Boston Beer Equity Valuation Valuation Date: April 1, 2005

Jason Boney jboneyttu@yahoo.com Jordan Gristy jgristy@yahoo.com

Preston Madden preston.e.madden@ttu.edu Heath Stanley charles.h.stanley@ttu.edu

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Boston Beer Co. Equity Valuation Table of Contents Executive Summary 4

Business and Industry Analysis 7 Competitive Advantages 8

Five Forces Model 9 Industry Competitive Analysis 15 Accounting Analysis 17 Key Accounting Policies 17 Degree of Accounting Flexibility 20 Evaluation of Accounting Strategy 22

Accounting Quality of Disclosure 23 Red Flags 23 Quantitative Analysis 25 Ratio Analysis 29 Liquidity 29 Profitability 31

Capital Structure 34 Forecasting 37 Balance Sheet 37 Income Statement 38 Statement of Cash Flows 39 Forecast Summary 40 Valuation Analysis 41 Method of Comparables 41 Valuation Tools 44 Discounted Free Cash Flow 45 Residual Income 46 Long Run Residual 47 Abnormal Earnings Growth (AEG) 48 Conclusion of Valuation 49 Work Cited 50 Appendix 52

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Boston Beer Co.

By Valuation Proclamation

Heath Stanley, Jordan Gristy, Preston Madden, Jason Boney Investment Recommendation: Buy, Undervalued 4-28-05

Stock Ticker and Exchange SAM-NYSE Current Price (4-1-05) $22.14 52 week price range $18.52 - $27.95 Revenue (2004) $239,680,000 Market Capitalization $313,130,000 Shares Outstanding 14,300,000 3-month Avg. Daily Volume 40,450 Percent Institutional Ownership 25% Book Value Per Share $5.52 ROE 15.95% ROA 11.64% Est. 5yr EPS Growth Rate 2% Cost of Capital Est. Beta Ke R2

Estimated 5.29% 5-year -0.201 5.29% .012 3-year 0.098 3.67% .003 2-year 0.434 5.24 .031 Published Beta 0.35 Kd 3.61% WACC 4.79%

Debt Risk Altman Z-Score 3.49-Company considered safe EPS Forecast FYE (12/31) 2004(A) 2005(E) 2006(E) 2007(E) EPS $0.86 $0.69 $0.71 $0.72 Valuation Ratio Comparison SAM Comp.’s Avg. Forward P/E 25.7 16 Forward P.E.G. 2.5 1.55 Trailing P/E 23.8 20 M/B 3.82 6.715 Valuation Predictions Actual Share Price (7 April 2005) $22.14 P/E Forward $13.76 PEG Forward $17.75 M/B $12.62 Ford Epic Valuation $12.01 Intrinsic Valuations Free Cash Flows $41.25 Residual Income $15.78 Abnormal Earnings Growth $38.51 Long-Run Residual Income Perpetuity $42.92

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Executive Summary Recommendation- Buy, Undervalued

After reviewing Boston Beer’s financial statements and data we believe the company

to be undervalued. Using four forecasting models we found that three prices put

Boston Beer’s value at around $40.00 which is well above the price of $22.14 on the

date of April 1, 2005.

Due to the recent growth in the better beer market and the low amount of debt the

company has, we see a positive future for the company and believe that over time it

may be able to grow and become a dominant player in the beer industry. Yet, as a

whole, the beer market in general has been declining over the past few years which

causes some alarm (though we do realize that declines come and go many times in

this industry). Therefore, we believe if managed right the company may be able to

grow substantially in their better beer market or at least maintain the hold of loyal

customers that is has acquired over the years.

Industry Demand Drivers

Boston Beer’s demand in the past has come from drinkers who prefer higher quality

beer with higher quality ingredients. As the better beer market continues to grow

within the alcoholic beverage industry, Boston Beer will be able to attain a larger

presence than what it once enjoyed. We believe that heavy advertising and the

continued pursuit of better ingredients will allow new drinkers to emerge who enjoy

the kind of quality that Boston Beer has to offer.

It is understood that the beer market fluctuates over time, but it has not seen quite a

growth within itself as it has with the “better beers”. Within the last few years the

growth has maintained a stable average of approximately 3% within the alcoholic

beverage industry and sees no looking back. As long as Boston Beer maintains its

status as a premium beer there should be no reason that it can not take advantage

of this stable growth.

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Light Beer Introduction and Expansion- Boston Beer has just unveiled their newest

product of Samuel Adams Light to the better beer market. In 2004, the light Samuel

Adams out sold the original for the first time in the company’s history. We believe

that this will be the key to Boston Beer’s success to maintain its hold in the better

beer industry and bring in new demand for Boston Beer.

Financial Stability

Boston Beer’s financials are impressive as compared to the big names in the beer

industry. One of the more impressive areas is the lack of debt and the ability to

leverage the company to new heights. In 2000, Boston Beer had no actual long term

debt on the books and since has brought on very little. This is mainly due to the

strategy of contracting to other brewers to maintain low risk for the well being of the

company.

The profitability, capital structure, and liquidity for Boston Beer all appear to be

stronger than the averages in the alcoholic industry which shows the strong stability

of the firm. Boston Beer’s Altman Z-score is at 3.49 which is considered safe and

good investment grade quality.

In conclusion, Boston Beer has many choices on where to take the company in the

21st Century. With overall high quality in its financial structure, Boston Beer has the

ability to one day grow and become a dominant force within the beer industry as a

whole.

Valuation

Models such as the free cash flow, long-run residual income, and abnormal earnings

growth showed Boston Beer to be undervalued, but the residual income showed

them as slightly overvalued. By examining these forecasting models we believe that

each one has some degree of truth, but based on three of the four models and

financial quality in the firm we believe Boston Beer is undervalued.

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Risks

Lack of growth overseas and the recent spike in imported better beers shows many

risks that Boston Beer is facing. We see Boston Beer being able to maintain its loyal

customers but it is a tough market to gain any new loyal customers. Also, the mega

brewers are beginning new strategies to break into the better beer market. With the

mega brewers entering there might be less opportunity for Boston Beer to maintain

its growth in the market.

Industry Analysis The Boston Beer Company is in an interesting situation to define its market status. It

is known as the largest microbrewery in the United States as well as being able to

compete with the mega brewers on a product differentiation competition. They

compete in the domestic better beer industry that is defined by increased price and

superior tastes. This has created a loyal customer base that has launched the

company to be able to compete nationally with companies such as Anheuser-Busch,

Heineken, Constellation Brands, and Adolph Coors. Boston Beer Company’s

customer loyalty can be seen in the decrease in sales in The Samuel Adams Boston

Lager and an increase in Sam Adams Light during the rollout in 2002, therefore

cannibalizing sales. Their real major competitors in the better beer industry are

Heineken and Corona, but being foreign firms reduces accounting reliability and

information sources. Therefore we have identified Molson Coors and Anheuser-Busch

as major competitors. This “better beer” market comprises of 15% of the total

domestic beer industry consumption. The following chart from finance.yahoo.com

compares Boston Beer Company to the leaders in the alcoholic beverage industry.

Statistic Industry Leader SAM SAM Rank

Market Capitalization DEO 42.06B 337.70M 11 / 18

P/E Ratio (ttm) KNBWY 30.84 25.85 3 / 18

PEG Ratio (ttm, 5 yr expected) KNBWY 2.91 2.31 2 / 18

Revenue Growth (Qtrly YoY) CEDC 39.09% -1.46% 12 / 18

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EPS Growth (Qtrly YoY) CEDC 37.95% -25.00% 9 / 18

Long-Term Growth Rate (5 yr) LQU 20.0% 12.0% 4 / 18

Return on Equity (ttm) AED 89.75% 19.95% 5 / 18

Long-Term Debt/Equity (mrq) AED 4.059 0 N/A

Dividend Yield (annual) DEO 4.45% N/A N/A

Last year 26 beverages were produced under the company and Boston Beer was the

sixth largest producer in the nation. Boston Beer Company is mostly known for the

Samuel Adams line and newly introduced Sam Adams Light in 2002. They also brew

specialty, seasonal, and extreme beers. This allows a new taste for the Sam Adams

loyalists year round that increases their product differentiation among competitors.

In addition to these products they also make Hardcore Crisp Hard Cider and three

differentiations of Twisted Teas.

Competitive Advantages

The main factor to Boston Beer Company’s success is its product differentiation. The

brewery relies on a unique product taste with a loyal customer base. Consumers

appreciate Samuel Adams distinct brand image and what they consider to be a

superior taste at a price that is not too outrageous compared to cost advantage firms

such as the mega brewers (i.e. Coors, Anheuser-Busch). Boston Beer Company also

delivers variety to its customers in several fashions, including seasonal beers, hard

iced teas, and hard ciders. This investment in research and development offers

consumers varieties in the alcoholic beverage market.

Their final competitive advantage is the established distribution channel with bases

in Cincinnati and Boston. This distribution system allows delivery for fresh beer, in a

timely manner, to a national audience.

Boston Beer Company can sustain these competitive advantages due to their distinct

role in the market. It is difficult to copy their product in a costly manner without

sacrificing quality. This allows the brewer to hold onto their market niche. Also,

Boston Beer Company consistently offers new choices to consumers in the alcoholic

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beverage industry that attracts new customers with new tastes. Finally, Boston Beer

Company is the only microbrew to distribute nationally, in addition to their well

developed distribution channels.

Five Forces Model Rivalry Among Existing Firms

Boston Beer is in one of the highest competitive fields within the realms of the

alcoholic beverage market. Unlike Anheuser Busch or Coors who compete nation

wide with volume, advertising, and standard tastes for the public, Boston Beer is part

of a much more competitive field of specialty brewers or what is known as the “Better

Beer” category of the beer industry. Better Beers are determined by higher price,

quality, image and taste, as compared with regular domestic beers. They are much

smaller in size as well as distribution but are able to hold on to a small but vital part

of the industry. Though they are at the top of what is considered “Better Beers” firms

based in the U.S., they still come third when imports are considered. Companies

such as Heineken and Corona have taken hold of the Better Beer share leaving

Boston Beer in third as far as sales and volume.

Degree of differentiation:

Alcoholic Beverages as a Whole- The “Better Beer” category of the beer industry,

which includes craft or specialty beers and most imports, mainly focuses on product

differentiation. Boston Beer’s main strategy to keep itself in the market for alcoholic

beverages is by differentiation of tastes to the customer. By offering distinct tastes

of many kinds, Boston Beer holds a small but strong share in the overall market

(*2%) of beverages that are sold.

Specialty Brewers (“Better Beer”)- Founder-chairman C. James Koch, a sixth-

generation brewmaster who crafted an old-family blend of hops into Sam Adams, has

created one of the best-selling specialty labels ever in the U.S. The numbers for

Boston Beer have been impressive (net sales up 2.6% to $161.4 million, operating

income up 49% to $15.2 million) and could be interpreted as leading to another

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profitable year that has landed Boston Beer in Forbes 200 Best Small Companies.

The wide variety of product choices based on taste has allowed Boston Beer to target

many different markets, including the specialty market. This has allowed Boston Beer

to maintain the highest percentage share in that market than any other U.S. firm in

their market.

Because of a steep learning curve in the industry for beer, Boston Beer cannot count

on size nor volume, but only on their differentiation from the larger firms, and their

ability to maintain and grow their niche in the market.

Threat of New Entrants:

Specialty Threats- One of Boston Beer’s biggest threats is that of new specialty

brewers entering the marketplace. Nationally, Boston Beer is one of the most well

known specialty beers firms, but it faces regional threats much higher than those

faced nationally. This is mainly due to local businesses brewing beverages that aim

towards local tastes with lower costs to the consumer. Although the learning curve is

steep for breweries, low barriers to entry based on price make it even more difficult

for Boston Beer to maintain its status due to the wide variety of tastes and prices

that are offered across the country and around the world.

Relationships and Distribution Channels- The company sells its products to a network

of approximately 440 wholesale distributors, who then sell to a variety of retailers

such as pubs, restaurants, grocery chains, package stores, stadiums and other retail

outlets. The good news is that Boston Beer has and will be able to maintain existing

relationships with their distributors due to their prestige standing in their industry.

Newer and smaller firms will have a difficult time obtaining the same kind of

relationships based on the marketability of their products. High taxation on alcoholic

beverages and strict laws that prohibit the sale to companies without license make it

even harder for new companies to gain portions of the market share.

Legal Barriers- Boston Beer is also able to maintain its market share because of high

legal barriers that the state and federal government sets for companies to begin

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constructing breweries. As mentioned above, high taxation is another legal barrier

that must be overcome by new firms to the market. The Environmental Protection

Agency (EPA) also sets strict guidelines enforcing a clean and healthy environment

for the workers and for the land that the brewery is built on.

Threats of Substitutes

In the industry of alcoholic beverages, there is always a threat of substitute products.

One of the biggest threats originates from wine and spirits. During 2003, the total

beer industry in the United States experienced a decline in volume of less than 0.5%

as compared to the prior year of 2002. This decline has been attributed to certain

negative economic factors, but mainly to the increase in market share of wines and

spirits. Although total light beers grew, they grew at a lower rate than in previous

years.

Also the substitution among types and brands of beers has been a huge threat

regionally as well as internationally. Boston Beer must compete with smaller regional

brewers with very low cost entry barriers, and international brewers in the Better Beer

market with tremendous volume capabilities.

Boston Beer has attempted to neutralize this threat by developing their own

substitutes (shown in Figure 1A) such as Hardcore and Twisted Tea malts to battle

the substitutes that infiltrate the market. Yet, Boston Beers main strength in

marketing is the loyalty that comes from being in business for a long period of time.

Boston Beer customers have not based their purchases on the lowness of the price

but on the quality and distinctiveness of the taste and the image that it portrays. This

loyalty has decreased the threat of substitutes as well as the buyers’ willingness to

switch. Below is a list of all Boston Beer products.

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Samuel Adams Boston Lager® Sam Adams Light® Samuel Adams® Pale Ale Samuel Adams® Boston Ale Samuel Adams Cherry Wheat® Samuel Adams® Weiss Bier Samuel Adams® Vienna Style Samuel Adams® Cream Stout Samuel Adams® Triple Bock Seasonals: Samuel Adams® Spring Ale Samuel Adams® Double Bock Samuel Adams® Summer Ale Samuel Adams® Octoberfest Samuel Adams® Winter Lager

amuel Adams UtopiasS TM

HardCore® Crisp Hard Cider

Twisted Tea® Hard Iced Tea Twisted Tea® Raspberry Twisted Tea® Half & Half

Power of the Customer

Boston Beer has maintained a solid niche for many years that bases their purchases

on taste, image, and quality. Boston Beer competes on these prime factors and not

on price as the three large beer firms do. Yet, if Boston Beer took advantage of the

niche they have there are many substitute products regionally, nationally, and

especially internationally that may take away their main customer base. Therefore,

the power of the customer is relatively high because of the increasing competition in

the “Better Beer” market.

Power of the Suppliers

Since the amount of breweries in the country is so large in number, there are just as

many suppliers. This leads to many different substitutions that Boston Beer can deal

with that allow them to find the better buy for the better beer. This obviously leads to

the power of the supplier being very low.

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Five Forces Summary

The alcoholic beverage market consists of many different types of companies that

deal in different sectors of the market. Each one has different strategies to gain their

share of the market domestically and internationally. While some companies base

their marketing on volume and price, Boston Beer bases theirs on product

differentiation. Through different tastes and substitutes, they have created the

largest Better Beer firm in the United States and created a strong niche in the public

based on loyalty. By being in one of the most competitive areas of the alcoholic

beverage industry, Boston Beer must continue to reinforce their loyalty and to create

new innovative products to help them grow in the 21st century.

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Five Forces Table

Rivalry Among Existing Firms -Heavy competition in industry -More firms in specialty market -Regional threats and international threats extremely high

Threat of Substitutes -Wines and Spirits main substitute over past two years -Many specialty beers enter market constantly -Loyalty, taste, and image are advantages -Largest niche in “Better Beer” market

Threat of New Entrants -Legal entry barrier is high -Regional entry much lower than national distribution -Have solid distribution channels -Imports are an extreme threat

High Relatively Low High

Power of Buyers

Relatively High Low

Power of Suppliers -Many different suppliers allowing stiff competition -Large amounts of substitutes that go into making the product, therefore increasing price competition

-Boston Beer has strong niche not based on price -Able to maintain slightly higher prices based on loyalty -If taken advantage of though could loose major portion of the market -Many substitutes keeps Boston Beer competitive

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Industry Competitive Analysis

Strengths-The Company believes that their current strategy of consolidating brewery

ownership with contract brewing, which helps utilize the excess capacity of other

breweries, provides the Company with lots of flexibility as well as quality and cost

advantages over its competitors. They carefully select breweries with the capability of

utilizing traditional brewing methods and first rate quality control capabilities

throughout brewing, fermentation, finishing, and packaging. Furthermore, by brewing

in multiple locations, the Company reduces its distribution costs and is better able to

deliver fresher beer to its customers than other craft brewers with broad distribution

from a single brewery.

Success at the Boston Beer Company is in large part due to the Samuel Adams brand

of beers which was first brewed by the Chairman of the Company Jim Koch back two

decades ago. Currently there are nine different permanent styles and six seasonal

flavors of the Samuel Adams beer on the market. While the Samuel Adams brands

may get all the attention, HardCore Crisp Hard Cider and three varieties of Twisted

Iced Tea have recently emerged on the scene with improving annual sales since their

release. Malt beverages only bring in less than ten percent in overall annual sales,

yet the Boston Beer Company optimistically sees this as a growing opportunity to

expand in the future.

Weaknesses- Boston Beer Company feels its present strategy to price above the

three mega titans for beer production is fairly justified due to its high quality brewed

beer. For the most part the highly competitive beer market in the United States is

consumed in large quantities with high sensitivity to price. Unfortunately, a large

percentage of beer sales rely on the younger more price conscience age drinkers.

The Company sells its products mainly in the United States, but also has markets in

Canada, Europe, the Caribbean, and the Pacific Rim. In 2003, the Company’s major

distributor accounted for approximately 5 percent of the Company’s net sales, and

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the Company’s second largest distributor accounted for approximately 3 percent of

the Company’s net sales. There was no other distributor accounting for as much as 3

percent of the Company’s net sales. In some states, the terms of the Company’s

contracts with its distributors may be affected by laws that restrict the enforcement

of some contract terms such as in California.

Opportunities- The idea to continue to grow in the already overcrowded market of

specialty brewers is critical to the success of this company. There are currently over

thirteen hundred micro-brewers in the United States with The Boston Beer Company

ranked number one in overall sales and sixth in the overall domestic market.

Currently the Heineken and Corona brands rank ahead of Samuel Adams in this

category in the world market. In the near future the company is leaning towards

owning more breweries and cutting back on the contract brewers. Currently the

different cost associated with contract brewing involves raw materials, excise taxes

and deposits for pallets and kegs and specialized equipment required for beer

production. Brewery ownership would involve significant capital investment which

could easily exceed $50 million for the combination of purchase, expansion and

improvement, or for original construction.

Threats- In recent years, all brewers have had to contend with a stagnant beer

market and per-capita consumption that is on the decline. The reasoning behind this

ongoing trend are attributed to underlying factors such as the low carbohydrate diet

crave that has taken off in recent years, the unstable economy, and an increase in

market share of wines and spirits. In the past ten years, domestic light beers, which

are beers with fewer calories than the brewers’ traditional beers, have experienced

significant growth within the category, and now have a higher market share than

traditional beers. The Boston Beer Company is a fairly new competitor in the beer

market today. The three major brewers (Anheuser-Busch, Inc., SAB Miller PLC, and

Coors Brewing Company) comprise over 90% of all United States domestic beer

production, excluding imports. In addition, these mega-brewers have also entered

the “better beer category” by either developing their own beers, acquiring, in whole or

part, existing craft brewers or by importing and distributing foreign brewers’ brands.

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Accounting Analysis

Key Accounting Policies

Boston Beer’s financial conditions are based on their financial statements, which are

prepared in accordance with FASB. Preparing these statements requires

management to make significant estimates and judgment decisions considering the

accuracy of their assets, liabilities, revenues and expenses. These policies allow the

firm to accurately follow the competitive advantages mentioned earlier, and operate

as the largest microbrewer in the nation. The firm is required to use some different

policies because of their unique position, but for the most part has the accounting

strategy in place to compete with the industry powerhouses.

• Revenue Recognition: Boston Beer practices accrual accounting and

recognizes revenue when an invoice is presented to the customer and the

product is received. Many of the firm’s sales are through contracts so future

sales can be easily recognized. Additionally, the company records an

allowance for estimated returns, in compliance with SFAS No. 48.

• Principal of Consolidation: Boston Beer’s consolidated financial statements

include the accounts of the company and its wholly-owned subsidiaries. All

inter company transactions have been eliminated in consolidation.

• Cash: Cash and cash-equivalents include cash-on-hand, as well as highly

liquid tax-exempt and taxable money market instruments.

• Short Term Investments: Short term investments are accounted for in

accordance with Statement of Financial Accounting Standards (SFAS), No.

115, classifying investments on their nature and intent of use.

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• Intangible assets and Goodwill: In accordance with SFAS No. 142, Goodwill

and other Intangibles, which the company adopted December 30, 2001, no

amortization related to Goodwill was recorded in fiscal 2002 or 2003. The

company tests for impairment the fourth quarter of every year, and a cost

benefit analysis of contract versus in-house brewing is conducted.

• Inventories: Inventories, which consist mainly of hops, bottles and packaging,

are stated at the lower of cost, FIFO basis, or market. The company’s policy

for inventory and purchase commitments is to recognize a loss by establishing

a reserve to cover forecasted needs, which is material to ensure the freshest

ingredients. Work in process and finished goods inventory tend to be low

because of sales contracts to sell products that are not even produced yet

and efficient operating procedures.

• Property, Plant & Equipment: Property, Plant and Equipment are stated at

cost. Expenditures for maintenance and repairs are expensed as incurred.

Major renewals extending the life of property are capitalized. Depreciation is

computed using the straight-line method based on the useful lives of the

individual assets. All of the property, plant and equipment owned by the

company are capitalized.

• Long-lived Assets: From time to time, the company enters into production

agreements with other companies. Through these agreements payments are

made, which are classified as assets and amortized over the life of the related

agreement. These capitalizations have been deemed cheaper to operate with

instead of operating leases because of cost benefit analysis mentioned by the

10-K, but no official numbers were released.

• Income Taxes: The company provides for deferred taxes using an asset and

liability approach that requires the recognition of deferred assets and

liabilities for the expected future tax consequences of events that have been

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recognized in their financial statements. The tax rate for Boston Beer has

been decreasing due to some short term investments that are tax deferred as

well. There is a large allotment for these taxes because of large

implementations on the alcohol industry by the government, such as

extensive permits and taxes.

• Stock: Boston Beer issued both Class A and B common stock which is

common stock and preferred stock. Both classes are eligible to receive

dividends, yet to this date none have been paid and none are planning on

being paid in the foreseeable future. Additionally, under terms of an existing

credit agreement, Boston Beer is prohibited from paying dividends.

• Advertising and Promotional Costs: Shipping costs are included in advertising

and promotional costs, which are all charged to expense during the period in

which they incurred. Advertising expenses are recognized when the ad is

completed

• Stock-based Compensation: Boston Beer accounts for stock-based

compensation using the intrinsic-valuation method prescribed in the

Accounting Principals Board Opinion No. 25.

Boston Beer’s key accounting practices should not all be weighed equally. Inventory

and revenue recognition should have more emphasis placed on them, because these

are very important to operations. Much of Boston Beer’s revenue is in accounts

receivable because a lot of their sales are through contracts, which is a competitive

advantage for the firm. Another competitive advantage in the accounting procedures

is Boston Beer’s ability to efficiently use operating leases with contract brewers to

create and distribute products cheaper than producing by the company.

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Degree of Potential Accounting Flexibility

The company’s financial statements agree that there is potential for a large degree of

flexibility in Boston Beer’s accounting policies, as with all alcoholic industry firms.

The main flexibility arrangements are concerning inventory. Managers must predict

the amount of hops consumed in operation, work in process and how much will be

consumed in future production. Accounting for grains, and oats is different than a

traditional inventory in that there are different qualities received, and cannot be

counted in units like a typical production company does. The product mixes

continually change according to the quality of the supplies received, therefore

changing the amount of inventory consumed for each barrel of beer. Inventory also

changes because of the return of stale supplies, and how many hops they will receive

due to purchase contract obligations. Boston Beer must also estimate a reserve for

bad supplies received or supplies that turn stale while in inventory. The firm simply

reimburses the contract brewing firm for stale supplies which has been an average of

$1.75 million over the past two years. This estimate is made at the beginning of the

year and inaccurate approximations could lead to changes in income, cost of goods

sold, and inventory. The company’s financial statements do a fair job in justifying all

estimates because estimated numbers have only varied slightly over the past several

years.

Further estimates include defined benefit payments to employees for pension plans.

These approximations grow slightly over the next few years indicating that they have

appropriated sufficient amounts for future payments.

They have pension plans for both non-union employees and union employees.

Boston Beer Co. had its own 401k plan that it introduced to most all non-union

employees in 1993. All fulltime non-union employees that are 21 years of age or

older, are allowed to participate in this 401k plan. After the sixth month of

employment the company matches the employee’s contribution dollar for dollar up to

$1000. Also for non-union workers is a health care plan that the company

contributes to.

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For union workers the company offers a defined contribution plan to eligible

employees under the terms of the collective bargaining agreement. Under this

defined contribution plan, employees can contribute up to 60% of their annual salary.

Under the plan though, the company does not make any matching contributions but

does incur immaterial administration costs.

Another plan for union employees is the defined benefit plan. Eligible participants for

this defined benefit plan according to the collective bargaining agreement, include

employees that have at least twelve consecutive months and at least 750 hours of

employment with the company. In the previous three years, 2002-2004, Boston Beer

Co. has $100,000 to this plan. The projected benefit obligation of these plans are

$847,000 for 2004, $707,000 for 2003, and $559,000 for 2002. These projected

numbers were calculated by accounting for the maintenance costs of the plan.

Goodwill was estimated in 2001 according to GAAP standards and is evaluated in the

fourth quarter of every year to see if necessary adjustments from impairments are

needed. No adjustments have been needed since 2001 and there seems to be no

need for changed to goodwill in the future do to steady asset numbers and no current

need for more assets.

All of the estimates seem to be appropriate even when compared to industry leaders.

Boston Beer’s numbers of course are much lower than competitors but this is due

sheer size differentiations as well as differing operating procedures because most

firms produce their own beer instead of contracting it out.

Summary of Flexibility

Although there is potential for large flexibility in approximations of inventory and

pension plans, the numbers they allocate in the company’s financial statements do

not seem too outlandish or vary greatly from years before, implying that they do not

abuse their flexibility.

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Evaluation of Accounting Strategy

Boston Beer’s accounting strategy is well defined in that they have very few

significant changes to policies and following industry norms. The company follows

the alcoholic beverage industry in allowance for large taxes, inventory estimations,

and accounting for union employees. They have diversified accounts receivable risk

by selling to a large number of distributors and individual buyers. Thousands of sales

beer stores and individual companies take away the risk of not collecting on some

invoices.

The company strays from the sector in several other strategies, but is acceptable

because of their significantly smaller size compared to competitors. The largest

difference is that Boston Beer has contracted some of their brewing to Miller and

High Falls Brewing Company. They have decided that by doing this they save an

estimated ten million dollars in capital costs and even more on the smaller

distribution costs by not brewing their own beer. Miller decided to close down its

plant in Tumwater, Washington and illegally tried to terminate its contract with

Boston Beer. This has recently been arbitrated and ruled in favor of Boston Beer in

which Miller must continue to brew for them until their contract expires. The cost

benefit analysis of contracting their own beer to other brewers is done at the end of

every year to ensure that the costs of contracting remains profitable as compared to

adding expensive capital and higher distribution costs.

The company uses the first in-first out inventory method while most alcoholic

beverage companies use last in-first out. The company also has large contract

agreements for sales and purchasing supplies. Operating leases are used for most

assets in the Boston Beer company while other beverage companies capitalize their

assets. Even with these leases they have estimated a fair amount for future rental

payments up to 2010.

In summary, Boston Beer uses industry norms by incorporating their own business

strategies that are beneficial to the company because of their size in comparison to

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the competitors. By having less capital and more contracts they are able to compete

better with price and distribution than others in the specialty beer market.

Quality of Disclosure

There are aspects of Boston Beer’s financials that are very well disclosed and others

that need more information to be completely transparent. First, there is an in-depth

view of how they configure many balance sheet and income statement line items.

These items are disclosed for current terms and changes from the previous terms as

well. Taxes, inventories, and assets are well laid out throughout the 10-K to provide

different information on why they have certain numbers for several topics and what

items these topics entail.

An area of concern is the lack of information for choosing different strategies. Only

FIFO numbers are mentioned in regards to inventory. There is no mention to how

income would change if LIFO or weighted average were used. Furthermore, with

several estimates needed to complete the financial statements, differences in

separate estimations could be disclosed to see how current estimates reflect income

as compared to other possible assessments. In conclusion the company could

disclose how much income changes with different accounting procedures and

estimates.

Potential Red Flags to Accounting Distortions

When looking for “Red Flags” in financial statements of a company, it is important to

look at the percent changes in sales and expense diagnostic ratios. Manipulation of

sales ratio’s from year to year can be done to show higher revenues than the actual

revenues. Manipulation of expense ratios can be done to show lower expenses,

which in turn falsely increases net income or some kind of earnings report.

24

Boston Beer Co.’s sales and expense ratio’s seem to be fairly sporadic. When looking

at the percent change in Net Sales/Accounts Receivable ratio from 2000 to 2001 we

see nearly a 60% decrease (from 39.06% to -35.77%). Reasons for this could range

from not reporting enough sales to avoid tax rates, not collecting their accounts

receivables properly, or a natural major decline in sales.

Another potential problem with the sales ratio’s lies within the Net Sales/Inventories

ratio. We notice pretty dramatic percent changes from year to year with this ratio.

From 2000 to 2001 we see nearly a 58% increase (from 7.22% to 65.48%) and then

sharp decreases to the point at which 2003’s percent change is -18.55%. Possible

reasons for this are, Boston Beer may not be reporting enough inventory, less sale

orders were received therefore clogging up inventory with unsold inventory, or

possibly sales were slightly overstated in 2001.

Some final potential “Red Flags” include pretty drastic percent changes in Cash Flow

from Operating Activities ratio’s. These ratio’s are considered core expense ratio’s

and the main purpose for manipulating these numbers are to show less expenses.

When examining Cash Flow from Operations/Operating Income, we see a severe

increase and then drastic decreases in the percent changes between 2000 and

2002. Possibilities for an increase in this number might include reporting more cash

flow than actual. A potential reason for falsely stating this number to show a

decrease might be to show higher operating income than a company actually has.

In order for these potential errors in financial information to be proven correct or

wrong, Boston Beer’s overall operations have to be investigated more. Looking at

certain market trends in the adult beverage industry might give a reason why there

are changes in sales ratios. Perhaps Boston Beer spent less money and time on

advertising their products in sales decreasing years, and that caused a legitimate

decrease in sales. Investigating certain events and operating activities will be able to

give a clearer picture on why certain ratios seem to have drastic changes from year to

year.

25

The final red flag could be could be the loss of contract breweries. This is very

unlikely because of legal contracts, yet detrimental to the company that it could bring

operations in all but two breweries (Cincinnati and Boston are the plants that the firm

owns) to a halt.

Quantitative Analysis

Manipulation ratios were used to show the relationship between net sales, cash

equivalents, accounts receivables and inventory. Expense manipulation diagnostics

were used to show the earnings relative to expenses.

Sales Manipulation Diagnostics

2003 2002 2001 2000 1999

Net Sales/CFS 1.05 1.09 1.11 1.07 1.10

Net Sales/AR 19.93 12.08 9.72 15.13 10.88

Net Sales/Inv 21.03 25.82 20.03 12.11 11.29

Net Sales / Cash From Sales

1.021.031.041.051.061.071.081.091.1

1.111.12

1999 2000 2001 2002 2003

Sam Bud

26

Net Sales / Accounts Recievable

05

1015202530354045

1999 2000 2001 2002 2003

Net Sales / Accounts Recievable

Sam Bud

Net Sales / Inventory

0

5

10

15

20

25

30

1999 2000 2001 2002 2003

Sam Bud

These ratios show that net sales-to-cash from sales remained constant. On the other

hand, net sales-accounts receivable increased, showing an improvement between

the amounts of sales made and the amount of money actually collected. From 1999

to 2002, Boston Beer showed great improvement in their inventory turnover,

although it decreased slightly in 2003. Overall, these results seem fairly favorable.

Core Expense Manipulation Diagnostics

2003 2002 2001 2000 1999

Sales/Assets 2.63 2.23 1.93 2.15 1.75

CFFO/OI 1.24 1.18 1.68 1.08 0.82

CFFO/NOA 0.43 0.24 0.34 0.36 0.23

27

Sales / Assets

0

0.5

1

1.5

2

2.5

3

1999 2000 2001 2002 2003

Sam Bud

Cash Flow From Operatins / Operating Income

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1999 2000 2001 2002 2003

Sam Bud

Cash Flow From Operations / Net Operating Assets

00.050.1

0.150.2

0.250.3

0.350.4

0.45

1999 2000 2001 2002 2003

Sam Bud

Sales to assets have shown an increase over the past few years, meaning sales have

increased relative to the amount of assets. Cash flow from operations-to-operating

28

income increased greatly in 2001, due to smaller operating income relative to CFFO.

However, it took a nosedive in 2002 due to a drop in cash flow from operating

activities. The last ratio remains relatively unchanged until 2003, when it increased

sharply, which could mean they were generating more cash flow with less working

capital.

% Changes in Ratios

2003 2002 2001 2000

Net Sales/CFS -0.03 -0.02 0.04 -0.03

Net Sales/AR 0.65 0.24 -0.36 0.39

Net Sales/Inv -0.19 0.29 0.65 0.07

Sales/Assets 0.18 0.16 -0.10 0.23

CFFO/OI 0.04 -0.29 0.56 0.31

CFFO/NOA 0.82 -0.31 -0.05 0.54

29

Financial Statement Ratio Analysis

By restructuring the data give in the financial statements we are able to reorganize it

in such a way that allows us to interpret the data in an easier fashion. The benefits of

manipulating the data are that of more transparency to valuate the financial wellness

of the company. All of the tables below enhance the transparency so that we may be

able to value the firm more accurately. Here we are able to trace trends and see how

the numbers coincide and interact with each other in positive or negative fashions.

With these charts we are mainly looking for the quality of liquidity, profitability, and

capital structure of the firm in comparison to competitors in their industry.

Liquidity Analysis 1999 2000 2001 2002 2003

Current Ratio 3.50 3.35 3.30 3.36 3.10

Quick Asset Ratio 2.58 2.33 2.75 2.83 2.43

Accounts Receivable

turnover 12.15 16.84 10.78 12.08 19.93

Days Sales Outstanding 30.05 21.67 33.85 30.22 18.31

Inventory Turnover 5.01 5.34 8.76 10.59 8.66

Days supply Inventory 72.89 68.34 41.56 34.36 42.17

Working Capital Turnover 3.01 3.97 3.33 3.67 4.53

Liquidity

Boston Beer’s liquidity overall is very good and very stable to include more debt

leverage. Things such as current ratio and working capital turnover have been slowly

decreasing over the past five years, but the accounts receivable turnovers and days

that the sales are outstanding have gradually begun to become better and more

positive looking over the years. Reasons for the fall of current ratio are because cash

and short-term investments decreased to $42.9 million for the year 2003 from

$52.6 million as of 2002. This is primarily due to cash used in financing activities to

30

purchase treasury stock to increase investments within the company. Yet in

comparison to some of Boston Beers competitors, Boston Beer maintains a very high

current ratio in the industry (as seen below).

*Industry includes Coors and Anheuser-Busch

00.5

11.5

22.5

33.5

1999 2000 2001 2002 2003

Current Ratio

Boston BeerIndustry

You can see that Boston Beer is about three times the norm in their industry

(norm=1.0). The same goes also for the quick asset ratio in which Boston Beer is

well above its competitors. The only problem with the quick asset ratio is that it is

very sporadic and not predictable. There is not a predictable pattern seen on the

diagram below but, it does appear to be stable over the past 5 years.

Qucik Asset Ratio

2.432.832.75

2.332.58

0.460.460.450.450.40

0.51

1.52

2.53

1998 1999 2000 2001 2002 2003 2004

Boston Beer Industry

A very positive sign is that the accounts receivable turnovers are slowly becoming

larger while the days sales outstanding ratio has been almost cut in half over the

past five years. These ratios prove, quite convincingly, that Boston Beer is a very

31

liquid company and heading in a positive trend. With fewer days for collection, it

enables Boston Beer to maintain good credit by being able to pay off its obligations

faster. Moving along, we see that the inventory turnover is also increasing at high

percentages. From these ratios we can conclude that Boston Beer has become more

efficient in keeping more of their current assets out of inventory, and allowing them

to stay more liquid with further investing opportunities. Finally, another true sign of

Boston Beer’s liquidity in comparison to competitors is their working capital turnover.

Also in this category we see that Boston Beer is well above competitors such as

Anheuser-Busch who has been falling in this category for the past five years.

Therefore, overall, Boston Beer is a very liquid company for its industry with positive

signs for the future.

Profitability

Boston Beer, in all categories of profitability, is showing steady increases. In every

ratio calculated for the measurement of profitability it shows Boston Beer as still one

of the front runners in their industry.

Profitability Analysis 1999 2000 2001 2002 2003

Gross Profit Margin 55.7% 55.9% 56.3% 59.0% 58.8%

Operating Expense 46.1% 47.4% 50.1% 53.5% 51.2%

Net Profit 6.3% 5.9% 4.2% 4.0% 5.1%

Asset Turnover 1.57 1.93 1.89 2.02 2.38

Return on Assets 9.8% 11.4% 7.3% 8.0% 12.1%

Return of Equity 9.4% 15.3% 10.0% 10.8% 16.9%

The gross profit margin has made minute stages of increase over the past five

years which show, simply, the stability of Boston Beer to keep gross profit and sales

building. With these small gains, Boston Beer shows their ability to be a very efficient

32

company in comparison to many of its competitors in their industry. Below is a

comparison of the gross profit margin to its competitors.

*Industry Includes Coors and Anheuser-Busch

0.00%10.00%20.00%30.00%40.00%50.00%60.00%

1999 2000 2001 2002 2003

Gross Profit Margin

Boston BeerIndustry

While their gross profit margin is growing due to gains in gross profit and sales, the

operating expenses are also growing slightly as well, but at a slightly faster pace in

comparison. They had risen up to 53.5% in 2002 from 46.1% in 1999, but seemed

to have leveled off back down to 51.2% in 2003. This increase is caused by a

number of different reasons, which vary from an increase in advertising to an

increase in general and administrative expenses. The advertising expenses though,

follow more closely the increases and decreases over the past five years with the

operating expense ratio. Therefore, this shows a true value of where most of the

expenses accumulated by Boston Beer are going towards.

While the gross profit margin is growing and operating expenses seem to be leveling

off, the net profit margin has taken quite a hit over the past five years causing some

alarm. In 1999, Boston Beer was able to retain 6.3 cents for every dollar of profit.

This is only about half of what Anheuser Busch’s net profit margin is at, which sets at

about 13 cents on the dollar in 2003. After four years of decreases Boston Beer was

able to regain only a few points back up to 5.1 cents, which still remains well below

some of its competitors. This is mainly caused by the increase in expenses in

advertising and less operating income to show for it. Yet, the return on equity and

return on assets are both firm increases for Boston Beer.

33

The ROE, which has almost double during the past five years despite taking a hard hit

in 2001 that decreased it by about 33%, appears to be remaining strong. Yet, in this

category more than the others, Boston Beer is lagging extremely in comparison to

Busch (who seems to be well ahead of the industry norm as well). With only roughly

one fifth by comparison it begins to show the lack there of in returns on equity. Many

other companies such as Coors and Miller are more around the industry norm as

well, therefore, not putting Boston Beer out of the run, but still not an industry leader.

0.00%

20.00%

40.00%

60.00%

80.00%

1999 2000 2001 2002 2003

Return on Equity

Boston BeerIndustry

The return on assets is not doing quite as well as ROE but still maintains a positive

looking trend after the hit of bad sales in 2001. In 2000 Boston Beer’s assets had

climbed up to around 107 million, yet, the ROA still lagged because of poor net

income performance. Not until 2003 did net income increase largely causing the

return on equity to rise along with it, as well as a large decrease in current assets. As

a result, it appears that ROA will continue to rise as long as net income keeps

increasing out of the recession in 2001 (which it has done so for the last two years).

34

0.00%

5.00%

10.00%

15.00%

20.00%

1999 2000 2001 2002 2003

Return on Assets

Boston BeerIndustry

In general, Boston Beer is and appears that it will continue to be a very profitable firm

with positive trends. As long as the “Better Beer” market continues to grow as it has,

it should be fairly easy to predict that sales and net income will rise along with it.

Capital Structure

Boston Beer’s capital structure by and large is very strong. The firm is in an

especially good position because of its lack of debt and debt financing. Here below

are the ratios to better determine the quality of Boston Beer’s capital structure.

Capital Structure Analysis 1999 2000 2001 2002 2003

Debt to Equity ratio .35 .34 .37 .35 .40

Times Interest Earned 61.14 N/A 1043.91 174.15 236.87

Debt service margin 0.59 0.85 0.79 0.68 0.81

Unlike most firms in the alcoholic beverage market, Boston Beer has a debt to

equity ratio that is well under one. Their total liabilities have had a steady decrease

over the past five years causing a decrease in the debt to equity ratio until 2003

when the stockholder’s equity 16 million dollars or approximately 20%. This is

mainly due to the purchase of treasury stock that decreased owner’s equity by more

35

than 30 million in the year of 2003. Below is the comparison to competitor’s debt to

equity ratio.

0

2

4

6

8

10

Boston BeerIndustry

2003 2002 2001 2000 1999

As you can see, Boston Beer has a considerably less liabilities in comparison allowing

their capital structure to be much more firm.

Boston Beer’s times interest earned shows how little of debt they have. Their

numbers vary from over 1000 down to 61 during the past five years. In the year of

2000, during the peak of prosperous economic times, there was no data because

there was no debt at all. The only problem this creates is trying to forecast future

times interest earned ratios because the debt is so minute. This also my bring the

question to the table that Boston Beer could (if taken on some debt) be a high growth

rate company in the future. Yet, the main cause of such low debt in capital is

because of Boston Beer’s strategy of contracting many brewers through out the

United States instead of investing into more of their own breweries.

The debt service margin has been increasing over the last five years. Most of the

current notes payable go to paying these brewers through out the United States to

brew the beer and in turn continue to increase their margin. Therefore, this is the

switch-off between the times interest earned ratio and the debt service margin.

Boston Beer says that it is always evaluating its strategy of maintaining contracts as

opposed to brewing more of their own, but still feels that it is more cost effective and

safer at this time continue to build upon their tactic that they have been using for

36

many years. As of right now, it appears to be more efficient in cutting cost such as

distribution costs and other costs as well.

In close, Boston Beer has maintained a strong and secure business by keeping its

debt to a minimum. They do have plenty of capital already built formally and believe

that to grow anymore, at this point in time, is better suited by contracting out rather

than going into heavy debt.

Summary

In conclusion, it is easy to assess that Boston Beer is strong in all three categories of

the financial statement ratio analysis. They have proved to be efficient by being

keeping their liquidity above the norm, by maintaining positive trends in profitability,

and by using strategic capital structuring in the firm. With the lack of debt their

appears to be enormous opportunity for growth in the firm as long as the better beer

market continues to rise without the threat of new substitutes that may come from

overseas.

37

Forecasting To forecast Boston Beer’s financial statements through the year 2013 the

group used conservative valuing numbers consistent with industry standards and

estimated rates of growth for the alcoholic beverage sector and Boston Beer. Several

different methods were used for each line item and statements as a whole and are

explained below. See appendix for the full financial statement forecasted

spreadsheets.

Balance Sheet

Balance sheet numbers were estimated according to total growth in the company.

For example, line item numbers were configured to meet with a two percent growth in

total assets per year which filtered down into liabilities and owner’s equity to equal

assets. Percentage quotes are listed with the use of a pro-forma balance sheet and

then converted into actual numbers in the forecasted data. An explanation for how

these numbers were conceived follows:

Assets Total Assets: Sales times approximately two, according to the asset

turnover ratio. Cash: Held at about 35% of total assets per prior period’s numbers.

Short-Term Investments: Held at 75% of current year’s cash. Accounts Receivable: Started at 12% of total assets, but declining percentages over time due to an increase in accounts receivable turnover ratio. Inventories: Held at 10% of total assets and declining to 8% in 2013 because of an increasing inventory turnover ratio, and improving operating efficiency ratios. Prepaid Expenses: Forecasted at an average of 1.5 million dollars that will

stay constant over the company’s current procedures. Deferred Income Tax: Reported at 10% of total assets for that year. This number could increase if Congress passes a bill that would increase taxes to breweries, which could be set in motion by the end of 2005. Property, Plant, and Equipment: An average of the past five years of 20% of total assets. Goodwill: $1,377,000 is the amortization of goodwill for an unidentified period.

38

Liabilities and Owner’s Equity Total Liabilities: Held at 27% of assets as per the average of liabilities over

assets over the past five years. Accrued Expenses: Held at the past five year average of $14,000,000. Deferred Income Taxes: Forecasted at 8% of that year’s total liabilities consistent with previous years allocation. Common Stock: Reported at average numbers over the past five years. Additional Paid-in Capital: Average of past five years at $58,000,000. Unearned Compensation: Average of $200,000 over the past five years. Retained Earnings: Forecasted by adding the forecasted Net Income to last year’s Retained Earnings.

Income Statement Income statement forecasts were based on a stable increase of 2% in net revenue

per year. Such a conservative number was used because the alcoholic beverage

industry is such a stable and mature market with the better beer category declining

in market share. The industry as a whole only grows steadily over time without many

large growth increases. Boston Beer will grow steadily, but slowly because of the

loyal customer base and the maturity of the market for alcoholic beverages. The

group does not expect a significant growth in the market or company, so this

accounts for such a small growth rate in net revenue. The two percent number is

also the average percent increase in sales figures over the past five years. Boston

Beer expected to grow much more with the rollout of Sam Adams Light in 2002, but

ended up cannibalizing sales of Sam Adams instead. A sustainable growth rate is

equal to Return of Equity, which is about 15%, due to the lack of dividends paid by

the company. This number is expected to decrease because of the large amount of

room available in debt financing, which may be necessary in the future to grow

substantially. Some expense numbers are manipulated for the company trying to

compete with mega-brewers in the future, which is indicated in the forward looking

statements in the 10-K. A pro-forma income statement was used to accumulate

actual forecasted data. An explanation for line item forecasting is defined below:

Revenue: A two percent increase every year because of the mature

market and lack of reaching new customers. Excise Taxes: 11% of net revenue every year, as for the average tax rate.

39

Advertising, Promotional and Selling Expense: Steady at 42% of Net Revenue for three years increasing to 45% after that to try and compete with mega-brewers. General and Administrative Expense: Reported at 7% of net revenue which is the average over the past five years. Operating Income: Consistently reported at 75% of Net Revenue. Interest Income: .8% is the average of Net Revenue over the past five years and forecasted at this percentage. Other Income: Reported at .5% of Net Revenue because of the five year average. Income before Provision for Income Taxes: Stated at the two percent growth rate as per the company’s approximated growth. Provision for Income Taxes: Always calculated at 35% of Net Revenue. Net Income: Calculated by subtracting Provision for Taxes from Income before Taxes.

Statement of Cash Flows

When forecasting the statement of cash flows it is important to know what your

company needs to forecast. Not everything on the statement of cash flows needs to

be forecasted for every company. Determining key numbers to forecast is important.

Inventories, depreciation, purchases of plant property and equipment, and the net

cash flows for each activity on the statement of cash flows are important for Boston

Beer. Operating Activities Depreciation: Averaged the percentages on the pro forma statement and used that to forecast; then took that percent and applied it operating income. Inventories: Applied changes in previous years’ balance sheet and forecasted inventory numbers. Net Cash from Operating Activities: Summed all figures in operating activities. Investing Activities Purchases: Applied changes in dollar amounts for how much the company is investing into Property, Plant and Equipment. Sale of Securities: Held at 20% of cash as per previous year’s assessment of sales of short term investments. Net Cash from Investing Activities: Summed all figures in Investing activities. Financing Activities

40

Net Cash from Financing Activities: Took the average of the past three years and used that number as the forecast because of such volatile historical numbers

Summary

The forecasted financial statements for Boston Beer have been conservatively

evaluated according to prior sales percentage increases and the mature market they

participate in. In creating these forecasts we recognized earnings per share declining

but immediately increasing at about the two percent growth rate. This is due to

forecasting conservatism of not increasing assets and income too aggressively. This

conservatism leaves room in the forecasting for errors and large increases in revenue

or expenses the company may expect and will not make the company look more

attractive than it is just because of its profitability, liquidity and capital structure

ratios.

41

Valuation Analysis The purpose of doing a valuation analysis of Boston Beer Co. is to help in making

future operational and financial decisions. Using the different valuation tools you can

predict future performance of a certain company. The methods used in the valuation

of Boston Beer Co. were the discounted free cash flow model, abnormal earnings

growth model, residual income model, and the long run residual income model.

Along with these four models we also used the multiples in the method of

comparables to help with the valuation.

The main purpose of these valuation methods is to determine whether the share

price of Boston Beer Co. is overvalued, undervalued, or fairly valued. Because each

method and model uses a different set of numbers there will be a bit of conflicting

information among the valuations. For example, the method of comparables use

ratios that are not very detailed which doesn’t make them very indicative of actual

performance. Other models are better methods for valuing a company because they

require the computation of numbers such as the cost of equity (Ke) and the weight

average of cost of capital (WACC) which are much more indicative of actual company

performance.

Method of Comparables Valuation

As of April 7, 2005 EPS BPS PPS SPS P.E.G.

Anheuser-Busch 2.77 0.64 46.1 19.22 1.6Molson Coors 5.19 0.86 79.5 49.26 1.5Boston Beer Co. 0.86 1.88 22.14 16.9 2.5

The method of comparables is a widely used valuation tool for analysts because of its

simplicity. The reason for its simplicity is that unlike other valuation models, the

method of comparables doesn’t require detailed multi year forecasts for items such

as growth, profitability, and the cost of capital. The method of comparables allows us

to take Boston Beer Co.’s two biggest competitors, Anheuser-Busch and Molson

Coors, and use their numbers to determine the best share price of Boston Beer Co.

42

Price/Earnings (Forward)Anheuser-Busch 16.6Molson Coors 15.4Average 16

Boston Beer Valuation 13.76

The forward price/earnings multiple did not end up being very close to Boston Beer

Co.’s actual share price, but proved to be the closest among all of the multiples that

we calculated. To get the price/earnings multiple we took the average of Anheuser-

Bush’s and Molson Coors’ price/earnings and multiplied that by Boston Beer Co.’s

EPS. That ended up equaling $13.76. Boston Beer Co.’s actual share price as of

April 7, 2005 was $22.14. A possible reason for why the price/earnings multiple

valuation wasn’t very close to Boston Beer Co.’s actual share price is the fact that

Boston Beer Co.’s price/earnings multiple was quite larger than the other two

competitors. Boston Beer Co.’s price/earnings multiple ended up being $25.70

which is much closer to the actual share price of Boston Beer Co.

Price Earnings (Trailing)Anheuser-Busch 23Molson Coors 17Average 20

Boston Beer Valuation 17.2

The trailing price/earnings multiple ended up being closer to Boston Beer Co.’s

actual share price than the forward price/earnings multiple.

Price/BookAnheuser-Busch 11.61Molson Coors 1.82Average 6.715

Boston Beer Valuation 12.62

The next multiple that we calculated was the price/book multiple. The price/book

multiple proved to be less valuable to use because of the very large discrepancy

43

between Anheuser-Busch’s ($11.61) and Molson Coors’ ($1.82) price/book

multiples. We could have decided to throw one of the numbers out but that would

mean we would only have one company’s multiple to use for the valuation. After

taking the average of the two competitors and then multiplying them by Boston Beer

Co.’s price/book multiple, we came up with a valuation of $12.64. This valuation

came out to be much less than the actual share price of $22.14.

Price/SalesAnheuser-Busch 2.4Molson Coors 1.61Average 2.005

Boston Beer Valuation 33.88

The final multiple that we calculated was the price/sales multiple. To calculate this

multiple we took the average of Anheuser-Bush’s and Molson Coors’ price/sales

multiple and multiplied it by Boston Beer Co.’s SPS. That ended up equaling $33.88.

Boston Beer Co.’s actual share price is $22.14. A possible reason for the big

discrepancy in the actual share price and the valuation model’s share price is the

fact that both of the competitors had a very large spread between their two

price/sales multiples. Anheuser-Busch had a price/sales multiple of $2.40 (for every

dollar of sales, it has to pay $2.40). Molson Coors ended up having a price/sales

multiple of $1.61. Unfortunately, we can’t throw out one of the competitors because

that would leave only one multiple to use to make the valuation.

Another multiple that is usually used when analysts calculate the method of

comparables is the dividends/price multiple. However, we did not use this multiple

for Boston Beer Co. because they do not pay dividends. Overall, the method of

comparables multiples seemed to be far off from Boston Beer Co.’s actual share

price. The main reason for this problem was the fact that we were only able to use

the multiples of two competitors, which in essence turned out to be very volatile

between each other. To get more accurate information when using the multiples, you

need to be able to use more companies than just two or three so that you can throw

out outlying numbers.

44

Introduction to Valuation Models

The purpose of this next section in our valuation of Boston Beer is to convert

forecasted data into information that can be used to evaluate and assess what we

believe to be the true value. Because so many decisions are based on the valuations

and the forecasting of data, it is important that the estimations must be as accurate

as possible as it pertains to the future of the firm. Every estimate that is made by any

analysis or company accountant is very important to ensure the information is

accurate and realistic.

To properly and accurately value Boston Beer, our valuation models considered

forecasts over two different time periods. Each of our forecast models went out ten

years in the future till we then considered the terminal value by estimating the firm

infinitely. Using our WACC we were able to discount the values to a present value for

the year 2004. Here we were able to come up with a clearer picture of what the

company’s worth is.

The valuation methods used in our assessment of the firm’s value were the method

of comparables model, the discounted free cash flow model, the long-term residual

income model, abnormal earnings growth model, and the discounted residual income

model. (All used WACC for discounting) To implement the various models, we

forecasted financial data based on abnormal earnings and book value, as well as

free cash flows. When each model is completed a sensitivity analysis is performed to

test any sensitivity of the price when the growth rate or WACC are changed. By

changing these variables we are able to compare our prices to that of the markets

and also able to see how the market is interrupting the free flow of data. Yet, most

importantly, we will be able to see how small interpretations of the data and

estimations by us have created the valuation given by these models.

45

Cost of Equity

Boston Beer has an estimated cost of equity of 5.241%. This percentage was

generated by using a risk free rate 3.2%, which is the rate for the seven year Treasury

bond. The beta used was calculated using a data regression for the previous 24

months, which came up to .434. There were three and five year regression done as

well but both of those posed unlikely and unrealistic numbers. The market risk

premium was estimated at about 4.69%.

Cost of Debt

The cost of debt for Boston Beer came to 3.61%. This was calculated by using a

weighted average of short and long term debt. This was pretty limited due to the fact

that Boston Beer has no real high debt as other companies in the industry do. The

short term debt represented around 90% of the total debt in the firm. The other ten

percent come from the long term debt which is only their pension fund obligations.

As of end of year 2004 Boston Beer has no long term liabilities on the books.

Weighted Average Cost of Capital

The weighted average cost of capital for Boston Beer was estimated to be

approximately around 4.79% (BT). With as the estimated value of debt and value of

equity we were able to calculate the WACC before and after tax (assuming a tax rate

of 35%). The after tax WACC was 4.44%.

Discounted Free Cash Flow Model

The free cash flow was the first method used to value Boston Beer Company’s

estimated share price. This model displays what the share price of the firm should

be considering operating and financing cash flows. First, a set of operating and

investing cash flows were used from the forecasting section of this document (see

Cash Flow Statement). The firm’s cash flows were then discounted by the WACC and

taken to a present value of 2004. We also took the 2014 estimated cash flow out to

perpetuity with a growth rate of two percent, per the forecasting mentioned in the

46

ratio analysis. The perpetuity adds value to the firm by configuring infinite cash flows

in the company and discounting it back to 2004 present values. By doing this we are

able to decide if Boston Beer is fairly valued in the market, compared to our valuation

considering free cash flows.

In constructing the Free Cash flows we valued the company at $41.25, compared to

the actual share price of $22.14. This large deviation is due to increases the

operating and investing cash flows over the forecasted life of the company. Boston

Beer has many funds in investing cash flows that really adds value to the firm.

According to this model Boston Beer is completely undervalued, assuming our cash

flow estimations are accurate. The sensitivity analysis showed moderate deviations

in the share price if growth or our WACC changed slightly. With incremental changes

in the growth rate the stock price changes significantly, which implies the firm is very

sensitive to change. This also means that if our forecasts are off by just a million

dollars then it changes our models enough to tell a difference in share price. The

changes in WACC change the price just as much because a .1% change in the WACC

estimation changes the price by a couple of dollars in some cases.

Sensitivity Analysis

g

1.00% 1.50% 2.00% 2.50% WACC 4.70% $33.10 $37.15 $42.70 $50.78 4.80% $32.15 $35.95 $41.25 $48.71 4.90% $31.26 $34.82 $39.60 $46.38 5.00% $30.41 $33.75 $38.21 $44.44

Residual Income Model

The residual income model shows the level of income above and beyond the cost of

equity. In this model, we observe a stream of incomes over the next ten years, which

are all discounted back to 2004. The residual income is computed by adding the

book value of equity per share, and earnings per share, then usually subtracting the

dividends distributed per share, but Boston Beer does not pay dividends. This

number represents the book value of equity at the end of the year, which in turn is

used to calculate next year’s beginning equity. Next, the normal income is derived by

47

multiplying Ke times the previous year’s book value of equity. The residual income is

simply the difference between earnings per share and normal income. All ten

residual incomes are then discounted back to the present year, and added together,

which gives a value of future incomes. The perpetuity of a continuing terminal value

is then calculated using a sustainable growth rate, two percent, which is the other

variable in our sensitivity analysis. We then plug in our estimated cost of equity of

5.24%, calculated with a professionally estimated beta, to see how Boston Beer is

valued concerning residual income.

The estimated Residual Income value of the firm per share is $15.78, which makes

the firm overvalued in this model, because of the actual share price of $22.14. This

could be because of the firm’s book value of equity being much higher than debt, and

room for more debt financing. The sensitivity analysis shows deviations that are

expected in a model like this. The higher the cost of equity for the firm the lower the

stock price. Small deviations in our estimations are not as detrimental to this model

and changes to growth rates or the cost of equity can easily be computed with this

analysis.

Sensitivity Analysis G 0 1% 2% 3%

3% $22.52 $28.84 $47.80 N/A 4% $16.97 $19.55 $24.71 $40.19

Ke 5% $13.00 $14.06 $15.78 $19.03

6% $11.37 $12.02 $13.01 $14.65

7% $9.74 $10.10 $10.61 $11.37

Long Run Residual Income Model

This model is simply a perpetuity using the Residual Income Model to estimate the

price of the firm over an even longer period. This model yielded results of $20.57

and is another model that leaves the company overvalued. This model (shown

below) shows that the firm does not create much income other than normal from

year to year. This sensitivity analysis is much like the analysis for the Residual

48

Income Model. Growth changes greatly affect the price, while cost of equity changes

are reasonable for this firm.

*BVE + BVE (ROE + Ke / Ke –G)

Sensitivity Analysis G 0% 1% 2% 3% 3% 41.83 60.01 114.54 n/a Ke 4% 34.11 43.66 62.57 120.02 5% 28.63 34.09 42.92 59.62 6% 26.39 30.58 36.85 47.31

Abnormal Earnings Growth Model (AEG)

The Abnormal Earnings Growth model examines the benefit of the investment

opportunities to shareholders concerning the present value of dividends received and

earnings per share. This method is condensed because of Boston Beer’s lack of

dividend payments. Abnormal earnings are generated by taking earnings per share

divided by any positive investment opportunity and then subtracting the normal

earnings. These earnings are then discounted back to present time, which lets us

start a continuing perpetuity.

The value of the firm according to the Abnormal Earnings growth is $37.12, which

leaves the company undervalued again when compared to the actual share price.

This model is particularly unhelpful because it takes dividends into account greatly

and this firm does not pay dividends and we do not expect them to start paying in the

future. This sensitivity analysis also has large deviations in the growth rate. If the

sustainable growth rate for the firm changes these models will the worthless. The

costs of equity estimations change the models by several dollars but this is expected

with any firm.

49

Sensitivity Analysis g 0% 1% 2% 3%

Ke 3% $44.27 $55.85 $90.61 NA 4% $35.87 $41.27 $52.08 84.48 5% $30.45 $33.47 $37.12 $48.59 6% $26.54 $28.42 $31.25 $35.59

Valuation Models Conclusion These models leave us to conclude that Boston Beer is undervalued based on three

out of the four models. Therefore, we consider Boston Beer to be undervalued

because of our models and the degree of forecasting we have estimated for the

future of the firm. We have decided not to take the method of comparables into

much consideration because of industry competitor discrepancies that can hurt the

accuracy of the valuation. Even with sensitivity analysis the price of the firm still

seems to be undervalued and the reason why we put a recommendation of buy.

50

Works Cited

United States. Securities and Exchange Commission. Edgar Database.

Information initially retrieved: February 1, 2005

http://sec.gov/edgar/searchedgar/webusers.htm

Pricewaterhouse Coopers. Edgarscan Database. Information initially retrieved:

February 1, 2005

http://edgarscan.pwcglobal.com/servlets/getCompanyDetail?Name=BOSTON+BEER

+CO+INC

The Boston Beer Company. Company Website. Information initially retrieved:

February 1, 2005

http://www.bostonbeer.com

Samuel Adams Beer. Beer’s Website. Information initially retrieved: February

1, 2005

http://www.samueladams.com

Moore, M. Chapter 3 – Overview of Accounting Analysis. Information initially

retrieved: February 1, 2005

http://mmoore.ba.ttu.edu/Fin3321-Spring-05/Lecture_Notes/Chapter-3.doc

Moore, M. Chapter 4 – Implementing Accounting Analysis. Information initially

retrieved: February 1, 2005

http://mmoore.ba.ttu.edu/Fin3321-Spring-05/Lecture_Notes/Chapter-4.doc

51

Moore, M. Chapter 6 – Forecasting. Information retrieved:

February 1, 2005

http://mmoore.ba.ttu.edu/Fin3321-Spring-05/Lecture_Notes/Chapter-6.doc

Moore, M. Chapter 7 – Valuation Basics and Theory. Information retrieved:

February 1, 2005

http://mmoore.ba.ttu.edu/Fin3321-Spring-05/Lecture_Notes/Chapter-7.doc

Moore, M. Chapter 8 – Prospective Analysis: Valuation. Information retrieved:

February 1, 2005

http://mmoore.ba.ttu.edu/Fin3321-Spring-05/Lecture_Notes/Chapter-8.doc

Yahoo Finance. Yahoo Financial Database and Information. Information

initially retrieved: February 1, 2005

http://finance.yahoo.com/

52

Balance Sheet

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Current Assets: Cash and cash equivalents $6,256,000 $45,838,000 $20,608,000 27,792,000.00$ $35,794,000 $39,714,709 $40,596,541 $42,400,266 $40,480,953 $44,594,703 $45,574,136 $46,573,161 $47,592,163 $48,122,379 $48,172,365 Short-term investments $28,858,000 $2,031,000 $32,001,000 $15,098,000 $24,000,000 $21,052,440 $21,473,489 $21,902,959 $22,341,018 $22,787,838 $23,243,595 $23,708,467 $24,182,636 $24,666,289 $25,159,615 Accounts receivable $12,593,000 $19,219,000 $17,830,000 $10,432,000 12,826,000$ $10,429,684 $10,638,278 $9,946,790 $10,145,726 $9,407,855 $9,596,012 $9,787,932 $9,983,691 $10,183,365 $10,387,032 Inventories $15,739,000 $9,323,000 $8,342,000 $9,890,000 $12,561,000 $8,691,404 $8,865,232 $9,042,536 $11,155,907 $9,103,220 $9,285,285 $9,470,990 $9,660,410 $9,853,618 $10,050,691 Prepaid expenses $1,619,000 $925,000 $1,284,000 $1,126,000 $883,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 Deferred income taxes $2,415,000 $2,291,000 $1,959,000 $1,177,000 $1,474,000 $869,140 $886,523 $904,254 $922,339 $940,785 $959,601 $978,793 $998,369 $1,018,336 $1,038,703 Other current assets $927,000 $844,000 $1,513,000 $2,304,000 $2,300,000 $2,607,421 $2,659,570 $2,712,761 $3,689,355 $3,763,142 $3,838,405 $3,915,173 $3,993,476 $4,582,514 $4,674,164 Total current assets $68,407,000 $80,471,000 $83,537,000 $67,819,000 87,768,000$ $84,864,798 $86,619,633 $88,409,566 $90,235,298 $92,097,543 $93,997,034 $95,934,516 $97,910,745 $99,926,501 $100,982,570 Property, plant and equipment, $27,047,000 $23,897,000 $20,202,000 $17,059,000 $17,222,000 $17,382,807 $17,730,464 $18,085,073 $18,446,774 $18,815,710 $19,192,024 $19,575,864 $19,967,382 $20,366,729 $20,774,064 Other assets $1,671,000 $1,750,000 $1,690,000 $1,099,000 $1,095,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 Goodwill $1,477,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 $1,377,000 Total assets $98,602,000 $107,495,000 $106,806,000 $87,354,000 $107,462,000 $105,124,605 $107,227,097 $109,371,639 $111,559,072 $113,790,253 $116,066,058 $118,387,380 $120,755,127 $123,170,230 $125,633,634

LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities: Accounts payable $6,506,000 $11,201,000 $8,997,000 $6,395,000 $9,744,000 $7,055,231 $7,196,336 $7,340,262 $7,487,068 $7,636,809 $7,789,545 $7,945,336 $8,104,243 $8,266,328 $8,431,654 Accrued expenses $13,940,000 $13,196,000 $15,874,000 $15,504,000 16,494,000 $14,000,000 $14,000,000 $14,000,000 $14,000,000 $14,000,000 $14,000,000 $14,000,000 $14,000,000 $14,000,000 $14,000,000 Total current liabilities $20,446,000 $24,397,000 $24,871,000 $21,899,000 26,238,000 $21,055,231 $21,196,336 $21,340,262 $21,487,068 $21,636,809 $21,789,545 $21,945,336 $22,104,243 $22,266,328 $22,431,654 Deferred income taxes $1,833,000 $3,583,000 $2,406,000 $2,191,000 2,085,000 $2,257,674 $2,302,827 $2,348,884 $2,395,862 $2,443,779 $2,492,654 $2,542,508 $2,593,358 $2,645,225 $2,698,129 Other long-term liabilities $2,634,000 $1,336,000 $697,000 $740,000 $769,000 $4,908,019 $5,286,180 $5,671,903 $6,065,342 $6,466,648 $6,875,981 $7,293,501 $7,719,371 $8,153,758 $8,596,833TOTAL LIABILITIES $24,913,000 $29,316,000 $27,974,000 $24,830,000 $29,092,000 $28,220,925 $28,785,343 $29,361,050 $29,948,271 $30,547,236 $31,158,181 $31,781,345 $32,416,971 $33,065,311 $33,726,617

Stockholders Equity: Class A Common Stock, $.01 par $165,000 $165,000 $166,000 $169,000 $101,000 $166,000 $166,000 $166,000 $166,000 $166,000 $166,000 $166,000 $166,000 $166,000 $166,000 Class B Common Stock, $.01 par $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 Additional paid-in capital $56,859,000 $57,610,000 $59,144,000 $62,517,000 $66,157,000 $58,000,000 $58,000,000 $58,000,000 $58,000,000 $58,000,000 $58,000,000 $58,000,000 $58,000,000 $58,000,000 $58,000,000 Other Equity $0 $0 $419,000 $45,000 ($203,000) $46,252,837 $31,881,149 $23,381,689 $14,712,240 $5,869,400 ($3,150,295) ($12,350,383) ($21,734,476) ($31,306,247) ($42,069,457) Retained earnings $47,814,000 $55,647,000 $64,200,000 $74,758,000 $12,554,000 $22,443,844 $32,531,484 $42,820,877 $53,316,058 $64,021,143 $74,940,329 $86,077,899 $97,438,221 $109,025,749 $120,845,027 Treasury stock ($31,034,000) ($35,072,000) ($44,949,000) ($74,777,000) ($78,370,000) ($50,000,000) ($50,000,000) ($50,000,000) ($50,000,000) ($50,000,000) ($50,000,000) ($50,000,000) ($50,000,000) ($50,000,000) ($50,000,000) Total stockholders equity $73,689,000 $78,179,000 $78,832,000 $62,524,000 $78,370,000 $76,903,680 $72,619,633 $74,409,566 $76,235,298 $78,097,543 $79,997,034 $81,934,516 $83,910,745 $85,926,501 $86,982,570 Total liabilities and $98,602,000 $107,495,000 $106,806,000 $87,354,000 $107,462,000 $105,124,605 $107,227,097 $109,371,639 $111,559,072 $113,790,253 $116,066,058 $118,387,380 $120,755,127 $123,170,230 $125,633,634 stockholders equity

Actual Data Forcasted Data

53

atement of Cash Flows

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Cash flows from operating activities: Net income $11,080,000 $11,239,000 $7,833,000 $8,553,000 $10,558,000 $12,502,000 $9,889,844 $10,087,640 $10,289,393 $10,495,181 $10,705,085 $10,919,186 $11,137,570 $11,360,321 $11,587,528 Adjustments to reconcile net income to net cash from operating activities: Depreciation and $5,907,000 $6,442,000 $6,658,000 $6,151,000 $7,106,000 $7,317,585 $7,463,936 $8,120,763 $8,283,178 $9,504,947 $9,695,046 $9,888,946 $10,086,725 $10,288,460 $10,494,229 amortization Accounts receivable ($3,865,000) $3,840,000 ($6,626,000) $1,325,000 $7,514,000 ($2,394,000) $3,869,596 ($208,594) $691,488 ($198,936) $737,871 ($188,157) ($191,920) ($195,759) ($199,674) Inventories $179,000 ($83,000) $6,416,000 $981,000 ($1,548,000) ($2,671,000) $3,869,596 ($173,828) ($177,304) ($2,113,371) $2,052,687 ($182,064) ($185,706) ($189,420) ($193,208) Deferred income taxes $1,874,000 ($763,000) $1,427,000 ($297,000) $604,860 ($17,383) ($17,731) ($18,085) ($18,446) ($18,816) ($19,192) ($19,576) ($19,967) Accounts payable ($343,000) ($4,153,000) $4,695,000 ($2,204,000) ($2,602,000) ($3,349,000) $2,688,769 ($141,105) ($143,927) ($146,805) ($149,741) ($152,736) ($155,791) ($158,907) ($162,085)Net Cash From Operating Activites $13,802,000 $17,336,000 $19,278,000 $13,820,000 $19,641,000 $11,108,585 $28,386,601 $17,667,493 $18,925,097 $17,522,930 $23,022,501 $20,266,359 $20,671,687 $21,085,120 $21,506,823Cash flows from investing activities: Purchases of property, plant ($3,765,000) ($5,602,000) ($3,271,000) ($2,336,000) ($1,729,000) ($163,000) ($160,807) ($347,657) ($354,609) ($361,701) ($368,936) ($376,314) ($383,840) ($391,518) ($399,347) and equipment Sale of Securities $20,470,000 $5,021,000 $10,238,000 $10,463,000 $0 $7,942,942 $8,119,308 $8,480,053 $8,096,191 $8,918,941 $9,114,827 $9,314,632 $9,518,433 $9,624,476 $9,634,473Other Investing Activities ($10,000,000) ($10,000,000) ($10,000,000) ($10,000,000) ($10,000,000) ($10,000,000) ($10,000,000) ($10,000,000) ($10,000,000) ($10,000,000) Net cash from (used in) ($17,000) $3,612,000 $4,346,000 ($30,267,000) $14,995,000 ($2,220,058) ($2,041,499) ($1,867,604) ($2,258,418) ($1,442,760) ($1,254,109) ($1,061,682) ($865,407) ($767,042) ($764,874) investing activities

Forecasts

St

Actual Data

54

Income Statement

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Revenue $212,105,000 $207,218,000 $238,335,000 $230,103,000 $239,680,000 188,772,471.00$ 192,547,920.42$ 196,398,878.83$ 200,326,856.40$ 204,333,393.53$ 208,420,061.40$ 212,588,462.63$ 216,840,231.88$ 221,177,036.52$ 225,600,577.25$ Less excise taxes $21,551,000 $20,435,000 $22,980,000 $22,158,000 $22,472,000 $23,331,429.00 $23,798,057.58 $24,274,018.73 $24,759,499.11 $25,254,689.09 $25,759,782.87 $26,274,978.53 $26,800,478.10 $27,336,487.66 $27,883,217.41 Net revenue $190,554,000 $186,783,000 $215,355,000 $207,945,000 $217,208,000 212,103,900.00$ 216,345,978.00$ 220,672,897.56$ 225,086,355.51$ 229,588,082.62$ 234,179,844.27$ 238,863,441.16$ 243,640,709.98$ 248,513,524.18$ 253,483,794.67$ Cost of goods sold $84,057,000 $81,693,000 $88,367,000 $85,606,000 $87,983,000 84,841,560.00$ 86,538,391.20$ 88,269,159.02$ 90,034,542.20$ 91,835,233.05$ 93,671,937.71$ 95,545,376.46$ 97,456,283.99$ 99,405,409.67$ 101,393,517.87$ Gross profit $106,497,000 $105,090,000 $126,988,000 $122,339,000 $129,225,000 127,262,340.00$ 129,807,586.80$ 132,403,738.54$ 135,051,813.31$ 137,752,849.57$ 140,507,906.56$ 143,318,064.70$ 146,184,425.99$ 149,108,114.51$ 152,090,276.80$ Operating expenses:Advertising, promotional and $77,838,000 $80,124,000 $100,734,000 $91,841,000 $94,913,000 89,083,638.00$ 90,865,310.76$ 92,682,616.98$ 94,536,269.31$ 96,426,994.70$ 105,380,929.92$ 107,488,548.52$ 109,638,319.49$ 111,831,085.88$ 114,067,707.60$ selling expensesGeneral and administrative $12,539,000 $13,483,000 $14,586,000 $14,628,000 $14,837,000 14,847,273.00$ 15,144,218.46$ 15,447,102.83$ 15,756,044.89$ 16,071,165.78$ 16,392,589.10$ 16,720,440.88$ 17,054,849.70$ 17,395,946.69$ 17,743,865.63$ expenses Total operating expenses $90,377,000 $93,607,000 $115,320,000 $106,469,000 $109,750,000 103,930,911.00$ 106,009,529.22$ 108,129,719.80$ 110,292,314.20$ 112,498,160.48$ 121,773,519.02$ 124,208,989.40$ 126,693,169.19$ 129,227,032.57$ 131,811,573.23$ Operating income $16,120,000 $11,483,000 $11,668,000 $15,870,000 $19,485,000 15,907,792.50$ 16,225,948.35$ 17,653,831.80$ 18,006,908.44$ 20,662,927.44$ 21,076,185.98$ 21,497,709.70$ 21,927,663.90$ 22,366,217.18$ 22,813,541.52$ Other income, net:Interest income, net $2,001,000 $1,468,000 $1,119,000 $1,085,000 $840,000 1,696,831.20$ 1,730,767.82$ 1,765,383.18$ 1,800,690.84$ 1,836,704.66$ 1,873,438.75$ 1,910,907.53$ 1,949,125.68$ 1,988,108.19$ 2,027,870.36$ Other income, net $929,000 $266,000 $1,304,000 $19,000 ($247,000) $1,060,520 $1,081,730 $1,103,364 $1,125,432 $1,147,940 $1,170,899 $1,194,317 $1,218,204 $1,242,568 $1,267,419 Total other income, net $2,930,000 $1,734,000 $2,423,000 $1,104,000 $593,000 2,757,350.70$ 2,812,497.71$ 2,868,747.67$ 2,926,122.62$ 2,984,645.07$ 3,044,337.98$ 3,105,224.74$ 3,167,329.23$ 3,230,675.81$ 3,295,289.33$ Income before provision for $19,050,000 $13,217,000 $14,091,000 $16,974,000 $20,078,000 17,313,480.00$ 17,659,749.60$ 18,012,944.59$ 18,373,203.48$ 18,740,667.55$ 19,115,480.90$ 19,497,790.52$ 19,887,746.33$ 20,285,501.26$ 20,691,211.28$ income taxesProvision for income taxes $7,811,000 $5,384,000 $5,538,000 $6,416,000 $7,576,000 7,423,636.50$ 7,572,109.23$ 7,723,551.41$ 7,878,022.44$ 8,035,582.89$ 8,196,294.55$ 8,360,220.44$ 8,527,424.85$ 8,697,973.35$ 8,871,932.81$ Net income $11,239,000 $7,833,000 $8,553,000 $10,558,000 $12,502,000 9,889,843.50$ 10,087,640.37$ 10,289,393.18$ 10,495,181.04$ 10,705,084.66$ 10,919,186.36$ 11,137,570.08$ 11,360,321.48$ 11,587,527.91$ 11,819,278.47$ Net income per common share - $620 $480 $530 $720 $890 734.40$ 749.09$ 764.07$ 779.35$ 794.94$ 810.84$ 827.05$ 843.59$ 860.47$ 877.68$ basicNet income per common share - $620 $470 $520 $700 $86,000 714.00$ 728.28$ 742.85$ 757.70$ 772.86$ 788.31$ 804.08$ 820.16$ 836.56$ 853.30$ dilutedWeighted average number of $18,056,000 $16,413,000 $16,083,000 $14,723,000 $14,126,000 15,907,792.50$ 16,225,948.35$ 16,550,467.32$ 16,881,476.66$ 17,219,106.20$ 17,563,488.32$ 17,914,758.09$ 18,273,053.25$ 18,638,514.31$ 19,011,284.60$ common shares - basicWeighted average number of $18,109,000 $16,590,000 $16,407,000 $15,000,000 $14,518,000 15,907,792.50$ 16,225,948.35$ 16,550,467.32$ 16,881,476.66$ 17,219,106.20$ 17,563,488.32$ 17,914,758.09$ 18,273,053.25$ 18,638,514.31$ 19,011,284.60$ common shares - diluted

Income StatementActual Data Forcasted Data

55

Pro Forma Income Statement% of net revenue

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Revenue 111.31% 110.94% 110.67% 110.66% 110.35% 113% 113% 113% 113% 113% 113% 113% 113% 113% 113%Less excise taxes 11.31% 10.94% 10.67% 10.66% 10.35% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% Net revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Cost of goods sold 44.11% 43.74% 41.03% 41.17% 40.51% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% Gross profit 55.89% 56.26% 58.97% 58.83% 59.49% 60.00% 60.00% 60.00% 60.00% 60.00% 61.00% 61.00% 62.00% 62.00% 62.00%Operating expenses:Advertising, promotional and 40.85% 42.90% 46.78% 44.17% 43.70% 42.00% 42.00% 42.00% 42.00% 42.00% 45.00% 45.00% 45.00% 45.00% 45.00%selling expensesGeneral and administrative 6.58% 7.22% 6.77% 7.03% 6.83% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%expenses Total operating expenses 47.43% 50.12% 53.55% 51.20% 50.53% 50.00% 50.00% 49.00% 48.00% 48.00% 48.00% 48.00% 48.00% 48.00% 48.00%Operating income 8.46% 6.15% 5.42% 7.63% 8.97% 7.50% 7.50% 8.00% 8.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%Other income, net:Interest income, net 1.05% 0.79% 0.52% 0.52% 0.39% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%Other income, net 0.49% 0.14% 0.61% 0.01% -0.11% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Total other income, net 1.54% 0.93% 1.13% 0.53% 0.27% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%Income before provision for 10.00% 7.08% 6.54% 8.16% 9.24% 8% 8% 9% 9% 9% 9% 9% 10% 10% 10%income taxesProvision for income taxes 4.10% 2.88% 2.57% 3.09% 3.49% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%Net income 5.90% 4.19% 3.97% 5.08% 5.76% 4.83% 4.99% 5.16% 5.34% 5.51% 5.69% 5.88% 6.06% 6.26% 6.45%Net income per common share - 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%basicNet income per common share - 0.00% 0.00% 0.00% 0.00% 0.04% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%dilutedWeighted average number of 9.48% 8.79% 7.47% 7.08% 6.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%common shares - basicWeighted average number of 9.50% 8.88% 7.62% 7.21% 6.68% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%common shares - diluted

Actual Data Forcasted Data

56

Boston Beer Free Cash Flows 1 2 3 4 5 6 7 8 9 10(in millions except per share data)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Cash Flow From Operations 19.64 $11.11 $28.93 $17.67 $18.91 $17.52 $23.02 $20.67 $20.67 $21.09 $21.51Cash Provided (Used) by Investing Activities ($2.22) ($2.04) ($1.86) ($2.25) ($1.14) ($1.25) ($1.06) ($0.87) ($0.77) ($0.76)Free Cash Flow to Firm $8.89 $26.89 $15.81 $16.66 $16.38 $21.77 $19.61 $19.80 $20.32 $20.75PV Factor BT WACC 4.79% 0.954 0.911 0.869 0.829 0.791 0.755 0.721 0.688 0.656

Present Value of Free Cash Flows $8 $24 $14 $14 $13 $16 $14 $14 $13Perpetuity 743.728PV of Perpetuity 488.13

Total PV of Annual Cash Flows $131Continuing (Terminal) Value Growth 2% $743.73Present Value of Continuing (Terminal) Value $488.13Value of Firm (end of 2004) $619.15Book Value of Debt and Preferred Stock $29.23Value of Equity (end of 2004) $589.92

Estimated Value Per Share $41.25Book Value Per Share $4.13g 2%

Actual Price Per Share $22.14

Forecast Years

57

Boston Beer Residual Income

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Beginning BE (per share) 5.48$ 5.38$ 5.08$ 5.20$ 5.33$ 5.46$ 5.59$ 5.73$ 5.87$ 6.01$ 6.15$ Earnings Per Share 0.69$ 0.71$ 0.72$ 0.73$ 0.75$ 0.76$ 0.78$ 0.79$ 0.81$ 0.90$ Dividends per share -$ -$ -$ -$ -$ -$ -$ -$ -$ Ending BE (per share) 5.48$ 6.07$ 5.78$ 5.92$ 6.07$ 6.21$ 6.36$ 6.51$ 6.66$ 6.82$ Ke 5.24%"Normal" Income 0.29$ 0.32$ 0.30$ 0.31$ 0.32$ 0.33$ 0.33$ 0.34$ 0.35$ Residual Income (RI) 0.40$ 0.39$ 0.42$ 0.42$ 0.43$ 0.44$ 0.45$ 0.45$ 0.46$

Present Value of RI 0.40$ 0.35$ 0.36$ 0.35$ 0.33$ 0.32$ 0.31$ 0.30$ 0.29$

BV Equity (per share) 5.48$ Total PV of RI (end 1987) 3.02$ Continuation (Terminal) Value 25.00$ PV of Terminal Value (end 1987) 7.28$ Estimated Value (end of 2004) 15.78$Capitalize 9 months value (april 1 2005 price) 16.39$

Actual Price per share 22.14$Growth 2%

Forecast Years

58

Abnormal Earnings Growth 1 2 3 4 5 6 7 8 8 9

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014EPS 0.69$ 0.71$ 0.72$ 0.73$ 0.75$ 0.76$ 0.78$ 0.79$ 0.81$ 0.83$ DPS $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Cum-Dividend Earnings $0.71 $0.72 $0.73 $0.75 $0.76 $0.78 $0.79 $0.81 $0.83Normal Earnings $0.73 $0.74 $0.76 $0.77 $0.79 $0.80 $0.82 $0.83 $0.85Abnormal Earning Growth (AEG) ($0.02) ($0.02) ($0.02) ($0.02) ($0.02) ($0.02) ($0.02) ($0.02) ($0.02)

PV Factor 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.677 0.645

PV of AEG ($0.02) ($0.02) ($0.02) ($0.02) ($0.02) ($0.02) ($0.02) ($0.02)Core EPS 0.69$ Total PV of AEG ($0.14)Continuing (Terminal) ValuePV of Terminal Value 0.60$ Total PV of AEGAverage Perpetuity 1.16$ Capitalization Rate (perpetuity) 0.031Estimated Firm Value 37.12$ Value Per Share April 1 2005 $38.71

Ke 5%g 2%

Actual Price per share 22.14$

Forecast YearsPerp

$0.03

59

CAPM Models

DateFirm's Return SP500 Return

Monthly Yield Risk Free

Market Risk Premium Beta Estimate R-Squared

Average Risk Free Rate

Yahoo Published Beta

Historical Market Risk Premium

Feb-00Mar-00 0.0071 -0.0219 0.00522 -0.02713 2yr 0.434 0.031 0.032 0.35 0.0469Apr-00 0.0222 0.0239 0.00558 0.01836May-00 0.0571 -0.0163 0.00525 -0.02159Jun-00 -0.0270 0.0607 0.00515 0.05555 Estimated Ke 5.241%Jul-00 -0.1389 -0.0535 0.00505 -0.05853

Aug-00 0.0400 -0.0049 0.00494 -0.00989Sep-00 0.0931 -0.0801 0.00482 -0.08489Oct-00 0.0216 0.0041 0.00475 -0.00070 Estimated Cost of Debt 3.61%Nov-00 0.0889 0.0346 0.00431 0.03033Dec-00 -0.0255 -0.0923 0.00405 -0.09634

1-Jan -0.0366 -0.0642 0.00408 -0.06828 Short Horizon 0.4299 Estimated Ke 5.223%1-Feb 0.0761 0.0768 0.00387 0.072951-Mar -0.1293 0.0051 0.00397 0.001121-Apr 0.2262 -0.0250 0.00411 -0.029111-May 0.0889 -0.0108 0.00401 -0.014781-Jun 0.0217 -0.0641 0.00397 -0.068081-Jul -0.0094 -0.0817 0.00381 -0.08553 5yr -0.201 0.012

1-Aug 0.1845 0.0174 0.00343 0.01393 3yr 0.098 0.0031-Sep 0.2428 0.0760 0.00326 0.07270 2yr 0.434 0.0311-Oct -0.0991 0.0076 0.00331 0.004271-Nov -0.1489 -0.0156 0.00366 -0.01923 WACC BT 4.79%1-Dec 0.1483 -0.0208 0.00362 -0.02438 Value of E $78,370,0002-Jan -0.0397 0.0367 0.00358 0.03316 Value of D $29,092,0002-Feb 0.1372 -0.0617 0.00395 -0.06561 WACC AT 4.44%2-Mar -0.0358 -0.0088 0.00388 -0.012702-Apr -0.1195 -0.0725 0.00374 -0.076212-May 0.0214 -0.0790 0.00349 -0.082492-Jun -0.0280 0.0049 0.00318 0.001712-Jul 0.1281 -0.1100 0.00274 -0.11276

2-Aug 0.0000 0.0864 0.00245 0.084002-Sep -0.0880 0.0571 0.00246 0.054602-Oct 0.0280 -0.0603 0.00254 -0.062872-Nov -0.1122 -0.0274 0.00253 -0.029942-Dec -0.0375 -0.0170 0.00254 -0.019553-Jan 0.0334 0.0084 0.00242 0.005943-Feb 0.0924 0.0810 0.00232 0.078733-Mar 0.0155 0.0509 0.00244 0.048463-Apr 0.0535 0.0113 0.00210 0.009233-May 0.0415 0.0162 0.00189 0.014323-Jun 0.0076 0.0179 0.00239 0.015483-Jul 0.0741 -0.0119 0.00281 -0.01475

3-Aug 0.0760 0.0550 0.00265 0.052313-Sep -0.0141 0.0071 0.00266 0.004473-Oct -0.0601 0.0508 0.00274 0.048023-Nov 0.0411 0.0173 0.00273 0.014553-Dec 0.0377 0.0122 0.00260 0.009614-Jan 0.0347 -0.0164 0.00256 -0.018924-Feb 0.0021 -0.0168 0.00233 -0.019124-Mar 0.0545 0.0121 0.00283 0.009264-Apr 0.1410 0.0180 0.00321 0.014784-May -0.0531 -0.0343 0.00328 -0.037574-Jun 0.1581 0.0023 0.00308 -0.000794-Jul 0.0028 0.0094 0.00289 0.00647

4-Aug -0.1381 0.0140 0.00280 0.011214-Sep -0.0234 0.0386 0.00279 0.035804-Oct 0.1105 0.0325 0.00294 0.029524-Nov 0.0034 -0.0253 0.00300 -0.028294-Dec -0.0759 0.0189 0.00309 0.015815-Jan -0.0274 -0.0191 0.00314 -0.022265-Feb -1.0000 -0.0065

60

Boston Beer Balance Sheet Debt

2004/05/30 Percent of Total LiabilitiesComputed

Interest RateValue

Weighted Rate

LIABILITIESCurrent Liabilities: Accounts payable $9,744,000 33.49% 3.83% 1.28% Accrued Expenses $16,494,000 56.70% 3.83% 2.17% Total Current Liabilities $26,238,000 90.19% 0.00%Long-term Debt $0 0.00% 0.00%Deferred Income Taxes $2,085,000 7.17% 0.00%Other Liabilities $769,000 2.64% 5.80% 0.15%

Total Non-Current Liabilities $2,854,000 9.81% Total Liabilities $29,092,000 100.00%

Weighted Average cost of Debt 3.61%