# FINA 305 Group Assignment -Estimating Hugo Boss’s Equity Value

January 30, 2017

Question
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FINA 305-15B HAM
FINA 305-15B TGA
Group Assignment
Estimating Hugo Boss’s Equity Value
Hugo Boss AG is a German designer, manufacturer and distributor of men’s and women’s
clothing, operating in the higher end of the clothing retail industry. During the period 2001–
2008, the company consistently earned returns on equity in excess of 18 percent, grew its book
value of equity (before special dividends) by 5.5 percent per year, on average, and paid out 65–
70 percent of its net profit as dividends. In 2008, the company paid out a special dividend of
€345.1 million. Consequently, the company’s book value of equity decreased from €546.8
million in 2007 to €199.0 million in 2008.
On April 1, 2009, one month before the publication of the first-quarter results, when Hugo
Boss’s 70.4 million common shares trade at about €11 per share, an analyst produces the
following forecasts for Hugo Boss.
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Assume that Hugo Boss’s cost of equity equals 12 percent. Consider the following issues in
1. Calculate free cash flows to equity, abnormal earnings, and abnormal earnings growth for
the years 2009–2011.
2. Assume that in 2012 Hugo Boss AG liquidates all its assets at their book values, uses the
proceeds to pay off debt and pays out the remainder to its equity holders. What does this
a. Free cash flow to equity holders in 2012 and beyond?
b. Abnormal earnings in 2012 and beyond?
c. Abnormal earnings growth in 2012 and beyond?
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3. Estimate the value of Hugo Boss’s equity on April 1, 2009, using the above forecasts and
assumptions. Check that the discounted cash flow model, the abnormal earnings model, and
the abnormal earnings growth model yield the same outcome.
4. The analyst estimates a target price of €20 per share. What is the expected value of Hugo
Boss’s equity at the end of 2011 that is implicit in the analysts’ forecasts and target price?
5. Under the assumption that the historical trends in the company’s ROE (i.e., approximately
18 percent), payout ratio (70 percent) and book value growth (5.5 percent) continue in the
future, what would be your estimate of Hugo Boss’s equity value-to-book ratio before the
company paid out its special dividend? How does the special dividend payment change your
estimate of the equity value-to-book ratio?
6. The analyst following Hugo Boss estimates a target price of €20 per share. Under the
assumption that the company’s profit margins, asset turnover, and capital structure remain
constant after 2011, what is the terminal growth rate that is implicit in the analysts’ forecasts
and target price?
7. Using the analyst’s forecasts, estimate Hugo Boss’s equity value under the following three
scenarios:
a. Hugo Boss enters into a competitive equilibrium in 2012.
b. After 2011, Hugo Boss’s competitive advantage can only be maintained on the
nominal sales level achieved in 2011.
c. After 2011, Hugo Boss’s competitive advantage can be maintained on a sales base
that remains constant in real terms.
8. Using the analyst’s forecasts, estimate Hugo Boss’s equity value under the assumption that
the company’s profitability gradually reverts to its required level (i.e., AEt = 0.75 × AEt-1) after
the terminal year.
Notes for the assignment:
1. Please do not submit Excel workouts only. Word documents with excel results pasted in the
body of text or attached in the Appendix are welcomed. Showing the procedure by which you
achieve each item will help to maximise your mark.
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2. An essay-style analysis report is recommended. This means there are different sections in
your report, which contribute to a complete, cohesive, and coherent story about equity value of