Tara Inc.

Case Solution
Emerging Markets
Campbell Harvey
March 8
th
, 2001
Yves McMullen
Jason Kam
Uche Osuji
Tara A Buhist savi!r"g!ess #ith numer!us $!rms%
James Sherrill
2
The following 10 steps tae !ou through the case writers solution to the Tara case" #t is important to
note that it is essential to follow along with e$cel portion of the solution as it will %etail the mo%el
&uilt an% the un%erl!ing factors 'figures of the e$cel mo%el have &een inclu%e% for !our convenience("
#t is also important to note that this is the case writers interpretation of the case an% there are more than
one possi&le solution"
&tep 1' (!recasting )evenues *&ee (igure 1 !r )ev Assumpti!ns in the E+cel spreasheet,
The first step in anal!)ing Tara is to forecast the revenues" The case gives the si)e of the U"S" *thletic
shoe maret an% gives an in%ication into the growth rate for the future" The maret is suppose% to
e$pan% less than +,- or at 1"./ a !ear" 0orecasting this growth rate out gives the total sales volume
for the ne$t 12 !ears 'the case alwa!s uses 12 !ears &ecause the writers felt this was an a%e1uate time
frame for the compan! to sta&ili)e(
Total athletic shoe volume %oesn2t help much &ecause Tara is focusing on 3unning an% 4ross Training
shoes" Total maret sales nee% to &e &roen %own into those two categories &! using the percentages
state% in the case '3unning is 15/ an% 4ross Training is 1."6/ of total athletic shoe sales("
Once volume sales have &een calculate% the ne$t step is the price" Tara2s strateg! is to &e a low cost
provi%er of 1ualit! shoes" The average athletic shoe price is given in the case &ut it is also mentione%
that 3unning an% 4ross Training segments cost significantl! more than the average athletic shoe" 7e
are choosing 'accor%ing to the case( to estimate our price as the average for the total shoe in%ustr!
nowing that this will &e a&out 20/ lower than the in%ustr! average for 3unning an% 4ross Training"
0urthermore8 an! price use% nee%s to inclu%e inflation8 which we estimate% to grow at 9/ over the
ne$t 12 !ears"
The last piece is to forecast maret share" This is a critical component to case an% one that will nee%
to &e forecaste% later using statistical techni1ues" 0or now8 it is important to note that maret share
will never grow in e$cess of 1/ of the aforementione% maret segments" The case writers grew
maret share &! "1/ &eginning the !ear after start:up '2009( an% stoppe% growth with it reache% "6./
maret share 'in 2005(" The last step is an o&vious one; 3evenues < Total Maret Sales = Maret
Share = -rice"
&tep 2' (!recasting C!st !$ -!!s &!l Assumpti!ns *&ee (igure 2 !r C-& Assumpti!ns in the
E+cel spreasheet,
There are two wa!s to calculate 4ost of +oo%s Sol% '4+S( in this case" The first is &! using an
in%ustr! &enchmar" 4+S in the shoe in%ustr! averages aroun% >./ of sales8 thus taing ">. =
revenues will give a rough estimate for the re1uire% num&er" This metho%8 however8 is not
recommen%e% &ecause a critical component to the case is %oing &usiness in +a&on an% it nee%s to &e
un%erstoo% how fluctuations in +a&on will affect our la&or costs"
The secon%8 an% preferre% metho% is to forecast out 4+S &! &reaing it %own into la&or8 materials8 an%
overhea% an% forecasting them in%ivi%uall! as a percentage of sales" This metho% will allow for
statistical variations to the inflation8 which will affect ?a&or" ?a&or is roughl! 96/ of sales" This will
give a @har%A estimate num&er for the 4+S an% this num&er can &e carrie% throughout the valuation &!
fluctuating +a&on2s inflation rate" +a&on2s currenc! is pegge% to the 0ranc an% the chance of them
removing the peg is capture% in the 4ost of 4apital" Material an% overhea% &oth can &e taen as a
percentage of sales throughout 'material is 1BC of sales an% overhea% is B/ of sales"
9
(igure 1 )evenues Assumpti!ns
Tara Inc.
Revenue Assumptions ($MM)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Size of US shoe market
Pairs of Shoes- Total 1180.0 1197.6 1215.5 1233.6 1251.9 1270.6 1289.5 1308.7 1328.2 1348.0 1368.1 1388.5 1409.2 1430.2
Pairs of Shoes- Athleti 413.0 419.2 425.4 431.7 438.2 444.7 451.3 458.1 464.9 471.8 478.8 486.0 493.2 500.6
Pairs of Shoes- !"##i#$ 78.5 100.6 102.1 103.6 105.2 106.7 108.3 109.9 111.6 113.2 114.9 116.6 118.4 120.1
Pairs of Shoes- %ross Tr. 64.8 65.8 66.8 67.8 68.8 69.8 70.9 71.9 73.0 74.1 75.2 76.3 77.4 78.6
A&$ ost 'er Athleti Shoe 45.21 ( 46.56 ( 47.96 ( 49.40 ( 50.88 ( 52.41 ( 53.98 ( 55.60 ( 57.27 ( 58.98 ( 60.75 ( 62.58 ( 64.45 ( 66.39 (
Total ( for Athleti Shoe 18)671 ( 19)517 ( 20)402 ( 21)328 ( 22)295 ( 23)306 ( 24)363 ( 25)467 ( 26)622 ( 27)830 ( 29)092 ( 30)411 ( 31)790 ( 33)231 (
Total ( for !"##i#$ Shoe 3)547 ( 4)684 ( 4)897 ( 5)119 ( 5)351 ( 5)593 ( 5)847 ( 6)112 ( 6)389 ( 6)679 ( 6)982 ( 7)299 ( 7)630 ( 7)976 (
Total ( for %ross Tr. Shoe 2)931 ( 3)064 ( 3)203 ( 3)348 ( 3)500 ( 3)659 ( 3)825 ( 3)998 ( 4)180 ( 4)369 ( 4)567 ( 4)774 ( 4)991 ( 5)217 (
% of Maret !"are
*ike 42.0+
A,i,as-Salomo# A.-. 17.5+
!ee.ok 11.1+
A#,1 1.8+
Tara 0.10+ 0.20+ 0.30+ 0.40+ 0.50+ 0.60+ 0.70+ 0.75+ 0.75+ 0.75+ 0.75+
Total Shoes Sol, 0.2 0.3 0.5 0.7 0.9 1.1 1.3 1.4 1.4 1.5 1.5
#ara Revenues - - 8.47 17.70 27.76 38.69 50.55 63.41 77.34 86.62 90.55 94.65 98.95
Ass"m'tio#s/
Pairs of shoes- Total- ha&e histori %A-! of 1.5+
Pairs of Shoes- Athleti- 01'ete, to mai#tai# #ear 35+ of total
Pairs of Shoes- !"##i#$- -re2 3"ikl4 to 19+) e1'ete, to .e aro"#, 24+ of athleti
Pairs of Shoes- %ross Trai#i#$- 01'ete, to .e #ear 17+ of shoes sol,
A&$ ost 'er Athleti Shoe- Stea,4 rise 2ith i#flatio# 53+6
$stimate%
Tara Inc.
&'! Assumptions ($MM)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
%ost of -oo,s Sol,/
Total Shoes Sol, - - 0.17 0.35 0.53 0.72 0.91 1.11 1.31 1.43 1.45 1.47 1.49
7a.or 16.89 ( 17.40 ( 17.92 ( 18.46 ( 19.02 ( 19.60 ( 20.20 ( 20.86 ( 21.54 ( 22.30 ( 23.52 ( 24.75 ( 25.13 (
8aterial 8.38 ( 8.63 ( 8.89 ( 9.16 ( 9.43 ( 9.72 ( 10.01 ( 10.31 ( 10.62 ( 10.94 ( 11.26 ( 11.60 ( 11.95 (
9&erhea, 3.73 ( 3.84 ( 3.95 ( 4.07 ( 4.19 ( 4.32 ( 4.45 ( 4.58 ( 4.72 ( 4.86 ( 5.01 ( 5.16 ( 5.31 (
Total Per Shoe 29.00 ( 29.87 ( 30.77 ( 31.69 ( 32.64 ( 33.63 ( 34.66 ( 35.75 ( 36.88 ( 38.10 ( 39.79 ( 41.51 ( 42.39 (
:#,"str4 A&era$e 30.27 ( 31.17 ( 32.11 ( 33.07 ( 34.06 ( 35.09 ( 36.14 ( 37.22 ( 38.34 ( 39.49 ( 40.67 ( 41.90 ( 43.15 (
+ ;iffere#e 95.8+ 95.8+ 95.8+ 95.8+ 95.8+ 95.9+ 95.9+ 96.0+ 96.2+ 96.5+ 97.8+ 99.1+ 98.2+
&'! 0 0 5.3 11.0 17.3 24.1 31.5 39.6 48.4 54.3 57.6 61.0 63.2
:#,"str4 A&era$e <e#hmark 0.0 0.0 5.5 11.5 18.0 25.1 32.9 41.2 50.3 56.3 58.9 61.5 64.3
Ass"m'tio#s/
37+ 7a.or- .ase, o# 'rie 'er shoe = 37+ !e& 5i#,"str4 a&$6 = -a.o# i#flatio#
18+ 8aterial- .ase, o# 'rie 'er shoe = 18+ !e& 5i#,"str4 a&$6 = US i#flatio#
8+ 9&erhea,- .ase, o# 'rie 'er shoe = + of !e& 5i#,"str4 a&$6 = -a.o# i#flatio#
63+ Total
$stimate%
(igure 2 C!st !$ -!!s &!l Assumpti!ns
>
&tep .' C!mpiling the /nc!me &tatement *&ee (igure . !r the /nc!me &tatement in the E+cel
spreasheet,
The ne$t step is to forecast the #ncome Statement" 7e alrea%! have our revenues an% 4+S num&ers
from the previous 2 steps" De$t8 we nee% to calculate Selling8 +eneral C *%ministrative e$penses
'S+C*(8 3C,8 #nterest #ncome" S+C* inclu%es mareting e$penses so this num&er is e$pecte% to &e
large in the first few !ears" The case hints that Tara having to spen% 10 million on mareting costs in
the first few !ears" Starting after the initial mareting e$pen%iture8 it is e$pecte% that S+C* will level
off to in%ustr! stan%ar%s '6/ of sales("
3C, is another critical component to Tara2s strateg! an% re1uires significant e$pen%iture" Tara is
going to have to rel! on 1ualit! shoes with relative fashion an% the case mentions that it will re1uire
10 million %ollars to %esign a shoe that is a%e1uate for the US maret" Once the initial e$pen%iture is
outlai%8 3C, shoul% revert closer to the in%ustr! average of 11/ of sales"
#nterest #ncome comes %irectl! from the %e&t raise% 'which will &e %iscusse% later(" The #04 an%
%evelopment &ans are e$pecte% to tae a su&or%inate %e&t of 6/ in or%er to stimulate economic
return" The calculation of this num&er can &e %one through either the capital assumptions or the
&alance sheet8 &oth of which are in the following steps"
0inall!8 Tara2s income ta$es are lower &ecause of its positioning in a low ta$ )one" There will &e a 2/
ta$ an% it is important to remem&er to carr! ta$ loses forwar%" 0or the first few !ears8 Tara will have a
negative net income"
&tep 0' Creating 1lant, 1r!perty an E2uipment Assumpti!ns *&ee (igure 0 !r the 11E
Assumpti!ns in the E+cel spreasheet,
-lant8 -ropert! an% E1uipment '--E( e$pen%itures will &e another place of large investments for Tara"
These e$pen%itures inclu%e lan%8 infrastructure8 factor!8 an% machiner!" Fecause these e$pen%itures
are high an% can ver! upon %ifferent scenarios8 it is also important to loo at statistical scenarios here
as well"
?an% is the easiest component to thin of" 7e e$pect that the necessar! lan%8 locate% near a port for
%istri&ution cost8 will cost roughl! 1". million U"S" %ollars 'US,(" ?an% o&viousl! %oes not
%epreciate"
#n or%er to assure that +a&on has the proper facilities for us to import8 e$port8 an% operate efficientl!8
we will also nee% invest %irectl! into +a&on2s infrastructure" This %oes not inclu%e @economic
investmentA into the countr! an% is simpl! nee%e% to get Tara up an% running" The case mentions that
it will cost appro$imatel! >"B million US, in infrastructure in +a&on"
Tara2s factor! will cost nearl! 19 million US, to get starte%" This mone! inclu%es not onl! the
assem&l! plant &ut also the cost of the offices an% facilities for the e$patriates that are nee%e% to help
run the plant" Once the plant an% facilities are up an% running8 we assume that it will cost 100
thousan% US, a !ear to eep the plant an% facilities maintaine%"
0inall!8 machiner! is an important investment for a shoe compan!" #t will cost aroun% 6"G million
US, to ac1uire the necessar! machiner! an% 900 thousan% US, to maintain the newest machines"
0inall!8 the case writers use a G:!ear straight:line %epreciation for all %eprecia&le assets8 as it is
important to reali)e that +a&on is risier an% we wante% to use conservative estimates" ,epreciation
%oes not affect the capital nee%e%8 as it %oes not affect the cash flow"
Tara Inc.
(n)ome !tatement ($MM)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
!e&e#"es 0.0 0.0 8.5 17.7 27.8 38.7 50.6 63.4 77.3 86.6 90.5 94.7 98.9
%ost a#, 01'e#ses/
%ost of Sales 0.0 0.0 5.3 11.0 17.3 24.1 31.5 39.6 48.4 54.3 57.6 61.0 63.2
S->A 5i#l",es ,e'reiatio#6 0.0 12.3 4.6 5.1 1.9 2.7 3.5 4.4 5.4 6.1 6.3 6.6 6.9
!>; 10.0 0.0 0.9 1.9 3.1 4.3 5.6 7.0 8.5 9.5 10.0 10.4 10.9
:#terest 01'e#se 0.2 1.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
9ther :#ome?01'e#se 0.0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.8 0.9 0.9 0.9 1.0
Total %osts a#, 01'e#ses 10.2 13.8 13.4 20.8 25.1 34.0 43.6 54.2 65.6 73.3 77.3 81.5 84.5
:#ome <efore :#ome Ta1es 510.26 513.86 54.96 53.16 2.7 4.7 6.9 9.3 11.8 13.3 13.2 13.2 14.5
:#ome Ta1es 0.00 0.00 0.00 0.00 0.05 0.09 0.14 0.19 0.24 0.27 0.26 0.26 0.29
Ta1 arr4 for2ar,----@ 0.20 0.28 0.10 0.06 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
*et :#ome 510.26 513.66 54.66 53.06 2.7 4.6 6.8 9.1 11.5 13.1 13.0 12.9 14.2
Ass"mtio#s/
!e&e#"es- See !e&e#"e Ass"m'tio# sheet
%ost of Sales- See %-S Ass"m'tio# Sheet
S->A- 10 millio# start-"' marketi#$ ost i# 2002. :#,"str4 a&$ is 31+ of %-S ."t *ike s'e#,s 11+ of re&e#e 537.5 of %-S6) A-S2ikk is 6.5+ or re&e#"e
527+ of %-S6. Be e1'et to s'e#, 15+ of re&e#"e after i#itial ost ,"e to o"r marketi#$ strate$4
:#terest 01'e#se- The :C% 2ill take a 7+ s".or,i#ate ,e.t
9ther :#ome?01'e#se- Tarrifs a#, other 2ill e3"al 1+ of re&e#"e.
:#ome Ta1es- As a 'art of the lo2 ta1 zo#e) 2e e1'et to 'a4 2+ i# ta1es
$stimate%
(igure . /nc!me &tatement
B
Tara Inc.
**$ Assumptions ($MM)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
*+ant *ropert, - $.uipment/
7a#, 1.0 0.5 - - - - - - - - - - -
:#frastr"t"re 3.0 2.2 1.4 - - - - - - - - - -
Pla#t 4.0 4.0 4.0 0.9 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
8ahi#er4 - 1.0 5.4 1.0 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Total PP0 8.0 7.7 10.8 1.9 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4
0epriation !)"e%u+e/
Total Pla#t D 8ah 4.0 5.0 9.4 1.9 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4
Total :#&este, 4.0 9.0 18.5 20.4 20.8 21.2 21.5 21.9 22.3 22.7 23.1 23.5 23.9
2001 ;e'r 1.0 1.0 1.0 1.0
2002 ;e'r 1.3 1.3 1.3 1.3
2003 ;e'r 2.4 2.4 2.4 2.4
2004 ;e'r 0.5 0.5 0.5 0.5
2005 ;e'r 0.1 0.1 0.1 0.1
2006 ;e'r 0.1 0.1 0.1 0.1
2007 ;e'r 0.1 0.1 0.1 0.1
2008 ;e'r 0.1 0.1 0.1 0.1
2009 ;e'r 0.1 0.1 0.1 0.1
2010 ;e'r 0.1 0.1 0.1 0.1
2011 ;e'r 0.1 0.1 0.1
2012 ;e'r 0.1 0.1
2013 ;e'r 0.1
;e'r S"m 1.0 2.3 4.6 5.1 4.2 3.0 0.8 0.4 0.4 0.4 0.4 0.4 0.4
A"m"late, ;e'r 1.0 3.3 7.9 13.0 17.2 20.2 21.0 21.3 21.7 22.1 22.5 22.9 23.3
<ook Eal"e 3.0 5.8 10.6 7.4 3.6 1.0 0.6 0.6 0.6 0.6 0.6 0.6 0.6
$stimate%
(igure 0 1lant, 1r!perty 3 E2uipment Assumpti!ns
10
&tep 4' Estimating Capital Assumpti!ns *&ee (igure 4 !r Capital Assumpti!ns in the E+cel
spreasheet,
3aising 4apital is o&viousl! an essential part to Tara2s case" How much capital remains inconclusive
an% if !ou want to %eviate from the amount the amount the case writers assume feel free to %o so" The
case writers assume that the amount of capital nee%e% is roughl! .. million US," This covers the
larger portion of the start:up costs inclu%ing --E8 Mareting8 an% 3C," Most importantl!8 however8
the cash raise% eeps Tara cash flow positive for the first few !ears"
Tara2s financing will come in two wa!s8 through issuing %e&t an% e1uit!" The %e&t portion will &e
roughl! 9. million US, an% will &e raise% through the #nternational 0inance 4ompan! '#04( an%
other %evelopment &ans" The #04 is assume% to tae 6./ of the %e&t position while the remaining
2./ is with the %evelopment &ans" #n a%%ition8 &oth %e&t hol%ers are assume% to charge 6/ interest
for their su&or%inate %e&t an% it will &e pai% off in 10 !ears"
E1uit! is where Tara %iffers from most countries" *s %escri&e% in the case8 Tara2s true e1uit! hol%ers
are the impoverishe% people of +a&on" 0rom a financial perspective8 however8 it is O$fam an% the
4hristian2s 4hil%ren 0un% who pa! in the e1uit! portion" *ccor%ing to the case8 Tara is tr!ing to raise
20 million US, in e1uit! an% the case writers assume that this will &e a .0I.0 split" Foth %e&t an%
e1uit! positions will &e hel% on the &alance sheet"
&tep 5' Creating the Balance &heet *&ee (igure 5 !r the Balance &heet in the E+cel spreasheet
an als! the 6ey )ati!s in the E+cel spreasheet,
4reating a &alance sheet that maes since is essential for an! start:up compan!" The &est wa! to
forecast the &alance sheet is through using in%ustr! compara&les" Through %oing this8 !ou are creating
a realistic scenario that will &e use% to estimate cash flows an% help i%entif! the capital nee%e% to start:
up the compan!"
4ash 'the first input(8 is actuall! last as it will &e the plug to mae the &alance sheet &alance" #t is
essential8 however8 that cash mae since an% that it is ept aroun% the in%ustr! average of 1B/ of
sales" *ccounts 3eceiva&les 'which inclu%es allowance of %ou&tful accounts(8 #nventories8 an%
-repai% E$penses all are in accor%ance to in%ustr! stan%ar%s '5"B/ of sales8 1.">/ of sales8 an% ."5/
of 4+S respectivel!(" 0inall!8 --E assumptions come %irectl! from the --E assumptions sprea%sheet"
*ccounts -a!a&le an% *ccrue% ?ia&ilities also come %irectl! from in%ustr! percentages although
*ccrue% ?ia&ilities is less than the in%ustr! average &ecause Tara spen%s less a%vertising %ollars '."1/
of 4+S for *ccounts -a!a&le an% >"G/ of S+C* for *ccrue% ?ia&ilities" 4urrent -ortion of ?ong
Term ,e&t an% ?ong Term ,e&t &oth come %irectl! from the 4apital *ssumptions"
Sharehol%er2s e1uit! inclu%es the capital investe% &! sharehol%ers 'in this case 20 million US,(" The
,ivi%en%s -ai% Out to +a&on come from the upcoming step @Economic JalueA an% retaine% earnings
is o&viousl! &rought over from the #ncome Statement" Total Sharehol%er2s E1uit! is net of the
%ivi%en%s pai% out to +a&on"
0inall!8 as state% &efore8 it is important to loo at e! ratios an% compare them to in%ustr! averages
a%s this will &enchmar the realit! of Tara2s &usiness an% wor to eep !our mo%el in line with
plausi&le outcomes"
11

Tara Inc.
&apita+ Assumptions ($MM)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 #ota+
1on2 #erm 0e3t
:C% S"''orte, ;e.t 2.25 14.25 9.75 0.75 0 0 0 0 0 0 0 0 0 27
;e& <a#k S"''orte, ;e.t 0.75 4.75 3.25 0.25 0 0 0 0 0 0 0 0 0 9
Total ;e.t Eal"e 3 19 13 1 0 0 0 0 0 0 0 0 0 36
8o&e to %"rre#t 7o#$ Tem ;e.t 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Pa4me#t of %"rre#t 7o#$ Term ;e.t 0 0 0 0 0 0 0 0 0 0 3 19 13 2
&ommon !to) 4a+ue
%hristia# %hil,re#s C"#, 7.5 2.5 0 0 0 0 0 0 0 0 0 0 0 10
91fam 7.5 2.5 0 0 0 0 0 0 0 0 0 0 0 10
Total Stok Eal"e 15 5 0 0 0 0 0 0 0 0 0 0 0 20
Ass"m'tio#s/
7o#$ Term ;e.t - is fi#a#e, thro"$h the 75+ :C% a#, 25+ 0%A at 7+ i#terest
:#t 01' F 7+
%ommo# Stok Eal"e- is s"''orte, 50?50 .4 %%C a#, 91fam a#, is o#si,ere, e3"it4 altho"$h ,i&e#,e#,s 2ill #e&er .e 'ai, o"t
:C% ,e.t + F 75+
0%A ,e.t +F 25+
%%C e3"it4 +F 50+
91 e3"it4 + F 50+
$stimate%
(igure 4 Capital Assumpti!ns
Tara Inc.
5a+an)e !"eet ($MM)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets
%"rre#t Assets/
%ash a#, e3"i&ale#ts 0.8 0.8 1.0 0.2 4.4 8.1 10.3 12.4 15.1 19.5 25.2 30.8 36.9
Ao"#ts reei&a.les 5i#l ,o".tf"l6 0.0 0.0 0.8 1.7 2.7 3.8 5.0 6.2 7.6 8.5 8.9 9.3 9.7
:#&e#tories 0.0 0.0 1.3 2.8 4.3 6.0 7.9 9.9 12.1 13.5 14.1 14.8 15.4
Pre'ai, e1'e#ses 0.0 0.7 0.3 0.3 0.1 0.2 0.2 0.3 0.3 0.4 0.4 0.4 0.4
Total Current Assets 0.8 1.5 3.5 5.0 11.6 18.1 23.3 28.8 35.0 41.9 48.6 55.2 62.4
PP0 - 7a#, > :#frastr"t"re 4.0 6.7 8.1 8.1 8.1 8.1 8.1 8.1 8.1 8.1 8.1 8.1 8.1
PP0 - Pla#t > 8ahi#er4 4.0 9.0 18.5 20.4 20.8 21.2 21.5 21.9 22.3 22.7 23.1 23.5 23.9
A"m"late, ;e'reiatio# 51.06 53.36 57.96 513.06 517.26 520.26 521.06 521.36 521.76 522.16 522.56 522.96 523.36
Total Assets 7.8 14.0 22.2 20.5 23.3 27.2 32.0 37.4 43.7 50.6 57.2 63.9 71.1
1ia3i+ities
%"rre#t 7ia.ilities
%"rre#t 'ortio# of lo#$ term ,e.t 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Ao"#ts Pa4a.le 0.0 0.0 0.3 0.6 0.9 1.2 1.6 2.0 2.4 2.7 2.9 3.0 3.2
Ar"e, 7ia.ilities 0.0 0.8 0.3 0.3 0.1 0.2 0.2 0.3 0.3 0.4 0.4 0.4 0.4
Total Current Liabilities 0.0 0.8 0.6 0.9 1.0 1.4 1.8 2.3 2.8 3.1 3.3 3.5 3.6
7o#$ term ,e.t 3.0 22.0 35.0 36.0 36.0 36.0 36.0 36.0 36.0 36.0 36.0 36.0 36.0
Total 7ia.ilities 3.0 22.8 35.6 36.9 37.0 37.4 37.8 38.3 38.8 39.1 39.3 39.5 39.6
!"are"o+%er6s $.uit,
%ommo# stok &al"e 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0
;i&i,e#,s - :#&estme#t :# -a.o# 0.0 0.0 0.0 0.0 0.0 1.2 2.4 4.1 5.8 6.5 6.5 6.5 7.1
!etai#e, ea#i#$s 510.26 523.86 528.46 531.46 528.76 525.26 520.86 515.86 510.16 53.56 3.0 9.4 16.5
Total Sharehol,erGs 03"it4 4.8 58.86 513.46 516.46 513.76 510.26 55.86 50.86 4.9 11.5 18.0 24.4 31.5
Total 7ia.lities D Sharehol,erGs 7.8 14.0 22.2 20.5 23.3 27.2 32.0 37.4 43.7 50.6 57.2 63.9 71.1
Ass"m'tio#s/
%ash a#, e3"i&ale#ts- !o"$hl4 mai#tai#e, at i#,"str4 a&$ of 18+ .4 'a4me#t of ,i&i,e#,s 5i#&estme#t i# -a.o#6
Ao"#ts !eei&a.le- %om'a#4 om'ara.les sho2 a# a&$ of 9.8+ of sales
:#&e#tories- %om'ara.les a#, i#,"str4 a&$ .oth sho2 ro"$hl4 aro"#, 15.6+ of sales .ase, o# 7:C9 metho,
Pre'ai, e1'e#ses - :#,"str4 a&era$e of 5.9+ of %-S
PP0 - 7a#, > :#frastr"t"re - See PP0 Ass"m'tio#s
PP0 - Pla#t > 8ahi#er4 - See PP0 Ass"m'tio#s
;e'reiatio# - See PP0 Ass"m'tio#s
%"rre#t 'ortio# of lo#$ term ,e.t - See a'ital ass"m'tio#s
Ao"#ts Pa4a.le- :#,"str4 a&era$e is 5+ of %-S
Ar"e, 7ia.ilities - Bell .elo2 i#,"str4 of of 17.+ of of S-A .ea"se of lo2er a,&ertisi#$ osts ,"e to om'a#4 strate$4 56.4+6
7o#$ term ,e.t- see %a'ital Ass"m'tio#s
%ommo# Stok Eal"e- see a'ital ass"m'tio#s
$stimate%
(igure 5 Balance &heet
1G
&tep 7' Creating the &tatement !$ Cash (l!#s *&ee (igure 7 !r &tatement !$ Cash (l!#s in the
E+cel spreasheet,
The Statement of 4ash 0lows is a compilation of the previous steps" #n starting out a new compan!8
cash is o&viousl! of paramount concern" The net cash position comes from the Falance Sheet8 as %oes
most of the information containe% within" There are the o&vious lins to net income an% --E
assumptions &ut one of the main lins is the connection to %ivi%en%s" #n or%er for the &alance sheet
cash assumptions to mae since8 the statement of cash flows has to mae since" 7ith the cash that
Tara has the! can either pa! out %ivi%en%s or invest in positive D-J projects" The case states that
since Tara is a profit:ma$imi)ing firm8 if the! have a positive D-J project to invest in the! shoul% %o
so" Since we are assuming there are no such projects availa&le8 %ivi%en% pa!out to +a&on is what
places the Falance Sheet8 #ncome Statement8 an% Statement of 4ash 0lows in harmon!"
&tep 8' E+amining Ec!n!mic 8alue *&ee (igure 8 an (igure 9 !r Ec!n!mic 8alue in the E+cel
spreasheet,
Economic value is of critical importance to Tara" This is the %ivi%en% pa!out an% this is the
foun%ation for Tara2s strateg! an% purpose" The case writers assume% a %ivi%en% pa!out of 2./
starting in 200> an% increasing to .0/ in 2005" This helpe% maintain an appropriate level of cash
while accomplishing Tara2s mission of investing su&stantial mone! into +a&on"
The metho%olog! of investing into +a&on is to first set:up the necessar! infrastructure an% then wal
%own Ma)low2s hierarch! of nee%s 'i"e" after the infrastructure &uilt &uil%ing up agriculture8 hospitals8
housing an% schools(" *fter the total amount of cash ha% &een assigne%8 the case writers also assume%
%iffering levels of investment in the %ifferent nee%s" This was %one allocating a percentage of cash to
each project to &uil% up the re1uire% facilities an% sustaining a proper amount of cash investment in
the !ears ahea%"
#n total8 there woul% &e a G0 million US, investment in +a&on up until 2019 'un%er the &ase
assumptions(" This %oes not inclu%e taing into account the life of the project to perpetuit!8 nor %oes it
tae into account the time value of mone!" 0or theoretical purposes8 an% in or%er to &etter un%erstan%
if the e1uit! investors shoul% invest in this project8 !ou can tae the project to perpetuit! an% %iscount
that &ac at the ris free rate" This gives an estimation of how much the project is worth to the e1uit!
investors compare% to the opportunit! cost of putting mone! into a ris free investment" Un%er the
&ase case assumption8 Tara invests 20"> million US, into +a&on in present value terms" The e1uit!
investors invest 20 million US, into the project so the &ase case scenario is marginall! &etter than a
flat investment in +a&on"
One important factor to note a&out %etermining the economic value is that this is just the %irect
investment in +a&on that is &eing measure%" There are man! other %etermines of economic return that
the #04 an% %evelopment &ans will &e measuring that %o not involve %irect investments" These other
factors inclu%e such things as emplo!ment8 health 'life e$pectanc!(8 e%ucation8 countr! infrastructure
'not inclu%ing Tara2s %irect investments(8 imports8 an% e$ports" *ll of these will have a su&stantial
impact to Tara2s nominal +-, an% will pla! an influential role in whether the #04 an% other &ans will
involve themselves with the project" The case writers assume% percentages &ase% upon the changes to
+a&on2s +,- that ha% a net affect of 1."9/ 'the estimate is inclu%e% at the &ottom of the Economic
Jalue 0igure an% Sprea%sheet(
1.
(igure 7 &tatement !$ Cash (l!#s
Tara Inc.
!tatement of &as" 7+o8s ($MM)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
&as" 7+o8 from 9perations/
*et :#ome 510.26 513.66 54.66 53.06 2.7 4.6 6.8 9.1 11.5 13.1 13.0 12.9 14.2
:#ome %har$es #ot affeti#$ ash/
;e'reiatio# 1.0 2.3 4.6 5.1 4.2 3.0 0.8 0.4 0.4 0.4 0.4 0.4 0.4
%ha#$es i# 2orki#$ a'ital/
5:#rease6 ;erease i# i#&e#tories 0.0 0.0 51.36 51.446 51.66 51.76 51.96 52.06 52.26 51.46 50.66 50.66 50.76
5:#rease6 ;erease i# ao"#ts reei&a.le 0.0 0.0 50.86 50.96 51.06 51.16 51.26 51.36 51.46 50.96 50.46 50.46 50.46
:#rease 5;erease6 i# Ar"e, 7ia.ilities 0.0 0.8 50.56 0.0 50.26 0.0 0.1 0.1 0.1 0.0 0.0 0.0 0.0
:#rease 5;erease6 i# ao"#ts 'a4a.le 0.0 0.0 0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.3 0.2 0.2 0.1
Cash flow from operations 59.26 510.66 52.46 0.1 4.4 5.3 5.0 6.7 8.9 11.4 12.5 12.5 13.6
&as" *rovi%e% 3, (nvestin2 A)tivities
PP0 - 7a#, > :#frastr"t"re 54.06 52.76 51.46 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
PP0 - Pla#t > 8ahi#er4 54.06 55.06 59.46 51.96 50.46 50.46 50.46 50.46 50.46 50.46 50.46 50.46 50.46
Cash se! b" #n$estin% A&ti$ities 58.06 57.76 510.86 51.96 50.46 50.46 50.46 50.46 50.46 50.46 50.46 50.46 50.46
&as" *rovi%e% 3, 7inan)in2 A)tivities
A,,itio#s to 7o#$ Term ;e.t 3.0 19.0 13.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
!e,"tio#s i# lo#$-term ,e't i#l",i#$ "rre#t 'ortio# 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
;i&i,e#,s- 5i.e. :#&estme#t i# -a.o#6 0.0 0.0 0.0 0.0 0.0 51.26 52.46 54.16 55.86 56.56 56.56 56.56 57.16
Cash se! b" 'inan&in% A&ti$ities 18.0 18.3 13.5 1.0 0.2 51.26 52.46 54.16 55.86 56.66 56.56 56.56 57.16
*et %ha#$e i# %ash 0.8 50.06 0.3 50.96 4.2 3.7 2.1 2.1 2.7 4.5 5.7 5.6 6.1
%ash i# <e$i##i#$ of Hear 0.0 0.8 0.8 1.0 0.2 4.4 8.1 10.3 12.4 15.1 19.5 25.2 30.8
&as" in $n% of :ear 0.8 0.8 1.0 0.2 4.4 8.1 10.3 12.4 15.1 19.5 25.2 30.8 36.9
%I0%A- ro"$hl4 2hat e#,i#$ ash sho"l, .e 0.0 0.0 1.5 3.2 5.0 7.0 9.1 11.4 13.9 15.6 16.3 17.0 17.8
omes from i#,"str4 a&era$e 18+ of re&e#"e
Ass"m'tio#s/
All ,ata is .ase, 5as i# #ormal ases6 o# the <ala#e Sheet a#, :#ome Stateme#t. The o#e e1e'tio# is ,i&i,e#,s 2hih omes from 0o#omi Eal"e sheet.
$stimate%
1>
Tara Inc.
0ire)t (nvestment ($MM)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Amo"#t Alloate, to 01'e#,it"re
01'e#,it"res/
:#frastr"t"re - - - - - 1.2 1.2 1.0 0.6 0.7 0.6 0.6 0.7
A$ri"lt"re - - - - - - 0.6 1.0 1.7 2.0 1.9 1.9 0.7
Ios'ital - - - - - - 0.6 2.0 0.6 0.7 1.3 1.3 1.4
Io"si#$ - - - - - - - - 2.9 3.3 1.9 1.3 2.1
Shools - - - - - - - - - - 0.6 1.3 2.1
Total 01',it"res 0.0 0.0 0.0 0.0 0.0 1.2 2.4 4.1 5.8 6.5 6.5 6.5 7.1
Total 01',it"res ;iso"#te, <ak 0.0 0.0 0.0 0.0 0.0 0.5 1.0 1.5 1.9 1.9 1.6 1.4 1.4
*PE of :#&estme#ts 20.6
Amo"#t A&aila.le to -a.o# 0.0 0.0 0.0 0.0 0.0 1.2 2.4 4.1 5.8 6.5 6.5 6.5 7.1
+ of Alloate from *et :#ome 0+ 0+ 0+ 0+ 0+ 25+ 35+ 45+ 50+ 50+ 50+ 50+ 50+
+ Alloate, to :#frastr"t"re 100+ 50+ 25+ 10+ 10+ 10+ 10+ 10+
+ Alloate, to A$ri"lt"re 25+ 25+ 30+ 30+ 30+ 30+ 10+
+ Alloate, to Ios'itals 25+ 50+ 10+ 10+ 20+ 20+ 20+
+ Alloate, to Io"si#$ 50+ 50+ 30+ 20+ 30+
+ Alloate, to Shools 10+ 20+ 30+
Total Alloate, 100+ 100+ 100+ 100+ 100+ 100+ 100+ 100+
$stimate%
'0* (mpa)t ($MM)
% (mpa)t on '0* % (mpa)t on '0* '0*
-a.o#
-;P 5US( 886 2)745
%o"#tr4 :#frastr"t"re 2.0+ 55
:m'orts 4.0+ 110
01'orts 1.0+ 27
0m'lo4me#t 4.0+ 110
Iealth 5life e1'eta#46 2.0+ 55
0,"atio# 5.0+ 137
*ost #ara '0* 3;240
0ifferen)e 15<3%
(igure 8 Ec!n!mic /nvestment
(igure 9 Ec!n!mic )eturn
&tep 9' C!ming up #ith the C!st !$ Capital *&ee (igure 10 an (igure 11 !r C!st !$ Capital in
the E+cel spreasheet,
The cost of capital will o&viousl! have a large impact on the valuation an% therefore the goIno go
%ecision" 7hen thining a&out the cost of capital8 it is important that it have &oth a theoretical an%
practical &asis an% that it simpl! maes since"
The first &enchmar for figuring the cost of capital is to loo at the U"S" cost of capital for a similar
project" Historical projects that mirror Tara2s have a &eta of 1"01" Using a levere% &eta &ase% on
Tara2s %e&t:to:e1uit! structure an% using the 4*-M mo%el !iel%s a U"S" %iscount rate of 12"0./"
O&viousl! our ris %oes not mirror U"S" ris &ecause we are sourcing from onl! one location an% there
is su&stantial ris associate% with that sourcing"
* @theoreticalA project lie Tara2s in +a&on woul% have a @theoreticalA %iscount rate of 2>"0./" This
comes from using a mo%el lie the +ol%man:Sachs integrate% mo%el where !ou tae the countr! cre%it
rating 'in this case 22(8 calculate the sovereign !iel% sprea% 'in this case 1G/( an% a%% that to the U"S"
cost of capital" Once again8 this is onl! h!pothetical since all of our revenues are U"S" &ase% an% we
from a sourcing stan%point we have mitigate% riss that are associate% with the project"
Dow that we have a gui%eline as to the range our cost of capital8 the ne$t step is to i%entif! the riss
an% separate them into project riss or sovereign riss" It is important to note that these risks are risks
associated with the project that are not included in the U.S. cost of capital 'i"e" project specific riss
associate% with sourcing from +a&on(" The case &reas %own project riss into completion timing8
electricit!8 la&or strie8 la&or 1ualit!8 information costs8 an% technolog!" These riss8 an% their
mitigating factors8 can &e 1uantifie% an% use% to a%just the cash flows" Each can happen in separate
!ears 'i"e" completion ris woul% onl! incur in the !ear that ris is vali%(" To 1uantif! these riss8 !ou
tae the pro&a&ilit! of the occurrence an% the estimate% impact to cash flows" You then multipl! them
together an% a%just the cash flows &! that percentage amount for each given !ear"
Once the cash flows have &een a%juste% for project ris" The ne$t step is to come up with a %iscount
rate to use in or%er to tae the present value of the adjusted cash flows" To %o this8 first thin of the
U"S" cost of capital as a &enchmar" 0rom there8 sovereign riss that occur &ut that are not im&e%%e%
in a U"S" cost of capital can &e a%%e%" Sovereign riss inclu%e currenc!8 inflation8 h!perinflation8
creeping e$propriation8 war8 corruption8 an% negotiation failure" These too can &e mo%ifie% &!
estimating the pro&a&ilit! an% their impact an% then a%%e% to the U"S" cost of capital" *n interesting
si%e note is that regular +a&on inflation is not inclu%e% in the case writers mo%el &ut this ris was
actuall! im&e%%e% %irectl! in the mo%el 'an% therefore in the cash flows(" This was %one in or%er to
use statistical metho%s to see the affect of inflation changes in +a&on 'this is covere% in the ne$t8 an%
final8 step("
Un%er the &ase case assumptions8 the %iscount rate use% is 1>"G./" This %oes not inclu%e the rate that
cash flows were %iscounte%" #n total8 the %iscount rate range% from 20:2G/ %epen%ing on the given
!ear" This is a ver! high %iscount rate &ut falls within our range" #t also passes the most important
step:: %oes the %iscount rate mae senseK The riss surroun%ing Tara are ver! large an% although there
are mitigating circumstances8 there are clearl! a lot of potential pro&lems that can occur &! using an
economicall! impoverishe% nation lie +a&on as a sourcing alternative"
1B
*ro=e)t Riss Miti2atin2 7a)tors
Teh#olo$4 The teh#olo$ies are k#o2# a#, 2ell esta.lishe,
A.ilti4 to o#&i#e :C% to i#&est ProJet oi#i,es 2ith their missio# stateme#t
:8C relatio#s ,eteriorate As lo#$ as $o&er#me#t o#ti#"es its maroeo#omi
'oli4 reforms) relatio#shi' sho"l, o#ti#"e to $ro2
%om'letio# !isks Bell esta.lishe, i#,"str4 5a#, US o"t'ost6
0letriit4 Same so"ri#$ as oil om'a#ies
7a.or Ii$h "#em'lo4me#t rate. %om'a#4 missio# to assist loal
'o'"latio# 2ill attrat em'lo4ees
:#formatio# %ost 01'erie#es ma#a$ers .oth e1ter#al a#, i# -a.o# 2ill
o'erate 'la#t
7a.or Skills 8a#,ator4 em'lo4ee trai#i#$ 2orksho's
US risk 'remi"m for Shoe 'roJet :#l",es risks of o'erati#$ i# a# a&era$e shoe
ma#"fat"rer i# the US
!overi2n Ris Miti2atin2 7a)tors
%"rre#4 9#l4 la.or ost is affete,
I4'er :#flatio# To the e1te#t Tara 2ill #ee, loal "rre#4) this 2ill #ot
affet om'a#4 m"h as lo#$ as '"rhasi#$ 'arit4 hol,s
%ree'i#$?%om'lete 01'ro'riatio# A 8aJorit4 of after ta1 'rofits are ret"r#e, to the o"#tr4.
%a'ital %o#trol A$ai#) maJorit4 of A.T. 'rofits are hel, 2ithi# o"#tr4
Bar Sli$ht ha#e for this o"ra#e a#, loatio# #e1t to US
9"t'ost
%orr"'tio# 8ost likel4 i# small amo"#ts. :C% offsets lar$e orr"'tio#
fators
(igure 10 1r!:ect an &!vereign )isks
(igure 11 C!st !$ Capital
Tara Inc.
&ost of &apita+ > ?na%=uste% 7ree &as" 7+o8s ($MM)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *erpetuit,
&as" 7+o8 7rom 9perations 59.26 510.66 52.46 0.1 4.4 5.3 5.0 6.7 8.9 11.4 12.5 12.5 13.6
-lus '1:t( interest pa!ments 0.2 1.5 2.4 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
Minus 40# 58.06 57.76 510.86 51.96 50.46 50.46 50.46 50.46 50.46 50.46 50.46 50.46 50.46
?n>a%=uste% 7ree &as" 7+o8s 517.06 516.86 510.86 0.6 6.5 7.4 7.0 8.7 11.0 13.5 14.6 14.5 15.7 102.07
7ree &as" 7+o8s A%=ustments $st< *ro3< 0is)nt
*ro3< A%=< Rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *erpetuit,
*ro=e)t Riss
%om'letio# Timi#$ 25+ 100+ -24.4+ 2.63
0letriit4 10+ 10+ -1.0+ 0.17 0.17 0.11 50.016 50.076 50.076 50.076 50.096 50.116 50.146 50.156 50.156 50.166 51.026
7a.or Strike 10+ 40+ -3.8+ 0.64 0.63 0.40 50.026 50.246 50.286 50.266 50.336 50.416 50.516 50.556 50.556 50.596 53.836
7a.or K"alit4 25+ 5+ -1.3+ 0.13 50.016 50.086 50.096 50.096 50.116 50.146 50.176 50.186 50.186 50.206 51.286
:#formatio# %osts 10+ 3+ -0.3+ 0.03 50.006 50.026 50.026 50.026 50.036 50.036 50.046 50.046 50.046 50.056 50.316
Teh#olo$4 1+ 40+ -0.2+ 0.02 50.006 50.016
%ash Clo2 A,J"stme#t 'er Hear 4.8+ 4.8+ 30.9+ 6.5+ 6.5+ 6.3+ 6.3+ 6.3+ 6.3+ 6.3+ 6.3+ 6.3+ 6.3+ 6.3+
A%=uste% &as" 7+o8s 516.26 516.06 57.56 0.6 6.1 6.9 6.6 8.2 10.3 12.7 13.7 13.6 14.7 95.6
@*4 ?sin2 Ris A=uste% &as" 7+o8s
#erm< 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *erpetuit,
Hear 1 2 3 4 5 6 7 8 9 10 11 12 13 13
!overi2n Riss
%"rre#4 20+ 5+ 1.0+
:#flatio# 5:#l",e, i# %r4stal <all6
I4'er :#flatio# 20+ 5+ 1.0+
%ree'i#$ 01'ro'riatio# 10+ 1+ 0.1+
Total 01'ro'riatio# 1+ 100+ 1.0+
Bar 2+ 35+ 0.7+
%orr"'tio# 30+ 1.0+ 0.3+
*e$otiatio# Cail"re 3+ 10+ 0.3+
US %ost of %a'ital for Shoe ProJet 12.05+
#ota+ 0is)ount 16<45%
A,J"ste, %ash Clo2s 516.26 516.06 57.56 0.6 6.1 6.9 6.6 8.2 10.3 12.7 13.7 13.6 14.7 95.6
;iso"#te, %ash Clo2s 513.96 511.86 54.76 0.3 2.8 2.8 2.3 2.4 2.6 2.8 2.6 2.2 2.0 13.2
@et *resent 4a+ue 5<58
Ass"m'tio#s/
-ro2th 3+
Ta1 !ate 2+
!f 7+
!m 12+
<eta 1.01
Tar$et ,e.t to e3"it4 114+
Tar$et e3"it4 to &al"e 44+
Tar$et ,e.t to &al"e 51+
%AP8 12.05+
:%%! 23.8
So&erei$# S'rea, 14+
:%%!% 44+
$stimates
$stimates
$stimates
&tep 10' ;sing &tatistical (!recasting t! Make the -!<=! -! >ecisi!n% *&ee (igure 12 !r Crystal
Ball in the E+cel spreasheet,
,oing a simple D-J anal!sis an% economic valuation is not enough to %etermine whether Tara is an
accepta&le project of not" The case is &uilt aroun% numerous assumptions an% each assumption nee%s
to &e e$amine%" There are man! statistical pacages that allow for simulations to &e run &! var!ing
plausi&le outcomes" The case writers chose to use 4r!stal Fall8 one such pacage8 in or%er to test
these possi&le outcomes"
There are also a num&er of %ifferent metho%s to choose from to tr! an% %etermine which assumptions
to test" The two most common metho%s8 an% the metho%s the case writers chose8 were sensitivit!
anal!sis an% torna%o charts" There are also o&vious assumptions that stan% out 'such as maret share(
in our case( that clearl! nee% to &e teste%"
0igure 11 shows all of our teste% assumptions in green an% all the outcomes we wante% to measure in
&lue" The num&ers that are showing now are our &ase case assumptions" *roun% each num&er is an
im&e%%e% %istri&ution that changes the num&er an% therefore the results of the mo%el"
The maret share num&ers have %istri&utions assigne% to them that mae them a @ran%om walA" This
means that each !ear the maret share is contingent upon the !ear &efore" The %istri&utions are normal
&ut un%er the &ase case scenario8 the! never rise a&ove 1/ an% never fall &elow G./ 'starting in
200.("
The --E also varies in %ifferent scenarios" Each num&er has a %istri&ution that allows for8 on average8
a .0/ swing on the e$pen%iture" The %istri&utions have fairl! tight stan%ar% %eviations8 as the case
num&ers are fairl! accurate in terms of e$pen%itures" #n a%%ition8 starting in 200> there is the chance
of a ran%om occurrence that a large e$pen%iture nee%s to &e %one"
The thir% assumption that we wante% to test was the +a&on inflation rate" 3emem&er that we %i% not
inclu%e this in the %iscount rate un%er the cost of capital" This in%ustr! is heavil! reliant on la&or an%
an!thing that affects the cost of that la&or grossl! affects the cost of goo%s sol%" Un%er our simulation8
we var! +a&on2s inflation rate8 again in a @ran%om walA fashion" This num&er fee%s into the cost of
goo%s sol% an% %epen%ing on the outcome8 increases our cost of goo%s sol% as high as 62/ of revenue
an% as low as >2/ 'the in%ustr! average is >./("
The final assumption that coul% potentiall! &e varie% is the cost of capital" This woul% o&viousl! have
the most significant impact 'unless there are %rastic changes to the maret share(" The &ottom line is8
@how comforta&le %o !ou feel a&out !our cost of capitalKA #f the cost of capital is such where it can &e
%efen%e%8 then var!ing the assumptions will %ecrease the clarit! of the &usiness an% strategic
%ecisions" #f !ou feel there is a nee% to %efen% !our cost of capital logic8 then running a separate
simulation for the cost of capital is a%vise%"
There are reall! onl! two results that are re1uire% to mae the goIno go %ecision" 0irst8 what is the
project D-JK This is o&viousl! the most important 1uestion &ecause it ass whether or not value is
&eing create% or %estro!e%" * positive D-J is the strongest argument to go ahea% with the project"
The other important 1uestion in this case is whether or not the e1uit! hol%ers are seeing a return to
+a&on 'given that is there mission(" ?ooing at an D-J of net investment in +a&on is one wa! to
attempt to 1uantif! that 1uestion" Overall8 however8 there are other non:o&vious impacts to +a&on an%
it is not eas! to get a clear answer" The answers to these two 1uestions will %eci%e whether or not to
go ahea% with the project"
22
Tara Inc.
&r,sta+ 5a++
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assumptions/
!e&e#"e/
8arket Share 0.10+ 0.20+ 0.30+ 0.40+ 0.50+ 0.60+ 0.70+ 0.75+ 0.75+ 0.75+ 0.75+
U#a.le to Pe#etrate 8kt 1.0
A.le to Pe#etrate 2ith L3+ market share -
A.le to 01erise !eal 9'tio# -
PP0 %ost/
7a#, 1.0 0.5
:#frastr"t"re 3.0 2.2 1.4
Pla#t 4.0 4.0 4.0 0.9 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
8ahi#er4 1.0 5.4 1.0 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
%ost of -oo,s Sol,/
-a.o# :#flatio# 1.0+ 1.0+ 1.0+ 1.0+ 1.0+ 1.1+ 1.2+ 1.4+ 1.7+ 2.2+ 4.6+ 6.9+ 5.4+
7ore)ast/
*PE 5.58
Total ;iret :#&. i# -a.o# 39.94
*PE of :#& i# -a.o# 20.64
A&era$e 8arket Share 0.53+
$stimate%
(igure 12 Crystal Ball &imulati!n
Finar! varia&les use% to alter scenarios"
,escri&e% in the @resultsA section"
)esults !$ the Base Case &cenari! *&ee (igure 1. !r )esults in the E+cel spreasheet,
The results from the first &ase case 4r!stal Fall simulation are shown in 0igure 12" *s can &e seen8
un%er the &ase case there is a >./ chance of there &eing a positive D-J" The net affect to the e1uit!
hol%ers8 is that .1/ of the time the! woul% have a higher present value investment rate into +a&on &!
investing in Tara as oppose% to %irectl! into +a&on" This is accor%ing to the !ears forecaste% an%
%oes not inclu%e% +,- an% other intangi&les" The figure also shows the total investment into +a&on
an% the relative maret shares forecaste%"
Alternative Hyp!theses /ncluing the =!ti!n !$ )eal ?pti!ns *&ee (igure 10 !r )esults in the
E+cel spreasheet,
The ne$t step was to loo at three possi&le scenarios an% their potential effect on the results" #n or%er
to test alternative h!potheses8 the case writes suggest one of two metho%s" The first metho% is to use a
%ecision tree an% forecast various scenarios" The secon%8 an% what is use% in the solution8 is to use
&inar! varia&les" Using ifIthen statements throughout the mo%el8 various scenarios can &e statisticall!
anal!)e% through ran%om events 'each assigne% with pro&a&ilities("
The three scenarios we wante% to test were; 1( Major competitors totall! prevent us from entering the
maret an% pro%uction is una&le to occur" 2( 7e are a&le to penetrate the maret an% garner no more
than 9/ maret" *n% 9( we are a&le to enter the maret an% a&le to e$ercise a real option of
e$pan%ing output to B0/ of our capacit!"
0igure 19 shows the results of the various scenarios" #n essence there are G %istri&utions that overlap
each other an% %emonstrate outcomes" The first @%istri&utionA 'i"e" the lowest outcome( is the first
scenario of not &eing a&le to penetrate the maret an% pro%uction not &eing a possi&le" This was given
a 10/ chance of occurrence an% means &anruptc!" There is reall! no real option of re%ucing
pro%uction or having salvage value since the plant has no real &enefits other than housing an assem&l!
line ma%e mostl! of people"
The secon% @%istri&ution is the &ase case scenario an% shows the lielihoo% of having a positive D-J
project"
The thir% @%istri&utionA com&ines with the fourth @%istri&utionA an% shows the possi&ilit! of garnering
higher maret share an% e$ercising the real option" '#t woul% have &een &etter to show each
%istri&ution in%epen%entl! &ut for time an% space we are showing the aggregate output"(
There has &een prece%ent set in garnering higher maret share in just the running an% cross training
spaces as small companies lie *n%1 have entere% the maret with higher that one percent maret
share 'the occurrence of this scenario was .0I.0 an% o&viousl! contingent on the first scenario &eing
true(" #n a%%ition8 the notion of the real is e$tremel! via&le as most shoe companies outsource to thir%
parties an% there are some capacit! issues" This woul% o&viousl! not occur with a %irect competitor
&ut given our low cost structure an% mission8 the case writers assume% that if all other assumptions
were true8 there was a 6./ chance of this scenario &eing true"
2G

7re.uen), &"art
%ertai #t4 is 65.80+ from 0.00 to D:#fi#i t4
.000
.008
.016
.024
.032
0
8
16
24
32
-10.71 -4.48 1.75 7.97 14.20
1;000 #ria+s 10 9ut+iers
7ore)ast/ *ro=e)t @*4
7re.uen), &"art
%ertai #t4 is 99.90+ from 25.00 to D:#fi#i t4
.000
.008
.017
.025
.033
0
8.25
16.5
24.75
33
25.00 31.25 37.50 43.75 50.00
1;000 #ria+s 2 9ut+iers
7ore)ast/ #ota+ 0ire)t (nv< in 'a3on
7re.uen), &"art
%ertai #t4 is 51.00+ from 20.00 to D:#fi#i t4
.000
.008
.015
.023
.030
0
7.5
15
22.5
30
11.28 15.61 19.94 24.28 28.61
1;000 #ria+s 1 9ut+ier
7ore)ast/ @*4 of (nv in 'a3on
7re.uen), &"art
.000
.008
.017
.025
.033
0
8.25
16.5
24.75
33
0.40+ 0.46+ 0.51+ 0.57+ 0.63+
1;000 #ria+s 0 9ut+iers
7ore)ast/ Avera2e Maret !"are
Tara Inc.
&r,sta+ 5a++ > 5ase &ase Assumptions
(igure 1. Crystal Ball )esults Base Case Assumpti!ns
7re.uen), &"art
%ertai #t4 is 76.60+ from 0.00 to D:#fi#i t4
.000
.017
.034
.051
.068
0
17
34
51
68
-24.81 17.23 59.26 101.30 143.33
1;000 #ria+s 7 9ut+iers
7ore)ast/ *ro=e)t @*4
7re.uen), &"art
%ertai #t4 is 90.30+ from 20.00 to D:#fi#i t4
.000
.027
.053
.080
.106
0
26.5
53
79.5
106
0.00 62.50 125.00 187.50 250.00
1;000 #ria+s 0 9ut+iers
7ore)ast/ #ota+ 0ire)t (nv< in 'a3on
7re.uen), &"art
.000
.008
.017
.025
.033
0
8.25
16.5
24.75
33
0.40+ 0.46+ 0.51+ 0.57+ 0.63+
1;000 #ria+s 0 9ut+iers
7ore)ast/ Avera2e Maret !"are
7re.uen), &"art
%ertai #t4 is 76.60+ from 0.00 to D:#fi#i t4
.000
.017
.034
.051
.068
0
17
34
51
68
-24.81 17.23 59.26 101.30 143.33
1;000 #ria+s 7 9ut+iers
7ore)ast/ *ro=e)t @*4
Tara Inc.
&r,sta+ 5a++ > 5inar, 4aria3+e Assumptions
2>
(igure 10 Crystal Ball )esults Binary 8ariable Assumpti!ns
26
)esults !$ the Binary 8ariable Assumpti!ns
O&viousl! the results un%er this scenario were ver! favora&le" *s can &e seen8 un%er these scenarios
there is a 6>/ chance of there &eing a positive D-J" The net affect to the e1uit! hol%ers8 is that >B/
of the time the! woul% have a higher present value investment rate into +a&on &! investing in Tara as
oppose% to %irectl! into +a&on" #n a%%ition8 the upsi%e potential is a huge %irect investment in +a&on
that reaches in e$cess of 1G0 million US,"
C!nclusi!n
There are man! lessons to &e gleame% from the Tara case &ut none that the writers want to rela! more
than the positive effects of Tara2s -rofitIDot:0or:-rofit &usiness mo%el" #t is &etter than a ta$:an%:
spen% polic! &ecause it places the power of the investments into the han%s of the e1uit! hol%ers" #t
creates a sustaina&le8 long:term source of investment into an impoverishe% compan! an% inclu%es
man! intangi&le upsi%es"
*lso to &e gleame% from this case are the notions of how to %efine an% mitigate various riss8 how to
create an appropriate cost of capital8 how to han%le various h!pothetical occurrences inclu%ing the
notion of 3eal Options8 an% how to put together a financial stor! of a start:up from scratch"
Overall8 this case was inten%e% to &e a lesson in finance in an Emerging Maret" Un1uestiona&l! Tara
is an i%ealistic mo%el with significant riss &ut e1uall! un1uestiona&le is that if the results are positive8
the effect is more than just the creation of financial value"
2B