39% 6.08% 6.82% 7.57% 6.87%Additional paid-in capital 28.31% 23.22% 20.78% 20.95% 26.65% 23.98%Deferred compensation -0.05% -0.01% 0.00% 0.00% 0.00% -0.01%Retained earnings 111.56% 104.97% 108.44% 131.37% 163.28% 123.92%Accumulated other comprehensive earnings 2.17% 5.02% 0.89% 0.73% 5.41% 2.84%Treasury stock -49.46% -39.60% -36.20% -59.87% -102.91% -57.61%
Total shareholders equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Actual Accounting Financials
90
HASBRO'S BALANCE SHEET RESTATEDin millions 2003 2004 2005 2006 2007 AVERAGE ASSUME 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017ASSETSCash and cash equivalents 520.75 725.00 942.27 715.40 774.46 0.24 960.33 1,190.81 1,476.60 1,830.98 2,270.42 2,815.32 3,491.00 4,328.84 5,367.76 6,656.02 Accounts receivable 607.56 578.71 523.23 556.29 654.79 18.22 0.205 789.02 950.77 1,145.68 1,380.54 1,663.55 2,004.58 2,415.52 2,910.70 3,507.40 4,226.41 Inventories 168.98 194.78 179.40 203.34 259.08 6.27 0.07 277.22 296.62 317.39 339.60 363.37 388.81 416.03 445.15 476.31 509.65 Prepaid expenses and other current assets 211.98 219.74 185.30 243.29 199.91
Total current assets 1,509.26 1,718.22 1,830.20 1,718.32 1,888.24 1,893.18 1,949.97 2,008.47 2,068.73 2,130.79 2,194.71 2,260.55 2,328.37 2,398.22 2,470.17 Property, plant and equipment, net 199.85 206.93 164.05 181.73 187.96
Other assetsGoodwill 463.68 469.73 467.06 469.94 471.18 0.1461 540.02 618.91 709.34 812.97 931.74 1,067.87 1,223.89 1,402.70 1,607.63 1,842.51 Other intangibles, net 928.58 866.84 901.16 777.32 737.22 0.19 877.29 1,043.98 1,242.33 1,478.38 1,759.27 2,093.53 2,491.30 2,964.65 3,527.93 4,198.24 Other 279.94 207.85 226.41 194.67 203.45
Total other assets 1,672.20 1,544.42 1,594.63 1,441.93 1,411.85 40.13% 1,268.97 1,307.04 1,346.25 1,386.64 1,428.24 1,471.08 1,515.22 1,560.67 1,607.49 1,655.72
Total assets 3,181.47 3,262.64 3,424.83 3,160.24 3,300.09 ato: 1.25 3,162.15 3,257.01 3,354.72 3,455.37 3,559.03 3,665.80 3,775.77 3,889.04 4,005.72 4,125.89
LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesShort-term borrowings 23.35 17.96 14.68 10.58 10.20Current portion of long-term debt 1.33 324.12 32.77 0.00 135.35Accounts payable 158.97 167.59 152.47 160.02 186.20Accrued liabilities 746.40 638.94 710.81 735.30 555.92
Total current liabilities 930.06 1,148.61 910.73 905.89 887.67 1.83 0.0201 905.51 923.71 942.28 961.22 980.54 1,000.25 1,020.35 1,040.86 1,061.79 1,083.13 Long-term debt, excluding current portion 686.87 302.70 495.62 494.92 709.72Other liabilities 217.50 229.75 251.38 243.98 342.42
Total liabilities 1,758.14 1,600.94 1,577.67 1,559.02 1,851.97 1,154.66 769.25 364.31 (61.55) (509.83) (982.16) (1,480.34) (2,006.29) (2,562.15) (3,150.21)
Shareholders equityPreference stockCommon stock 104.85 104.85 104.85 104.85 104.85Additional paid-in capital 397.88 380.75 358.20 322.25 369.09Deferred compensation (0.68) (0.10) (0.02)Retained earnings 1,709.36 1,863.00 2,017.68 2,179.64 2,424.70 2,883.96 3,364.23 3,866.88 4,393.38 4,945.32 5,524.43 6,132.58 6,771.81 7,444.33 8,152.57Accumulated other comprehensive earnings 30.48 82.39 15.35 11.19 74.94Treasury stock (694.98) (649.37) (623.90) (920.75) (1,425.35)
Total shareholders equity 1,546.90 1,781.52 1,872.15 1,697.18 1,548.24 2,007.49 2,487.76 2,990.42 3,516.92 4,068.86 4,647.96 5,256.11 5,895.34 6,567.87 7,276.10
Total liabilities and shareholders equity 3,163.38 3,240.66 3,301.14 3,096.91 3,237.06 0.0125 3,162.15 3,257.01 3,354.72 3,455.37 3,559.03 3,665.80 3,775.77 3,889.04 4,005.72 4,125.89
Actual Accounting Financials Forecast Financial Statements
91
Cash Flow Analysis
The statement of cash flows helps us better understand the operating, financing,
and investing activities of the company. We first calculated the Cash Flows from
Operations/ Sales, Cash Flows from Operations/ Net Income, and Cash Flows from
Operations/ Operating Income. We calculating these ratios we determined CFFO/Sales
was our best estimate for forecasting cash flows from operations. We used a ratio of
13.67% and forecasted the values for the next ten years. Cash flows from investing
activities are reflected by the net change in assets each year. The can be used because
when there is an increase in long term assets, cash is used to purchase these items. All
this was helpful information to help us predict the future out come of the company.
92
HASBRO'S CASH FLOW2003 2004 2005 2006 2007 AVERAGE ASSUME 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net Income/Starting Line 157.66 195.98 212.08 230.06 333 51% 362.97 395.64 431.24 470.06 512.36 558.47 608.74 663.52 723.24 788.33 Depreciation/Depletion 88.07 75.62 78.1 67.77 88.8Amortization 76.05 70.56 102.04 78.93 67.72Deferred Taxes 22.77 34.62 -24.03 24.97 37.58Non-Cash Items 51.5 -2.31 -2.01 42.27 73.77Accounting Change 17.35 0 0 0 0Unusual Items 33.97 -2.45 -2.08 34.4 44.37Other Non-Cash Items 0.17 0.14 0.07 7.87 29.4Changes in Working Capital 58.1 -15.97 130.46 -123.35 0.92Accounts Receivable -13.2 75.59 39.34 -10.71 -74.94Inventories 34.85 -15.84 10.68 -17.62 -44.27Prepaid Expenses 7.85 29.42 74.53 -35.17 79.25Payable/Accrued 16.71 -89.74 33.21 -20.68 64.94Other Liabilities 11.9 -15.41 -27.31 -39.17 -24.05Cash from Operating Activities 454.16 358.51 496.62 320.65 601.79 123.03 446.56 486.75 530.56 578.31 630.36 687.09 748.93 816.33 889.80 969.88
Capital Expenditures -63.07 -79.24 -70.58 -82.1 -91.53Purchase of Fixed Assets -63.07 -79.24 -70.58 -82.1 -91.53Other Investing Cash Flow Items, Total -1.81 -5.73 -50.09 -1.5 -20.93Acquisition of Business 0 -9.82 -79.18 0 -18Sale of Fixed Assets 4.57 4.31 33.08 1.2 0.59Sale/Maturity of Investment 0 0 0 941.12 43.7Purchase of Investments 0 0 0 -941.12 -43.7Other Investing Cash Flow -6.38 -0.21 -3.99 -2.7 -3.52Cash from Investing Activities -64.88 -84.97 -120.67 -83.6 -112.47 5.87 (119.07) (126.06) (133.46) (141.30) (149.59) (158.37) (167.67) (177.51) (187.93) (198.96)
Financing Cash Flow Items 0 0 0 14.96 -182.99Other Financing Cash Flow 0 0 0 14.96 -182.99Total Cash Dividends Paid -20.85 -37.09 -58.9 -75.28 -94.1 10% (103.51) (113.86) (125.25) (137.77) (151.55) (166.70) (183.37) (201.71) (221.88) (244.07) Issuance (Retirement) of Stock, Net 36.51 25.84 -2.75 -370.49 -501.69Issuance (Retirement) of Debt, Net -388.97 -64.57 -96.99 -36.47 344.86Cash from Financing Activities -373.31 -75.82 -158.64 -467.28 -433.92
0.5621461 0.6297114 0.7824123 0.8
CFFO/Sales 14.47% 11.96% 16.08% 10.17% 15.68% 13.67% 13.67% 13.67% 13.67% 13.67% 13.67% 13.67% 13.67% 13.67% 13.67% 13.67%CFFO/Net Income 288.06% 182.93% 234.17% 139.38% 180.72% 205.05% 180.00% 180.00% 180.00% 180.00% 180.00% 180.00% 180.00% 180.00% 180.00% 180.00%CFFO/Operating Income 131.79% 122.35% 159.93% 85.20% 115.87% 123.03% 123.03% 123.03% 123.03% 123.03% 123.03% 123.03% 123.03% 123.03% 123.03% 123.03%
Actual Accounting Financials Forecast Financial Statements
93
Cash Flow - Common Size2003 2004 2005 2006 2007 AVERAGE ASSUME
Net Income/Starting Line 34.71% 54.67% 42.70% 71.75% 55.33% 51.83% 0.51Depreciation/Depletion 19.39% 21.09% 15.73% 21.14% 14.76% 18.42%Amortization 16.75% 19.68% 20.55% 24.62% 11.25% 18.57%Deferred Taxes 5.01% 9.66% -4.84% 7.79% 6.24% 4.77%Non-Cash Items 11.34% -0.64% -0.40% 13.18% 12.26% 7.15%Accounting Change 3.82% 0.00% 0.00% 0.00% 0.00% 0.76%Unusual Items 7.48% -0.68% -0.42% 10.73% 7.37% 4.90%Other Non-Cash Items 0.04% 0.04% 0.01% 2.45% 4.89% 1.49%Changes in Working Capital 12.79% -4.45% 26.27% -38.47% 0.15% -0.74%Accounts Receivable -2.91% 21.08% 7.92% -3.34% -12.45% 2.06%Inventories 7.67% -4.42% 2.15% -5.50% -7.36% -1.49%Prepaid Expenses 1.73% 8.21% 15.01% -10.97% 13.17% 5.43%Payable/Accrued 3.68% -25.03% 6.69% -6.45% 10.79% -2.06%Other Liabilities 2.62% -4.30% -5.50% -12.22% -4.00% -4.68%Cash from Operating Activities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Capital Expenditures 97.21% 93.26% 58.49% 98.21% 81.38% 85.71%Purchase of Fixed Assets 97.21% 93.26% 58.49% 98.21% 81.38% 85.71%Other Investing Cash Flow Items, Total 2.79% 6.74% 41.51% 1.79% 18.61% 14.29%Acquisition of Business 0.00% 11.56% 65.62% 0.00% 16.00% 18.64%Sale of Fixed Assets -7.04% -5.07% -27.41% -1.44% -0.52% -8.30%Sale/Maturity of Investment 0.00% 0.00% 0.00% -1125.74% -38.85% -232.92%Purchase of Investments 0.00% 0.00% 0.00% 1125.74% 38.85% 232.92%Other Investing Cash Flow 9.83% 0.25% 3.31% 3.23% 3.13% 3.95%Cash from Investing Activities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Financing Cash Flow Items 0.00% 0.00% 0.00% -3.20% 42.17% 7.79%Other Financing Cash Flow 0.00% 0.00% 0.00% -3.20% 42.17% 7.79%Total Cash Dividends Paid 5.59% 48.92% 37.13% 16.11% 21.69% 25.89%Issuance (Retirement) of Stock, Net -9.78% -34.08% 1.73% 79.29% 115.62% 30.56%Issuance (Retirement) of Debt, Net 104.19% 85.16% 61.14% 7.80% -79.48% 35.76%Cash from Financing Activities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Actual Accounting Financials
94
Cost of Capital Estimation
Cost of Equity
The estimated cost of equity, “Ke”, is calculated by using the Capital Asset Pricing
Model. According to Palepu & Healy’s Business Analysis & Valuation Using Financial Statements,
CAPM means “the sum of a required return on riskless assets plus premium for beta or systemic
risk.” To break this down into simple terms, the formula we are using is:
(CAPM)Ke= Rf +β (MRP)
The three main components we use in this formula are the risk free rate, “Rf” which
comes for the St. Louis Fed website, our beta, “β”, that we got from our highest adjusted R^2
in our regression tables, and lastly our market risk premium,“MRP”, which is calculated by
subtracting the market return from the risk free rate.
First of all, we have five points on the yield curve which consists of the treasury constant
maturity rates (3 months, 6 months, 2 year, 5 year, and 10 year). Then we ran regressions for
five different horizons (72, 60, 48, 36, and 24 months) for each point on the yield curve.
Overall, the data we computed were the firm’s monthly stock returns, the market
returns which we got from S&P 500 overall prices, the risk free rates from the treasury constant
maturity rates which we computed into monthly rates, and lastly the market risk premiums
which we got from subtracting the firm’s monthly stock returns from the risk free rates. These
regressions required the monthly stock return data and the market risk premium data from
each treasury rate. We ran these regressions to find our highest adjusted R^2, so we can use
that beta component. During running these regressions, we noticed that the betas, adjusted
R^2’s, and Ke’s were either similar to each other or exactly the same between the different
points and horizons.
95
Regression Analysis
3 Month
72 60 48 36 24
β 1.25 1.38 1.47 1.50 1.33
Adj.R^2 0.3350 0.3365 0.3668 0.4047 0.3881
T-stat 6.06 5.56 5.31 4.98 3.57
Risk Free 3.74% 3.74% 3.74% 3.74% 3.74%
Ke 13.61% 14.64% 15.35% 15.59% 14.25%
6 Month
72 60 48 36 24
β 1.25 1.38 1.47 1.50 1.34
Adj. R^2 0.3352 0.3368 0.3671 0.4054 0.3386
T-stat 6.07 5.56 5.32 4.99 3.57
Risk Free 3.74% 3.74% 3.74% 3.74% 3.74%
Ke 13.62% 14.64% 15.35% 15.59% 14.43%
96
2 Year
72 60 48 36 24
β 1.25 1.39 1.48 1.51 1.34
Adj. R^2 .3364 .3398 0.3709 0.4079 0.3400
T-stat 6.08 5.60 5.36 5.01 3.58
Risk Free 3.74% 3.74% 3.74% 3.74% 3.74%
Ke 13.62% 14.72% 15.43% 15.67% 14.33%
5 Year
72 60 48 36 24
β 1.25 1.40 1.48 1.50 1.33
Adj. R^2 0.3363 0.3414 0.3735 0.4076 0.3397
T-stat 6.08 5.62 5.39 5.01 3.58
Risk Free 3.74% 3.74% 3.74% 3.74% 3.74%
Ke 13.62% 14.80% 15.43% 15.59 14.25%
97
10 Year
72 60 48 36 24
β 1.25 1.40 1.48 1.49 1.32
Adj. R^2 0.3358 0.3417 0.3743 0.4062 0.3384
T-stat 6.07 5.62 5.40 4.99 3.57
Risk Free 3.74% 3.74% 3.74% 3.74% 3.74%
Ke 13.62% 14.80% 15.43% 15.51% 14.42%
After running a total of 25 regressions, we found that the 2 year treasury constant
maturity rate at 36 months gave us the highest adjusted R^2 of .4079 causing our beta to be
1.51. This is similar to what Yahoo! Finance reported our beta at which is 1.59. Beta is “a
measure of the volatility”
(http://www.investopedia.com/terms/b/beta.asp). Since our beta is more than 1, it is more
volatile according to investopedia.com. Through out all of our different five point yield curves,
the 36 month horizon gave the highest adjusted R^2 across the board. This is what gave us the
highest explanatory power for our beta. Also, with our highest adjusted R^2 being in the 2 year
treasury constant maturity rate, this shows us that we have a “medium-term investment”
(bnet.com), because 2 years is in the “one to three years” investment horizon. We used the 10
year treasury constant maturity rate of 3.74% for our risk free rates through out the different
regression periods. We found our market risk premium by taking the “1926-2005 period long
run average on the S&P 500’s index of 6.8%” (Business Analysis & Valuation Using Financial
Statements) and adding a size premium of 1.1% according to Hasbro’s market cap value and
table 8-1 in Palepu and Healy, totaling the market risk premium to be 7.9%. After we collected
all of this data, we concluded the calculation of our cost of equity:
Ke= .0374 + 1.51(.079) = 15.67%
Another method we learned about in class to calculate the cost of equity is called “the backdoor
approach”. This formula is P/B= 1 + (ROE-Ke)/(Ke-g). We got these variables from Yahoo!
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Finance and plugged them into the equation. Here we ended up getting a cost of equity of
12.60%, which is slightly less than our cost of equity above, but we felt it was best to go ahead
and use our cost of equity of 15.67% at this time in the year.
Cost of debt
When evaluating the cost of debt the 3 month AA commercial paper rate of 2.80% for
Hasbro’s accounts payable. For short term borrowings and accrued liabilities a disclosed rate of
4.70% was used. For the current portion of long term debt and long term debt a disclosed rate
of 6.50% was used. The pension rate of 8.75% was used for other liabilities. A percentage of
total liabilities was acquired for each listing of every item under the current liabilities section of
the balance sheet and multiplied by their respective rates to get a summed weighted rate of
2.19% for current liabilities. A percentage of long term liabilities were multiplied by their
respective rates mentioned and a total 3.69% was the result. A weighted average cost of debt
came to be 5.89% when adding the 3.69% weighted rate to the 2.19%weighted rate.
WACC
The cost of funds being 5.89% for debt and 15.67% for equity was multiplied by an
economic weighting that is the percentage of debt and equity to get a before tax WACC of
8.84%. The following equation is the before tax WACC.
(1) Cost of Debt*Economic weight = 3.22%
+
(2) Ke*Economic weight = 6.85%
=
(3) Total before tax WACC = 10.07%
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The economic weight is assumed to be a capital structure of 54.63% debt and 45.37% equity
and that target is assumed to hold reasonably around that target for this report. The after tax
WACC has an addition to step one that is a tax rate assumption of 38% or (1-.38) multiplied by
the cost of debt and by the economic weighting for a total WACC after tax rate of 8.85%.
Conclusion
After completing our regression analysis to find our beta, we estimated our cost of
equity to be 15.67%. With our beta being 1.51, Hasbro tends to be a more risky company,
because it is over 1. The cost of debt happened to be 5.89% and it should be noted that this is
expected to change given inflation concerns. These calculations show that a 15.1% cost of
equity will be used to discount forecasts of abnormal earnings and cash flows for equity
holders. The 10.07% WACC will be used to discount abnormal NOPAT and cash flows derived
from debt and equity.
Valuation Analysis
The valuation analysis is comprised in two sections, the method of comparables
and the intrinsic valuations to estimate the appropriate selling price of Hasbro. The
method of comparables section is comprised of the following measures, trailing P/E,
forward P/E, B/P, PEG, P/EBITDA, P/FCF, and EV/EBITDA. The intrinsic valuations
included the dividend discount model, discounted free cash flows model, abnormal
earnings growth, the residual income method, and the residual income perpetuity.
Method of Comparables
The comparables method is the not so accurate, no value added valuation
process to determine any off pricing in the marketplace. No value added means that no
unique opinion can be factored in; we are not adding any real value using this method
of comparables. The method itself revolves around industry averages and backing in to
a few ratios to acquire a share price for the firm Hasbro. The graph below is a summary
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of our results and the deviation of price using the ratios and industry averages. First of
all, since we were valuating our company’s as of April1, 2008, we had to use that share
price on that day for our company and their competitors. Also, we chose a 15% error
tolerance. So anything above $33.66 is considered undervalued and anything below
$24.88 is considered overvalued. As can be seen the price can vary widely on the ratio
used. Some firms were excluded or thrown out to prevent any extreme abnormality in
price when using the ratios and at many times this was the case. Also, we would like to
point out that we had to do many of the ratios over because of our restatements on the
financial information. Those adjustments caused a little bit of a change in most of all
the ratios. There were only two equations which were close and that are the trailing P/E
ratio and forward P/E ratio. Since our valuation date for our companies is April 1, 2008,
we used that price per share number for each of companies. The models and methods
are discussed in more detail past this graph below on calculation and meaning.
Model Suggested Price
Compared to Actual price
Trailing P/E $29.16 Fairly ValuedForward P/E $28.94 Fairly ValuedB/P $22.32 Overvalued D/P $18.66 Overvalued PEG $20.61 Overvalued P/EBITDA $37.10 Undervalued P/FCF $45.67 Undervalued EV/EBITDA $35.98 Undervalued *Actual price on April 1, 2008 is $29.27.
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Trailing Price to Earnings
PPS EPS Trailing P/E Industry Average
Price
Hasbro (BR) 29.27 2.13 13.74 13.47 $28.69 Hasbro (AR) 29.27 2.16 13.52 13.47 $29.16 Marvel 27.65 1.70 16.26 JAKKS 28.75 2.77 10.38 Mattel 21.20 1.54 13.77
The trailing P/E ratio is computed by taking a company’s price per share (PPS)
and dividing it by their earnings per share (EPS). This ratio compares our share price to
our earnings per share, as it states in the equation above. For Mattel, JAKKS, and
Marvel, we got their EPS number from Yahoo! Finance. For Hasbro, we got that
information from their most recent 10-K. Next, we divided the PPS by the EPS to get
the trailing P/E for each company. Then we found an industry average of the three
competitors, Hasbro’s trailing P/E ratio wasn’t included in this average, and divided that
number by 3 for the number of competitors. To get our share price, we took the
industry average, 13.47, and multiplied it by Hasbro’s EPS of 2.16. This price turned out
to be $29.16. We can conclude that the trailing P/E ratio turned out to be fairly value,
because it is between that 15%.
Forward Price to Earnings
PPS EPS Forward P/E Industry Average
Price
Hasbro (BR) 29.27 2.56 11.41 11.26 $28.90 Hasbro (AR) 29.27 2.57 11.38 11.26 $28.94 Marvel 27.65 1.61 17.17 Thrown out JAKKS 28.75 2.97 9.68 Mattel 21.20 1.65 12.84
Forward P/E is almost the same as trailing P/E. The only change here is that we
used the forecasted out EPS, which are five-years ahead. We did this ratio, because we
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want to see Hasbro’s and their competitor’s price to earnings ratio in five years. It is
interesting to see how it has changed from our trailing price to earnings ratio. We can
see that all of the company’s EPS went up except for Marvel. The concept is exactly the
same as above. We divided our PPS from the EPS to get our forward P/E. We throw out
Marvel’s in the industry average, because their ratio was much higher than all the other
competitors. After we got the industry average, we figured out the price by multiplying
that average by Hasbro’s forward EPS, which resulting in a share price of $28.94. With
our 15% error tolerance, we can conclude that this is fairly valued, because it is in that
range.
Price to Book
PPS BPS P/B Industry Average
Price
Hasbro (BR) 29.27 8.88 3.30 2.25 $19.97 Hasbro (AR) 29.27 9.92 2.95 2.25 $22.32 Marvel 27.65 2.34 11.82 Thrown Out JAKKS 28.75 24.44 1.18 Mattel 21.20 6.38 3.32
The price to book ratio is used to compare the market value to the book value.
The market value is the stated price and the book value is the “the value of an asset as
it appears on a balance sheet” (investorwords). We computed the price to book ratio by
dividing our price per share (PPS) by the book per share (BPS). We found our
competitor’s BPS on Yahoo! Finance. To compute Hasbro’s BPS, we took their total
stockholder equity and divided that number by their total shares outstanding. We found
this information on Hasbro’s 10-K. Then we computed the P/B ratios for each company
by dividing the PPS by the BPS. In our industry average we would like to point out that
Marvel’s P/B ratio was thrown out again, because is clearly bigger than the rest of the
price to book averages and it should not be included in the industry. So we took the
industry average of just Mattel and JAKKS, and got 2.25. To get our share price we took
the industry average of 2.25 and multiplied it by Hasbro’s books per share of 9.92. This
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came out to be a total of $22.32. By looking at our price per share on April 1, 2008, we
can conclude that this price is overvalued.
Dividends to Price
PPS DPS D/P Industry Average
Price
Hasbro (BR) 29.27 0.66 0.02 0.04 $18.66 Hasbro (AR) 29.27 0.66 0.02 0.04 $18.66 Marvel 27.65 N/A N/A JAKKS 28.75 N/A N/A Mattel 21.20 0.74 0.04
The dividends to price ratio is computed by taking the dividend per share (DPS)
and dividing it by the price per share (PPS). We found Mattel’s DPS on Yahoo! Finance.
We computed Hasbro’s DPS by using their 10-K information. Many companies don’t
have dividends, like two of our competitors, JAKKS and Marvel. So the only competitor
in the industry average is Mattel. To find our share price we dividend Hasbro’s DPS
from the industry average and we got a share price of $18.66. This shows that our
price is overvalued again.
Price Earnings Growth
P/E EPS PEG Industry Average
Price
Hasbro (BR) 13.74 2.13 1.37 1.06 $22.58 Hasbro (AR) 13.52 2.16 1.35 1.06 $22.90 Marvel 16.26 1.70 0.91 JAKKS 10.38 2.77 0.96 Mattel 13.76 1.54 1.31 *Hasbro’s growth rate= 10%
The equation for the price earnings growth (PEG) ratio is:
(P/E)/ Growth Rate
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Here we use our trailing P/E ratios from above for each company. Then for our
competitors we got their growth rate that was reported on Yahoo! Finance. We used
their “next 5 years” growth rate. For Hasbro’s PEG we computed that their growth rate
was 9%, so we divided their P/E of 13.52 from a growth rate of 9% to get a PEG of
1.35. This came out to be the highest PEG out of all the companies in the industry. We
took an industry average of the three competitors. To get our share price we took the
industry average and multiplied that by our 10% growth rate and multiplied that
number by Hasbro’s EPS. We came out with a share price of $22.90, which is
overstated according to the April 1, 2008 share price of $29.27.
Price to EBITDA
Market Cap (in millions)
EBITDA P/EBITDA Industry Average
Price
Hasbro (BR) 4230 531.62 7.96 7.50 $37.10 Hasbro (AR) 4230 531.61 7.96 7.50 $37.10 Marvel 2110 279.00 7.56 JAKKS 836.11 133.66 6.26 Mattel 7820 902.16 8.67
The price to EBITDA is computed by taking the market capitalization amount and
dividing it by the EBITDA. EBITDA consists of earnings before income, taxes,
depreciation, and amortization. If you look at an income statement, this would just be
the revenues minus expenses before the income, tax, deprecation, and amortization.
The $37.10 price was derived by taking Hasbro’s EBITDA, multiplying it by the industry
average, and then dividing that final number by our number of shares outstanding.
$37.10 price is over what is reasonable and shows the firm as gravely undervalued or
this is just horrible valuation method.
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Price to Future Cash Flows (FCF)
PPS (in millions)
FCF (in millions)
P/FCF Industry Average
Price
Hasbro (BR) 29.27 3.43 8.53 13.16 $45.17
Hasbro (AR) 29.27 3.47 8.45 13.16 $45.67
Marvel 27.65 2.53 10.94 JAKKS 28.75 1.87 15.39 Mattel 21.20 0.12 176.60 Thrown Out
The price to future cash flows comparable uses the price per share divided by
free cash flows on a per share basis. Free cash flows are determined by subtracting
cash flows from investing activities from operating cash flows. Dividing this by the
number of shares outstanding gives the price to future cash flows or free cash flows on
a per share basis. The industry average was calculated by adding JAKKS and Marvel
together and dividing by two. Mattel was thrown out, because their P/FCF ratio was
extremely high. Hasbro’s price of $45.67 was derived by taking the free cash flow of the
firm on a per share basis and multiplying that by the industry average. This comparable
is way off because a price of $45.67, which came out to be undervalued, is about
double what Hasbro’s share price is today.
Enterprise Value to EBITDA
EV (in billions)
EBITDA (in billions)
EV/EBITDA Industry Average
Price
Hasbro (BR) 5.30 0.53 9.96 8.55 $36.06 Hasbro (AR) 5.40 0.53 10.16 8.55 $35.98 Marvel 2.37 0.28 8.50 JAKKS 0.71 0.13 5.33 Thrown Out Mattel 7.75 0.90 8.59
Enterprise value was determined by using the equation below.
(Market Capitalization + Book Value of Liabilities) – Cash & Cash Equivalents
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This was divided by EBITDA to arrive at EV/EBITDA. JAKKS was thrown out for
being outside a reasonable measuring range. The EV/EBITDA was divided by two to get
the industry average. Hasbro’s price was acquired by taking EBITDA and dividing it by
the number of shares outstanding and multiplying that by the industry average. Then
cash and cash equivalents were added back with book value of liabilities subtracted to
get a price per share of $35.98. This price is reasonably close to Hasbro’s current price
and show the company as slightly undervalued.
Conclusion
In conclusion, there are many ways to value your company using ratios, even
though these ratios may not be accurate in the end. After computing these eight
comparables, we can conclude that the only two ratios that make our company a fairly
valued company is the trailing price to earning and forward price to earning ratios. It is
hard to conclude whether our company is overvalued or undervalued, because out of
our six comparables we had three that were overvalued and three that were
undervalued. The competed share prices ranged from $18.66 to $45.67, which are very
different from out share price of $29.27 on April 1, 2008. These prices prove that these
methods of comparables aren’t the best way to value a company.
Intrinsic Valuations
Another way to value a company is by using intrinsic valuation models, which is a
more accurate way of valuation. The information for these models come from our
various financial statements and forecasted information. The five models we used to
value Hasbro are: dividend discount model, free cash flows model, residual income
model, the abnormal earnings growth earnings, and the long run residual income
perpetuity model.
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Dividend Discount Model
The dividend discount model is an old model for valuating firms created by Myron
Gordon. Since it is highly probable that the firm will grow at a steady rate this is an appropriate
model to use to valuate Hasbro. A growth of 14.4% might be a better indicator over the 10%
rate used earlier because it best reflects the past eight years into the next ten years out. The
logic being that the past eight years included a sharp recession after the tech bubble burst, a
terrorist attack, a fiscal stimulus at the same time, and a slow recovery mirrors the next ten
years minus the terrorist attack and replace “tech” with “housing market”. The result was this
seen below.
1 2 3 4 5 6 7 8 9 102008 2009 2010 2011 2012 2013 2014 2015 2016 2017
DIV 0.16 0.18 0.21 0.24 0.27 0.31 0.36 0.41 0.47 0.54DIV Growth 14.4%
As can be seen the dividends go up a first by two or three cents until year five. With the
Wall Street Journal announces better than estimated earnings by Hasbro, and considering the
growth potential of the firm given its commitment to the key success factors outlined before a
rate of 14.4% is something to consider. The 10% rate assumes less growth than the past eight
years and is a more pessimistic view of the firm. The result is below.
1 2 3 4 5 6 7 8 9 102008 2009 2010 2011 2012 2013 2014 2015 2016 2017
DIV 0.16 0.18 0.19 0.21 0.23 0.26 0.28 0.31 0.34 0.38DIV Growth 10.0%
A growing perpetuity for year 11 (2018) was used for the future dividends onward. Using the
Ke of 15.67%, the 2018 (year 11) perpetuity of 61 cents discounted back came to be $11.28.
With the sum present value of the year by year dividends came to be $1.32. The time
consistent value ended as $12.15 with the two added together. After a sensitivity analysis
considering a 15% spread over and under the $29.97 (1/4/08 price) the Gordon growth model
came to be quite sensitive. A major difference between the Ke and the growth rate showed a
significant decline in the value of the firm. The rate of 14.4% would have to be maintained
closely with a cost of equity just above it for the firm to have value. The model shows the
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importance of a solid growth rate for this firm. The original forecasted rate of 10% shows an
overvalued firm with a price of $2.72! The price arrived through this model with a 14.4%
growth rate was $12.15, a difference of $9.43. Both still convey an overvalued firm. The model
relies on numerous assumptions, one being a stable growth rate that can vary from year to
year. The sensitivity analysis shows that any deviation from the existing growth rate would
result is wildly different numbers. Below is the sensitivity analysis taken from Microsoft Excel.
G10.00% 12.00% 13.00% 14.40% 15.00% 16.00% 17.00%
12% 7.78$ N/A N/A N/A N/A N/A N/A13% 5.17$ 15.52$ N/A N/A N/A N/A N/A14% 3.87$ 7.74$ 15.48$ N/A N/A N/A N/A
Ke 15.67% 2.72$ 4.20$ 5.78$ 12.15$ N/A N/A N/A16% 2.57$ 3.85$ 5.14$ 9.64$ 15.42$ N/A N/A17% 2.20$ 3.08$ 3.85$ 5.92$ 7.69$ 15.38$ N/A18% 1.92$ 2.56$ 3.07$ 4.26$ 5.12$ 7.68$ 15.35$
Mkt within 15%4/1/2008
Undervalued > 33.66$ Overvalued < 24.88$ Fairly valued
Free Cash Flow Model
The Free Cash Flow model takes the cost of capital and the growth rate of perpetuity
into account on a total dollar basis. To start this model, you need your forecasted out
information on cash flows from operations (CFFO) and cash flows from investing (CFFI), and
the before tax weighted average cost of capital. You use the before tax weighted average cost
of capital, because we when we compute the free cash flow to firm, it is already after tax, so
we need to use the before tax WACC. Also, the cash flow from operations is an after tax
concept, so we can leave that as be. To begin with finding our annual free cash flow units we
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need to add the CFFI to our CFFO. Then we found the present value of all ten years out using
our WACC before tax. Next, we got our present value year by year free cash flows by
multiplying the free cash flows units from the present values of each year and we totaled these
numbers up. Even though we only forecasted out ten years, we need that eleventh year unit,
which is known as our perpetuity. We get this by taking year ten’s annual free cash flow unit
and divided it by our before tax WACC minus the growth rate. Then to find the present value of
that, we take that number and multiple it by our year ten’s present value factor. Next, we add
these two numbers up to get our total present value of free cash flows. Our last step before
computing the share price is subtracting the total present value of free cash flows from our
book value of equity and preferred stock to get our market value of equity. Lastly, we divide
that number by our number of shares outstanding to get our intrinsic value. Since we are
valuating our company in April, we move that value up three months, so to get our time
consistent price we take that share price and add our WACC to one and finally multiple that by
3/12 and we get a final share price of $29.10. To see how our companied is valued, we
changed the before tax WACC and the growth rate to see what would happen to our share
price:
Perp Growth Rate0 2 3 5 7 9
8.07 41.71 52.07 60.31 92.91 247.35 N/A9.07 34.68 41.91 47.32 66.09 121.14 3321.69
WACCbt 10.07 29.1 34.32 38.04 49.87 77.13 206.2911.07 24.57 28.44 31.09 39.02 54.74 100.8512.07 20.82 23.75 25.7 31.35 41.18 64.05
Mkt within 15%4/1/2008 $29.27
Undervalued >33.66Overvalued <24.88Fairly Valued
Overall, this model shows that our company is undervalued. Here we used growth rates
from 0% to 9%, because we wanted to see how the model would change for different rates.
One thing we want to make sure is that our growth rate is less than our weighted average cost
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of capital, because if it is the opposite then we will get negative prices for our model. There are
some problems with this model though. First of all, it is sensitive to the terminal value growth
rate and it also has a low explanatory power, but not as low as the dividend discount model.
Residual Income Model
The residual income model takes the cost of equity, which we computed earlier, and
negative growth rates into account. It basically tells us what we have plus the present value of
value added. Our growth rates are negative, because we want to restore it back to equilibrium
quickly. Unlike the free cash flows model, the residual income model is not that sensitive to
errors and has one of the highest explanatory power. Two things you need to forecast for this
model are net income and total dividends, which we had to do for ten years out. With these
variables on hand you need to compute the book value of equity. The formula to compute this
book value of equity is:
BVEo= BVEt-1+NIo-TDo
This formula means we need the net income and total dividends of the current year, but
we need to remember that in order to compute this we need to use the book value of equity for
the year before. Once we have our book value of equity for each year, we can figure out the
normal earnings, which is our benchmark. You figure this out by multiplying the year’s book
value per share by the cost of equity variable and drag that out along the years. Next we need
the residual income for the year which is computed by subtracting the net income from the
normal income. Our next step is to find the present value for each year. Then to find the
present value of the residual income you just need to multiple the present values by their
residual income for the year and add up all of these to get a sum of present value. Even though
we only have to forecast out to ten years, we still have to deal with the terminal perpetuity
value. So once we figure this out for year eleven, we can find the market value of equity, which
is just our first year’s book value of equity plus our total present value plus our terminal value
perpetuity value. Just like the other models you then divide by the number of shares and then
make initial share price time consistent by moving it up three months, which makes our share
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price to be $10. 42. We started out with a zero growth rate and our initial cost of equity of
15.67%, but as we see below we changed both variables:
g0 -0.1 -0.2 -0.3 -0.4 -0.5
0.1267 14.24 14.44 14.52 14.56 14.58 14.60.1367 12.75 13.04 13.32 13.41 13.46 13.50.1467 11.49 12.02 12.25 12.38 12.46 12.51
Ke 0.1567 10.42 11.03 11.3 11.45 11.55 11.620.1667 9.51 10.15 10.45 10.62 10.73 10.80.1767 8.71 9.38 9.68 9.86 9.98 10.06
Mkt within 15%4/1/2008 $29.27
Undervalued >33.66Overvalued <24.88Fairly Valued
This model shows that Hasbro is completely overvalued and none of the prices are close
to our share price of $29.27 at all. Also, we notice that the lower the cost of equity and the
higher the negative growth rate, the higher the price will be.
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Abnormal Earnings Growth Model (AEG)
The abnormal growth model is similar to the residual income model. One thing that is
different is that we discount this back to year one instead of year zero. According to the AEG
model, if the market to book value goes up then we are holding a lot of residual income, which
is excess earnings. The AEG model is our “actual” income vs. our benchmark income. The
“actual” income consists of direct wealth, which is our earnings and indirect wealth, which is our
DRIP values. The two things you need forecasted here is the net income and total dividends,
just like the residual income model. Then we need to find our DRIP model. DRIP stands for our
dividend reinvestment income. We do this by multiplying our cost of equity by the total
dividends for the year before. Then we need to find our cumulative dividend income, which is
just adding our net income to the DRIP values. Then we need the second half of our AEG
model, which is our normal income (benchmark). We calculate this by taking our net incomes
for the year before multiplying it by one plus our cost of equity. Next we have the AEG year by
year numbers, which is computed by subtracting our cumulative dividend income from our
normal, income. It is important to note here that this is where our residual income model and
our abnormal growth model connect. This is where changes in residual income, from the
residual income model, should be the same as the AEG year by year values. You can do this to
test if you are doing these two models correctly and see if they match up.
Change in Residual Income -28.85 -28.58 -28.19 -27.66 -26.98 -26.13 -25.08 -23.83 -22.33 20.56 AEG YBY (28.85) (28.58) (28.19) (27.66) (26.98) (26.13) (25.08) (23.83) (22.33) (20.56)
Once we have these values, we find the present value of them and multiply those by the
AEG year by year values to get the present value for the AEG. Make sure to add all of these
numbers up to get a total for our present value factors. Next we need our CORE earnings of
perpetuity which is our first year’s net income. Then we found our AEG terminal value
perpetuity for year eleven. Lastly, we did what we have done for every model, which is find the
market value of equity, dividing that by the number of shares outstanding to get our share
price. To make it time consistent with our projects, we had to push it forward three months
again to April. With our cost of equity at 15.67% and our growth rate at zero, we get a share
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price of $9.00. We use negative growth rates here too, so we can get it back to equilibrium
quickly. Here is what our model looks like during the sensitivity analysis:
g0 -0.1 -0.2 -0.3 -0.4 -0.5
0.1267 12.42 13.37 13.74 13.94 14.06 14.140.1367 11.05 11.89 12.23 12.42 12.53 12.610.1467 9.93 10.67 10.98 11.15 11.26 11.33
Ke 0.1567 9 9.64 9.92 10.08 10.18 10.250.1667 8.21 8.77 9.02 9.17 9.26 9.330.1767 7.54 8.02 8.25 8.38 8.47 8.53
Mkt within 15%29.27
Undervalued >33.66Overvalued <24.88Fairly Valued
Just like our residual income model, this model shows that Hasbro is overvalued, with
our highest price being $14.14.
Long Run Residual Income Perpetuity Model
The long run residual income perpetuity model is the easiest valuation to compute. It
meets all the criteria for valuation models. It has underlining theory, has measurability, not that
sensitive, and lastly it does a good job at identifying mispriced companies. The equation for it
is:
MVEo= BVEo x (1 +(ROE-ke)/(ke-g))
The return on equity and the growth rate are both the five year ahead average ROE and
forwards earnings growth rate. The growth rate is positive, because it comes from what is
sitting in our return on equity. The three main components we are dealing with here are the
return on equity and growth rate, which we stated above and lastly the cost of equity. This
model little similar to the residual income model. First we need our initial book value of equity
at time zero. Then we need the three values which are stated above. We use the cost of equity
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that we computed earlier. Then we need our forward earnings growth rate, which comes from
our forecasting. Lastly, we need our average return on equity. We get this value by looking at
out residual income model. We take the net income for the year and divide that by the total
dividends of the year before:
0 1 2 3 4 5 6 7 8 9 102008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net Income 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16 Total Divdends 103.51 113.86 125.25 137.77 151.55 166.70 183.37 201.71 221.88 244.07 Book Value Equity 1548.235 1,800.47 2,053.02 2,305.18 2,556.14 2,804.98 3,050.68 3,292.08 3,527.88 3,756.64 3,976.73
0.229772491 0.203510592 0.18382992 0.168632734 0.156638974 0.14702515 0.1392394 0.1329002 0.127737570.165476338
Here it shows that we have an average return on equity of .17. Once we have these three
values we need to find our estimated market value of equity. The formula for this is:
MVEo= BVEo (1 +(ROE-ke)/(ke-g))
This formula is exactly what the formula is above and all we have to do it plug those
numbers in. Once we get the market value of equity, we divide that by the number of shares to
get the initial price. Lastly, we have to make it the price time consistent to April, so we take that
price and add one plus our cost of equity to the 3/12. Our final price that we get is $12.22 with
our cost of equity at 15.67%, our growth rate at 0% and our average ROE at 17%. Since we
have three different factors here, we had to do three different sensitivity analysis graphs:
115
Perp Growth Rate0 2 3 5 7 9
0.1267 15.01 10.93 11.02 11.09 11.12 11.130.1367 13.94 11.01 11.08 11.13 11.16 11.170.1467 13.02 11.09 11.14 11.18 11.2 11.21
Ke 0.1567 12.22 11.18 11.21 11.23 11.24 11.240.1667 11.5 11.26 11.27 11.28 11.28 11.290.1767 10.88 11.35 11.33 11.32 11.32 11.32
ROE0.14 0.15 0.16 0.17 0.18 0.19
0.1267 11.16 11.13 11.11 11.09 11.06 11.040.1367 11.2 11.18 11.16 11.13 11.11 11.08
Ke 0.1467 11.25 11.23 11.2 11.18 11.16 11.130.1567 11.3 11.28 11.25 11.23 11.21 11.180.1667 11.35 11.32 11.3 11.28 11.25 11.230.1767 11.39 11.37 11.35 11.32 11.3 11.28
ROE0.14 0.15 0.16 0.17 0.18 0.19
0 10.06 10.78 11.5 12.22 12.93 13.652 11.36 11.31 11.24 11.18 11.12 11.063 11.33 11.29 11.25 11.21 11.18 11.13
g 5 11.3 11.28 11.25 11.23 11.21 11.187 11.29 11.27 11.25 11.24 11.22 11.29 11.28 11.27 11.26 11.24 11.23 11.22
Mkt within 15%4/1/2008 $29.27
Undervalued >33.66Overvalued <24.88Fairly Valued
After doing all three of these graphs, we are confident to say that Hasbro is an
overvalued firm.
116
Conclusion
In conclusion, looking at these intrinsic values, we can say that Hasbro is an overvalued
company as of April 1, 2008.
Model Outcome
Dividend Discount Model Overvalued
Free Cash Flow Model Undervalued
Residual Income Model Overvalued
AEG Model Overvalued
Long Run RI Model Overvalued
HASBRO OVERVALUED
The only model that disproves this point is the free cash flow model, because that came
out mainly undervalued, but we have to remember that this model is sensitive to the growth
rates. The residual income model, abnormal growth rate model, and the long run residual
income perpetuity model all convey that Hasbro is overvalued, but the dividend discount model
was almost the only model to show that we way overvalued. We are going to have to agree
with these conclusions, because the last three models, especially the long run residual income
perpetuity model meets the criteria, which is four rules: has theory underlining, has
measurability, not that sensitive to growth rates, and does a good job identifying mispriced
companies.
117
Analyst’s Recommendation
Hasbro, Inc is an overvalued firm and that conclusion is based on the industry
analysis, accounting analysis, forecasts, method of comparables, and the valuation
models. To begin with the industry analysis shows Hasbro second to Mattel in an
environment with high concentration and low competition. The nature of the industry
favors a firm like Hasbro given the product line Hasbro has acquired and the brand
names associated with them. Industry growth was made up for during troubled times
internationally with nations outside the U.S., this will continue to show profit potential
for Hasbro in the coming years. The industry analysis gave a positive outlook for the
firm. On the accounting analysis the firm has strong expenditures in R&D, Brand Image,
but shows less lease obligations over time. That may be a sign of shrinking revenues
and a firm scaling back or maybe a move towards efficiency. The capitalization of R&D
displayed a much better economic position for Hasbro outside of GAAP requirements.
The capitalization of operating leases showed much more assets and liabilities than the
method chosen by Hasbro but, these are decreasing following the trend that was
discovered in this report. The accounting analysis overall showed a trend that looked
promising. The method of comparables showed more mixed and less definitive results.
There were three undervalued conclusions, three overvalued conclusions, and two
displayed Hasbro as fairly valued. The intrinsic valuations undo the nice pretty picture
displayed earlier in the report. All the valuations except the free cash flow model show
a gravely overvalued firm. While Hasbro may be one of the “3 stocks that blew the
market away” (fool.com), our valuation models showed an overvalued firm. This report
concludes that current investors should sell their shares and that potential investors
look elsewhere.
118
Appendix
References
About.com:
http://retailindustry.about.com/od/seg_toys/a/toy_sales.htm
Axiom:
http://www.axiomvaluation.com/documents/2004.04.27-GoodwillImpairmentPrimer.pdf
BNet.com:
http://findarticles.com/p/articles/mi_m0EIN/is_2004_May_7/ai_n6016454
http://findarticles.com/p/articles/mi_qa5440/is_200603/ai_n21388610 (Bnet.com)
Business Wire:
http://findarticles.com/p/articles/mi_m0EIN/is_2005_Feb_11/ai_n9511270
Cafemom.com:
http://www.cafemom.com/journals/read.php?post_id=518809
Cnn.com:
http://money.cnn.com/2008/01/31/news/economy/barr_recession.fortune/index.htm?p
ostversion=2008020104
Conference-Board.org:
http://www.conference-board.org/economics/ConsumerConfidence.cfm
Eric Johnson, Dartmouth University:
http://mba.tuck.dartmouth.edu/digital/Research/AcademicPublications/CMRToys.pdf
119
Fool.com:
http://www.fool.com/investing/general/2008/04/28/3-stocks-that-blew-the-market-
away.aspx
Hasbro Quality Assurance:
http://64.233.167.104/search?q=cache:CvJNsf8x9zYJ:www.dianyuan.com/bbs/u/39/11
42050346.pdf+hasbro+product+quality&hl=en&ct=clnk&cd=27&gl=us
Investopedia:
http://www.investopedia.com/articles/analyst/100902.asp
http://www.investopedia.com/articles/stocks/04/102004.asp
http://www.investopedia.com/terms/b/beta.asp
Investor Words:
http://www.investorwords.com/549/book_value.html
Mindbranch.com:
http://www.mindbranch.com/catalog/find.jsp?cat=cs-toys
Msnbc.com
http://www.msnbc.msn.com/id/24127314/
NPD
http://www.npd.com/press/releases/press_080212.html
Toy Association:
http://www.toyassociation.org/AM/Template.cfm?Section=About_TIA&Template=/TaggedPage/TaggedPageDisplay.cfm&TPLID=3&ContentID=2546
USAToday.com:
http://www.usatoday.com/money/companies/management/2006-05-08-cranium-
exec_x.htm
120
Wall Street Journal:
http://online.wsj.com/article/SB118670816533693824.html?mod=hps_us_whats_news
http://online.wsj.com/article/SB119820110371043929.html
http://online.wsj.com/article/SB119457459136887486.html
http://online.wsj.com/article/SB120026504989687063.html
http://blogs.wsj.com/holidaysales/2007/12/12/toys-r-us-ceo-talks-about-toy-safety-and-
the-future/
http://online.wsj.com/article/SB119803123397338477.html
http://online.wsj.com/article/SB119458129368387655.html
http://online.wsj.com/article/SB119819930986543637.html
Yahoo.com:
http://biz.yahoo.com/ic/ll/315tor.html
http://biz.yahoo.com/bw/080125/20080125005695.html?.v=1
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/lease.htm
Palepu & Healy’s Business Analysis & Valuation Using Financial Statements
121
Regression
3 Month Regression Data
SUMMARY OUTPUT-72
Regression StatisticsMultiple R 0.586834924R Square 0.344375228Adjusted R Square 0.33500916Standard Error 0.061644833Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.139723015 0.139723 36.76839 6.04554E-08Residual 70 0.26600598 0.0038Total 71 0.405728996
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.010751295 0.007265091 1.479857 0.143398 -0.003738473 0.02524106 -0.003738473 0.025241062X Variable 1 1.251691129 0.206423853 6.063694 6.05E-08 0.839991742 1.66339052 0.839991742 1.663390517
122
SUMMARY OUTPUT-60
Regression StatisticsMultiple R 0.589710328R Square 0.347758271Adjusted R Square 0.336512724Standard Error 0.052344487Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.084730307 0.08473 30.92409 7.12666E-07Residual 58 0.15891683 0.00274Total 59 0.243647137
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.006862893 0.006855232 1.001118 0.320928 -0.006859345 0.02058513 -0.006859345 0.02058513X Variable 1 1.384934112 0.249046631 5.560943 7.13E-07 0.88641312 1.8834551 0.88641312 1.883455104
SUMMARY OUTPUT-48
Regression StatisticsMultiple R 0.616664541R Square 0.380275156Adjusted R Square 0.366802877Standard Error 0.047525652Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.063754822 0.063755 28.22649 3.05508E-06Residual 46 0.103899629 0.002259Total 47 0.167654451
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.006418854 0.006859773 0.935724 0.354302 -0.007389153 0.02022686 -0.007389153 0.020226861X Variable 1 1.468076883 0.276325116 5.312861 3.06E-06 0.911863282 2.02429049 0.911863282 2.024290485
123
SUMMARY OUTPUT-36
Regression StatisticsMultiple R 0.649370826R Square 0.42168247Adjusted R Square 0.404673131Standard Error 0.046256871Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.053045752 0.053046 24.79123 1.8284E-05Residual 34 0.072749736 0.00214Total 35 0.125795488
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.010754413 0.007715884 1.393802 0.172421 -0.004926149 0.02643498 -0.004926149 0.026434975X Variable 1 1.501108166 0.301483073 4.979079 1.83E-05 0.888420848 2.11379548 0.888420848 2.113795483
SUMMARY OUTPUT-24
Regression StatisticsMultiple R 0.605699455R Square 0.36687183Adjusted R Square 0.338093277Standard Error 0.051062172Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.033238696 0.033239 12.7481 0.001708878Residual 22 0.057361599 0.002607Total 23 0.090600296
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.016427606 0.01053258 1.559694 0.133103 -0.005415629 0.03827084 -0.005415629 0.03827084X Variable 1 1.338128804 0.374778971 3.570448 0.001709 0.560884794 2.11537281 0.560884794 2.115372815
124
6 Month Regression Data
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.58707461R Square 0.344656598Adjusted R Square 0.335294549Standard Error 0.061631604Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.139837175 0.139837 36.81423 5.95314E-08Residual 70 0.26589182 0.003798Total 71 0.405728996
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.010906112 0.007263756 1.501443 0.137739 -0.003580992 0.02539322 -0.003580992 0.025393215X Variable 1 1.251944964 0.20633713 6.067473 5.95E-08 0.84041854 1.66347139 0.84041854 1.663471388
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.58994627R Square 0.348036602Adjusted R Square 0.336795854Standard Error 0.052333318Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.084798122 0.084798 30.96205 7.03641E-07Residual 58 0.158849015 0.002739Total 59 0.243647137
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.007052872 0.006848036 1.029912 0.307327 -0.006654961 0.02076071 -0.006654961 0.020760706X Variable 1 1.384777048 0.248865679 5.564355 7.04E-07 0.886618271 1.88293582 0.886618271 1.882935825
125
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.616896717R Square 0.380561559Adjusted R Square 0.367095506Standard Error 0.047514669Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.063802839 0.063803 28.26081 3.02174E-06Residual 46 0.103851612 0.002258Total 47 0.167654451
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.006652521 0.006858471 0.969971 0.337134 -0.007152866 0.02045791 -0.007152866 0.020457908X Variable 1 1.468919379 0.276315764 5.31609 3.02E-06 0.912724603 2.02511416 0.912724603 2.025114156
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.649877567R Square 0.422340852Adjusted R Square 0.405350877Standard Error 0.046230533Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.053128573 0.053129 24.85824 1.7921E-05Residual 34 0.072666914 0.002137Total 35 0.125795488
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.010969885 0.007713361 1.422193 0.16408 -0.004705549 0.02664532 -0.004705549 0.02664532X Variable 1 1.502604114 0.301376508 4.985804 1.79E-05 0.890133363 2.11507486 0.890133363 2.115074865
126
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.606087606R Square 0.367342186Adjusted R Square 0.338585013Standard Error 0.051043201Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.033281311 0.033281 12.77393 0.001694069Residual 22 0.057318985 0.002605Total 23 0.090600296
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.016569346 0.010534302 1.572894 0.130015 -0.00527746 0.03841615 -0.00527746 0.038416152X Variable 1 1.338695922 0.374558481 3.574064 0.001694 0.56190918 2.11548266 0.56190918 2.115482664
2 Year Regression Data
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.588031859R Square 0.345781467Adjusted R Square 0.336435488Standard Error 0.061578687Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.140293567 0.140294 36.99788599 5.59726E-08Residual 70 0.265435428 0.003792Total 71 0.405728996
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.011244843 0.007258316 1.549236 0.125834634 -0.00323141 0.025721097 -0.003231411 0.025721097X Variable 1 1.251645303 0.205775099 6.082589 5.59726E-08 0.841239815 1.662050792 0.841239815 1.662050792
127
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.592408641R Square 0.350947998Adjusted R Square 0.339757446Standard Error 0.052216337Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.085507475 0.085507 31.36109866 6.15638E-07Residual 58 0.158139662 0.002727Total 59 0.243647137
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.007282503 0.006825428 1.066967 0.290408094 -0.00638007 0.020945081 -0.006380075 0.020945081X Variable 1 1.393144744 0.248771489 5.600098 6.15638E-07 0.895174508 1.89111498 0.895174508 1.89111498
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.619911841R Square 0.38429069Adjusted R Square 0.370905705Standard Error 0.047371429Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.064428045 0.064428 28.7105806 2.61833E-06Residual 46 0.103226406 0.002244Total 47 0.167654451
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.006816792 0.006838156 0.996876 0.324040056 -0.0069477 0.020581285 -0.006947702 0.020581285X Variable 1 1.476318264 0.275523727 5.358226 2.61833E-06 0.921717775 2.030918753 0.921717775 2.030918753
128
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.651803182R Square 0.424847388Adjusted R Square 0.407931135Standard Error 0.046130124Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.053443884 0.053444 25.114745 1.66003E-05Residual 34 0.072351603 0.002128Total 35 0.125795488
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.010888665 0.007695828 1.414879 0.166197892 -0.00475114 0.026528469 -0.004751139 0.026528469X Variable 1 1.506455914 0.300602121 5.011461 1.66003E-05 0.895558908 2.11735292 0.895558908 2.11735292
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.607206968R Square 0.368700302Adjusted R Square 0.340004862Standard Error 0.050988385Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.033404356 0.033404 12.84874155 0.001651975Residual 22 0.057195939 0.0026Total 23 0.090600296
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.016313837 0.010512313 1.551879 0.13495904 -0.00548736 0.038115039 -0.005487365 0.038115039X Variable 1 1.338732506 0.373476699 3.584514 0.001651975 0.564189242 2.113275771 0.564189242 2.113275771
129
5 Year Regression Data
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.587900864R Square 0.345627426Adjusted R Square 0.336279247Standard Error 0.061585936Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.140231069 0.140231 36.9727 5.64474E-08Residual 70 0.265497927 0.003793Total 71 0.405728996
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.011874013 0.007261788 1.635136 0.10651 -0.002609167 0.026357192 -0.002609167 0.026357192X Variable 1 1.250266435 0.205618411 6.080518 5.64E-08 0.840173451 1.660359418 0.840173451 1.660359418
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.593802603R Square 0.352601531Adjusted R Square 0.341439489Standard Error 0.052149782Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.085910354 0.08591 31.58934 5.70509E-07Residual 58 0.157736783 0.00272Total 59 0.243647137
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.007824098 0.006801935 1.150275 0.254751 -0.005791455 0.021439651 -0.005791455 0.021439651X Variable 1 1.400203593 0.249127074 5.620439 5.71E-07 0.901521577 1.89888561 0.901521577 1.89888561
130
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.621951164R Square 0.386823251Adjusted R Square 0.373493321Standard Error 0.047273904Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.06485264 0.064853 29.01915 2.37444E-06Residual 46 0.102801811 0.002235Total 47 0.167654451
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.007164232 0.006825284 1.049661 0.299358 -0.006574352 0.020902815 -0.006574352 0.020902815X Variable 1 1.477884018 0.274345595 5.386943 2.37E-06 0.925654986 2.03011305 0.925654986 2.03011305
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.651570657R Square 0.424544321Adjusted R Square 0.407619154Standard Error 0.046142276Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.05340576 0.053406 25.08361 1.67549E-05Residual 34 0.072389728 0.002129Total 35 0.125795488
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.010977504 0.007698663 1.425897 0.163015 -0.004668062 0.026623069 -0.004668062 0.026623069X Variable 1 1.500824228 0.299664154 5.008354 1.68E-05 0.8918334 2.109815057 0.8918334 2.109815057
131
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.606987272R Square 0.368433549Adjusted R Square 0.339725983Standard Error 0.050999157Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.033380188 0.03338 12.83402 0.001660165Residual 22 0.057220107 0.002601Total 23 0.090600296
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.016355831 0.010516263 1.555289 0.134146 -0.005453564 0.038165225 -0.005453564 0.038165225X Variable 1 1.332621804 0.371985076 3.58246 0.00166 0.561171978 2.104071631 0.561171978 2.104071631
10 Year Regression Data
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.587513965R Square 0.34517266Adjusted R Square 0.335817983Standard Error 0.061607332Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.140046556 0.140047 36.89841 5.78722E-08Residual 70 0.265682439 0.003795Total 71 0.405728996
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.012430853 0.007267867 1.710385 0.091624 -0.00206445 0.026926157 -0.00206445 0.026926157X Variable 1 1.249180967 0.205646606 6.074406 5.79E-08 0.83903175 1.659330185 0.83903175 1.659330185
132
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.594002042R Square 0.352838426Adjusted R Square 0.341680467Standard Error 0.052140239Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.085968072 0.085968 31.62213 5.64312E-07Residual 58 0.157679065 0.002719Total 59 0.243647137
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.00836834 0.006787532 1.232899 0.222587 -0.005218381 0.021955062 -0.005218381 0.021955062X Variable 1 1.402285903 0.249368157 5.623356 5.64E-07 0.903121308 1.901450499 0.903121308 1.901450499
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.622599586R Square 0.387630245Adjusted R Square 0.374317859Standard Error 0.047242785Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.064987936 0.064988 29.11801 2.30142E-06Residual 46 0.102666515 0.002232Total 47 0.167654451
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.007566695 0.006822945 1.109007 0.273192 -0.006167181 0.021300571 -0.006167181 0.021300571X Variable 1 1.475667163 0.273468643 5.396111 2.3E-06 0.925203343 2.026130983 0.925203343 2.026130983
133
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.650511873R Square 0.423165696Adjusted R Square 0.406199982Standard Error 0.046197515Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.053232335 0.053232 24.9424 1.74758E-05Residual 34 0.072563152 0.002134Total 35 0.125795488
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.011201421 0.007710119 1.452821 0.155441 -0.004467426 0.026870268 -0.004467426 0.026870268X Variable 1 1.492969396 0.298938437 4.994237 1.75E-05 0.885453403 2.10048539 0.885453403 2.10048539
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.605980253R Square 0.367212067Adjusted R Square 0.338448979Standard Error 0.05104845Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.033269522 0.03327 12.76678 0.001698154Residual 22 0.057330774 0.002606Total 23 0.090600296
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.016537979 0.010534135 1.569942 0.130701 -0.00530848 0.038384438 -0.00530848 0.038384438X Variable 1 1.324589079 0.37071525 3.573063 0.001698 0.55577271 2.093405448 0.55577271 2.093405448
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Cost of Debt 07 $ Amount% of Total
Liab Rate Used Wgt Rate Source LinkSt Borrowings 10,201 0.6% 4.70% 0.03% Hasbro 10-k page 55 2007A/P 186,202 10.1% 2.80% 0.28% 90 asset backed commercial paper http://www.federalreserve.gov/releases/cp/Current portion L 135,348 7.3% 6.50% 0.48%Accrued Liab 555,920 30.0% 4.70% 1.41%Curr Liab 887,671 47.9% 2.19%
LT Deb 709,723 38.3% 6.50% 2.49% Hasbror 10 k, page 57 2007Other Liab 254,577 13.7% 8.75% 1.20% Hasbro 10-k 2007LT Liab 964,300 52.1% 3.69%
Total Liab 1,851,971 100.0% 5.89%
Wgt Avg Cost of Debt 5.89%
Cost of EquitySource Link
Risk free Rate 3.74% 10 yr US Treasury http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtmlBeta 1.51 Validated with Regression http://finance.yahoo.com/q/ks?s=HASMarket Risk Premium 6.8% Retun of Market less Risk Free rateSize Premium 1.1% Market Cap 3.95 B - Yahoo FinanceKe 15.1%
2007 SourceTotal Debt 1,851,971$ 54.63% Hasbro 10 K 2007Total Equity 1,537,890$ 45.37% Hasbro 10 K 2007
3,389,861$
Weighted Avg Cost of Capital
Cost of FundsEconomic
Wgt Wgt Cost
Debt 5.89% 54.63% 3.22%Equity 15.1% 45.37% 6.85%Bef Tax WACC 10.07%
Tax Rate 38%
Debt 3.65% 54.63% 1.99%Equity 15.1% 45.37% 6.85%Aft Tax WACC 8.85%
135
Dividend Discount Model
1 2 3 4 5 6 7 8 9 10 112008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
DIV 0.16 0.18 0.21 0.24 0.27 0.31 0.36 0.41 0.47 0.54 0.61DIV Growth 14.4% PerpetuityKe 15.67%Price (1/4/08) 29.27$ PV Factor 0.865 0.747 0.646 0.559 0.483 0.418 0.361 0.312 0.270 0.233PV DIV YBY 0.138$ 0.137$ 0.135$ 0.134$ 0.132$ 0.131$ 0.129$ 0.128$ 0.127$ 0.125$ SUM PV DIV YBY 1.317$ Perpetuity 2018 48.37$ Time Zero PV Perp 11.28$ PV Tot F DIV 12.60$ Time consistent value 12.15$
G10.00% 12.00% 13.00% 14.40% 15.00% 16.00% 17.00% Mkt within 15%
12% 7.78$ N/A N/A N/A N/A N/A N/A 4/ 1/ 200813% 5.17$ 15.52$ N/A N/A N/A N/A N/A Undervalued > 33.66$ 14% 3.87$ 7.74$ 15.48$ N/A N/A N/A N/A Overvalued < 24.88$
Ke 15.67% 2.72$ 4.20$ 5.78$ 12.15$ N/A N/A N/A Fairly valued16% 2.57$ 3.85$ 5.14$ 9.64$ 15.42$ N/A N/A17% 2.20$ 3.08$ 3.85$ 5.92$ 7.69$ 15.38$ N/A18% 1.92$ 2.56$ 3.07$ 4.26$ 5.12$ 7.68$ 15.35$
136
Free Cash Flow Model
Hasbro 1 2 3 4 5 6 7 8 9 10#'s in Millions 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017CFFO 446.56 486.75 530.56 578.31 630.36 687.09 748.93 816.33 889.80 969.88 1193.25CFFI -119.07 -126.06 -133.46 -141.30 -149.59 -158.37 -167.67 -177.51 -187.93 -198.96 -198.96FCF 327.49 360.69 397.10 437.02 480.77 528.72 581.26 638.82 701.87 770.92 994.29
FCF growth rate YBY 10.14% 10.09% 10.05% 10.01% 9.97% 9.94% 9.90% 9.87% 9.84%Average 9.98%
PV Factor 0.909 0.825 0.750 0.681 0.619 0.562 0.511 0.464 0.422 0.383WACCbt 10.07%Prep Growth Rate 0.00%PV YBY FCF 297.53 297.71 297.78 297.73 297.57 297.31 296.95 296.50 295.96 295.34
FCF to firm 770.92
Total PV YBY FCF 2970.39Perpetuity Yr 11 7655.61PV TV Perpetuity 2932.85PV Tot FC FCF 5903.25 Perp Growth Rate Mkt within 15%
0 2 3 5 7 9 4/1/2008 $29.27BV of Debt & PS 1852.00 8.07 41.71 52.07 60.31 92.91 247.35 N/A Undervalued >33.66MVe 4051.25 9.07 34.68 41.91 47.32 66.09 121.14 3321.69 Overvalued <24.88# shares outstanding 142.60 WACCbt 10.07 29.1 34.32 38.04 49.87 77.13 206.29 Fairly ValuedIntrinsic Value PS 28.41 11.07 24.57 28.44 31.09 39.02 54.74 100.85Time consistent price 29.10 12.07 20.82 23.75 25.7 31.35 41.18 64.05
Residual Income Model
0 1 2 3 4 5 6 7 8 9 10 11Perp2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net Income 355.7418 366.4141 377.4065 388.7287 400.3905 412.4023 424.7743 437.5176 450.6431 464.1624 478.09 Total Dividends 103.51 113.861 125.2471 137.7718 151.549 166.7039 183.3743 201.7117 221.8829 244.0712 268.478282BVE 1,548.24 1,800.47 2,053.02 2,305.18 2,556.14 2,804.98 3,050.68 3,292.08 3,527.88 3,756.64 3,976.73 4,186.34
Normal Income 242.6084 282.1331 321.7082 361.2216 400.5465 439.54 478.0409 515.8683 552.8191 588.6658 623.1541204
Residual Income for Year 113.1334 84.28092 55.69827 27.50709 -0.15599 -27.1377 -53.2666 -78.3508 -102.176 -124.503 (145.07) Change in RI -28.8525 -28.5826 -28.1912 -27.6631 -26.9818 -26.1289 -25.0842 -23.8253 -22.3274
PV Factor 0.864528 0.747409 0.646157 0.558621 0.482943 0.417518 0.360956 0.312057 0.269782 0.233234PV YBY RI 97.80703 62.99235 35.98981 15.36603 -0.07533 -11.3305 -19.2269 -24.4499 -27.5653 -29.0385
BE 1548.24Total PV YBY RI 100.4688Terminal Value of Perp -215.92 -925.7617896MVE (12/31) 1432.789Share 142.6 gInitial Share Price 10.04761 0 -0.1 -0.2 -0.3 -0.4 -0.5Time Consistent Price 10.42001 0.1267 14.24 14.44 14.52 14.56 14.58 14.6 Mkt within 15%
0.1367 12.75 13.04 13.32 13.41 13.46 13.5 4/1/2008 $29.27Ke 0.1567 0.1467 11.49 12.02 12.25 12.38 12.46 12.51 Undervalued >33.66Growth Rate 0 Ke 0.1567 10.42 11.03 11.3 11.45 11.55 11.62 Overvalued <24.88
0.1667 9.51 10.15 10.45 10.62 10.73 10.8 Fairly Valued0.1767 8.71 9.38 9.68 9.86 9.98 10.06
137
Abnormal Earnings Growth Model
0 1 2 3 4 5 6 7 8 9 100 1 2 3 4 5 6 7 8 9 10 11Perp
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Net Income 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16 478.0872Total Divdends 103.51 113.86 125.25 137.77 151.55 166.70 183.37 201.71 221.88 244.07 268.4783DRIP Income 16.22002 17.84202 19.62622 21.58884 23.74773 26.1225 28.73475 31.60822 34.76905 38.24595
Cumulative Div Income 382.63 395.25 408.35 421.98 436.15 450.90 466.25 482.25 498.93 516.33 Normal Income (Benchmark) 411.4866 423.8312 436.5461 449.6425 463.1317 477.0257 491.3365 506.0766 521.2589 536.8966
Change in Residual Income -28.85 -28.58 -28.19 -27.66 -26.98 -26.13 -25.08 -23.83 -22.33 20.56AEG YBY (28.85) (28.58) (28.19) (27.66) (26.98) (26.13) (25.08) (23.83) (22.33) (20.56) 0.05 0.049434 0.05037
PV Factor 0.864528 0.747409 0.646157 0.558621 0.482943 0.417518 0.360956 0.312057 0.269782PV AEG YBY -24.94378 -21.36294 -18.21592 -15.45317 -13.03066 -10.90928 -9.054289 -7.434839 -6.023545CORE Earning (of Perp) 355.74 Total PV of YBY AEG -126.428
AEG TV Perp -35.403 -131.228Total Model Adjusted Perp 193.91
gMVE 1,237.46 0 -0.1 -0.2 -0.3 -0.4 -0.5Divide by shares 142.60 0.1267 12.42 13.37 13.74 13.94 14.06 14.14 Mkt within 15%Initial Share Price 8.68 0.1367 11.05 11.89 12.23 12.42 12.53 12.61 39539 29.27Time Consistent Price 9.00 0.1467 9.93 10.67 10.98 11.15 11.26 11.33 Undervalued >33.66
Ke 0.1567 9 9.64 9.92 10.08 10.18 10.25 Overvalued <24.88Ke 0.1567 0.1667 8.21 8.77 9.02 9.17 9.26 9.33 Fairly ValuedGrowth Rate 0 0.1767 7.54 8.02 8.25 8.38 8.47 8.53
LR RI Perp Model
138
Initial BVE 1,548.24 Perp Growth RateAverage ROE 0.18 0 2 3 5 7 9Ke 0.1567 0.1267 15.01 10.93 11.02 11.09 11.12 11.13 Mkt within 15%Forward Earnings Growth Rate 2 0.1367 13.94 11.01 11.08 11.13 11.16 11.17 4/1/2008 $29.27Est MVE 1528.665 0.1467 13.02 11.09 11.14 11.18 11.2 11.21 Undervalued >33.66Divide by shares 142.6 Ke 0.1567 12.22 11.18 11.21 11.23 11.24 11.24 Overvalued <24.88Initial Share Price 10.71995 0.1667 11.5 11.26 11.27 11.28 11.28 11.29 Fairly ValuedTime Consistent Price 11.11726 0.1767 10.88 11.35 11.33 11.32 11.32 11.32
0 1 2 3 4 5 6 7 8 9 10 11Perp2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net Income 355.74 366.41 377.41 388.73 400.39 412.40 424.77 437.52 450.64 464.16 478.09 Total Divdends 103.51 113.86 125.25 137.77 151.55 166.70 183.37 201.71 221.88 244.07 268.478282Book Value Equity 1548.235 1,800.47 2,053.02 2,305.18 2,556.14 2,804.98 3,050.68 3,292.08 3,527.88 3,756.64 3,976.73 4,186.34
0.229772491 0.203510592 0.18382992 0.168632734 0.156638974 0.14702515 0.1392394 0.1329002 0.12773757
0.165476338ROE
0.14 0.15 0.16 0.17 0.18 0.190.1267 11.16 11.13 11.11 11.09 11.06 11.040.1367 11.2 11.18 11.16 11.13 11.11 11.08
Ke 0.1467 11.25 11.23 11.2 11.18 11.16 11.130.1567 11.3 11.28 11.25 11.23 11.21 11.180.1667 11.35 11.32 11.3 11.28 11.25 11.230.1767 11.39 11.37 11.35 11.32 11.3 11.28
ROE0.14 0.15 0.16 0.17 0.18 0.19
0 10.06 10.78 11.5 12.22 12.93 13.652 11.36 11.31 11.24 11.18 11.12 11.063 11.33 11.29 11.25 11.21 11.18 11.13
g 5 11.3 11.28 11.25 11.23 11.21 11.187 11.29 11.27 11.25 11.24 11.22 11.29 11.28 11.27 11.26 11.24 11.23 11.22
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