Mattel Group Equity Valuation Jeremy Gilbert Angela Gorczyca Michael Innerebner Erin

Mattel Group Equity Valuation

Jeremy Gilbert Angela Gorczyca

Michael Innerebner Erin Kunselman

Andrew Mead

Mattel Valuation

T A B L E O F C O N T E N T S

Executive Summary.................................................. 3

Business & Industry Analysis................................... 6 Industry Analysis .............................................................6 Five Forces Model...........................................................7 SWOT Analysis ...............................................................9 Competitive Strategy Analysis .....................................10

Accounting Analysis ................................................ 11 Accounting Analysis Steps ...........................................11 Screening Ratios ............................................................16

Ratio Analysis & Forecast Financials......................17 Financial Ratio Analysis................................................17 Cross Sectional (Benchmark) Analysis .......................20 Financial Statement Forecasting Metholdology ........27

Valuations Analysis..................................................32 Method of Comparables...............................................33 Free Cash Flow & Discounted Dividends .................34 Discounted Residual Income.......................................39 Long Run Residual Income .........................................40 Abnormal Earnings Growth........................................41

Appendix..................................................................44

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Executive Summary

Executive Summary

MAT Mattel, Inc. (NYSE) Date: December, 2004 Industry: Recreational Products

Business Summary: Mattel is one of the leading toy manufacturers and sellers in the world. Producing hundreds of thousands of toys each year, Mattel has earned five billion dollars in revenue last year (2003) and 4.9 billion the previous year (2002). Some of Mattel’s well-known products include Barbie, Hot Wheels, Fisher Price and American Girl toys.

Share Performance

Price: (current) $18.65 52 Week High: $20.50 Volume (millions): 3,879,200 52 Week Low: $15.94 Market Cap 7.7B Shares Outstanding 414.9670M Dividend $.45 Yield 2.37%

Financial Snapshot (2003) Revenue $5.0B Total Net Income $537.6M Earnings Per Share $1.22 EBITDA $1.0B Long Term Debt $589.1M Valuation Predictions Free Cash Flow $19.43 Discounted Dividends $19.24 Long Run Residual Income $19.30 Residual Income $22.33 Abnormal Earnings Growth $22.69

Liquidity Ratios Current Ratio 1.63 Quick Asset Ratio 1.16 Inventory Turnover 6.51 A/R Turnover 9.12 Working Capital Turnover 5.35 Profitability Ratios Gross Profit Margin .49 Operating Expense 20.22 Net Profit Margin .11 Asset Turnover 1.10 Return on Assets .12 Return on Equity .24

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Executive Summary

s stated previously, Mattel is in the business of manufacturing and selling toys. We have discovered that the toy industry is both highly competitive and highly lucrative. There is a high rivalry factor with a low threat of

new entrants, which means that there are a few main competitors that fight over the same market share. Mattel currently has a 24% market cap, which is the largest of any of the toy manufacturers. This gives Mattel a serious competitive advantage over its rivals. By being the biggest company, Mattel is able to set industry standards and lead the way in new and innovative trends, taking hold of opportunities that present themselves. Mattel also has the flexibility in manufacturing to keep up with the threats that appear within the toy industry. For example, there are few toys that Mattel is not able to make, which means virtually no smaller company will be able to exclusively produce and sell a hot product without Mattel producing a comparable toy. Analyzing Mattel’s accounting policies led us to believe that Mattel is a fairly conservative company with a few aggressive features. Mattel does not have to take risks that other companies may, due to its sheer size. By using fairly conservative accounting and business practices, Mattel is able to turn a profit without exposing itself to risky accounting or business ventures. Mattel generally implements transparent accounting disclosures as well, meaning that it willingly divulges information to the public. Based on our research, Mattel does not leave information undisclosed in order to obscure the image of the company. We could not identify any potential problems that would lead us to believe that Mattel is fabricating or changing figures within the financial statements. By using a few quantitative ratios for the last five years (ex: Net sales/Cash from sales) we were able to check for problems within the company’s accounting system. All the changes in the ratios were easily explained and nothing appeared out of the ordinary. By forecasting the financial statements we were able to see what kind of structure Mattel would have for the next ten years. Overall, the results of our forecasts were very positive. For example, sales ten years from now are projected to be almost six billion, which is about a 20% increase in sales from the last reported year. Mattel seems to be in the position to grow at about 2% per year, which is very realistic. We feel these estimates are very conservative meaning Mattel has the potential for even larger gains in the future. Also, by using a common-size income statement, we see that the capital structure of Mattel is projected to remain fairly constant in the future. To the conservative investor, this is good news because it means Mattel should not be making any drastic changes in its business strategies in the near future.

• We consider Mattel to be a strong hold recommendation for future investors.

Through our in-depth analysis, we have found the stock to be fairly accurately priced. However, there was a trend in our analysis that seemed to show the company as overvalued. This trend, although interesting, is not fully reliable due to the difficulty in estimating the cost of equity for Mattel. Using a sensitivity analysis we were able to estimate the cost of equity to be somewhere in the range from six to ten percent. The free cash flow, dividend discount, and residual income models seemed to be effective in valuing the company; the abnormal

AMattel has a 24% market cap—the largest of any toy manufacturer

4

Executive Summary

earnings growth model was the least effective. As you can see in the summary above, the estimated share prices for each of the valuation models are off by only a small amount from the true observed stock price of $19.27. Notice that all models except the dividend discount model show that the stock should be valued at a higher price. It may be that Mattel is undervalued in the market by a small margin, but the difference could also be resulting from the wrong estimate of the cost of equity, or the weighted average cost of capital. In the above estimates, the cost of equity ranges from six to nine percent. Although there may be some estimating error in the models, we feel Mattel is a profitable stock that the investor should definitely hold. All valuations lead us to believe that Mattel’s stock is correctly priced, or even slightly undervalued. This means an investor has the chance to capitalize on any undervalued amount. If the stock is priced correctly, it also has a chance to increase in the next ten years due to the growth opportunities and the competitive advantages that Mattel possesses. For this reason, our recommendation for potential investors is that Mattel is not only a hold, but a strong hold.

We consider Mattel to be a strong hold recommendation

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Business & Industry Analysis


attel is one of the leading toy manufacturers and sellers in the world. Producing hundreds of thousands of toys each year, Mattel has managed to earn five billion dollars in revenue last year (2003) and 4.9 billion the

previous year (2002). The purpose of this report is to analyze the company in relation to the rest of the toy industry. In the first few pages, the industry as a whole will be analyzed in a five forces model, which assesses threats, competition, and bargaining power. Then, a SWOT analysis will be given to show the company’s Strengths, Weaknesses, Opportunities, and Threats. Finally, a list of competitive advantages will be given to explain what the company really excels at in the industry.

M Mattel has earned $5 billion dollars in revenue in 2003

Below is a financial overview of Mattel that shows stock price information as well as a general summary of the company’s financial statements. Industry Analysis

Market Cap of Toy Industry

24%

11%

2%63%

MattelHasbroJakks PacificAll Others

*Mattel has a grip on 24% of the market cap—the largest of any other toy manufacturer.1

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Table 1

Toy Industry

Rivalry Among Existing Firms High

Threat of New Entrants Relatively Low

Threat of Substitutes Relatively High

Bargaining Power of Buyers Low

Bargaining Power of Suppliers Low

Five Forces Model Competitive Force 1: Rivalry among existing firms In general, rivalry is very high due to the number of competing companies and struggle for market share. Because industry growth has already leveled off, companies must fight for a set market to survive. In addition, the market for toys is fairly concentrated because of competing companies in the industry, including Hasbro and Jakks Pacific. This forces Mattel to compete on price and strive to be the lowest cost competitor.

Mattel’s two primary rivals include Hasbro and Jakks Pacific

The switching cost of the consumer is very low in this industry. For example, if a consumer purchases a similar item from the same store, it will not cost the buyer any more money to choose a different product. Because of this, toy companies must engage in price competition, which keeps the level of differentiation fairly low. Mattel has attempted to create unique products by increasing the popularity of its goods. For instance, Mattel contracted to make Harry Potter toys to promote the upcoming Harry Potter film. This is an example of a differentiated product because children will want “Harry Potter,” and not a Harry Potter imitation. The toy industry has a steep learning curve in that the industry requires a lot of capital and knowledge for new entrants. Toy companies have built strong relationships and reputations with toy buyers and endorsers. Since Mattel is one of the largest toy manufacturers, the steep learning curve gives them a significant competitive advantage. Because there are no exit barrier regulations within the toy industry, it is not costly to leave the market. The primary substantial investments a company could possibly lose are its fixed assets such as machinery and factories, or any contracts with suppliers that may have been created. Competitive Force 2: Threat of new entrants Within the toy industry, there are large economies of scale, specifically in the marketing segment. In order to inform buyers about upcoming products, companies must invest large quantities of capital in advertising and marketing. Designing and manufacturing toys might be fairly easy for smaller companies to do, but the actual marketing of the products is what is difficult. For example,

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Mattel has many well known brands in the marketplace such as Fisher-Price, Hot Wheels, and Barbie. If it wasn’t for all of the marketing and advertising that went into each product, these toys wouldn’t be nearly as successful as they are today. Because of the popularity of these products, it is extremely difficult for new companies to compete in this industry. This advantage decreases the threat that new entrants would have over Mattel. It is possible for new companies to enter the industry, but they will suffer from a cost disadvantage and low beginning profits. New entrants may have problems setting up distribution channels because large, established companies already dominate them. Because larger companies have set up relationships with suppliers and buyers, they will tend to have more influence over the smaller companies. For instance, Mattel has set up numerous relationships with many of its suppliers and buyers that could potentially limit the number of new entrants into the industry. One last barrier that new entrants must surpass is the legal barrier. In the toy industry, this would be patented products. Many potential products, especially ones related to the movie industry, have patents that only certain companies have the rights to. For example, Mattel holds the exclusive right to produce the Barbie doll. Another example is Lego. Mattel has patented its design and holds the only right to manufacture and distribute Legos. This means that new entrants must design new products, or secure the rights to existing products to get into the industry. Competitive Force 3: Threat of Substitute Products In the toy industry, depending on the nature of a certain product, there may or may not be a threat of substitute products. In most cases, the threat of substitute products is relatively high. A good example of this would be a toy that can be easily replicated, such as a plastic toy soldier. Most consumers will likely purchase whatever product is the cheapest. On the other hand, the threat of substitute products could be relatively low as in the case of technologically advanced or licensed toys. The key to a successful product is to create a toy that is so appealing to children that it cannot be substituted. A perfect example would be the Harry Potter collection which has virtually no threat of substitutes. By securing this right, consumers are willing to pay a higher price. Competitive Force 4: Bargaining Power of Buyers When it comes to the bargaining power of buyers, their overall effect on Mattel is considerably low. Two factors that determine the power of buyers include price sensitivity and relative bargaining power. Because most of the products that Mattel sells tend to be differentiated, buyers are generally less sensitive to increases and decreases in price. Barbie, for example, is a product licensed by Mattel that young children love to play with. From a child’s perspective, there is no other product on the market that can replace the authenticity of a Barbie doll, thus lowering the price sensitivity of its buyers. Relative bargaining power is another aspect that determines the power of buyers. Unless there was a huge volume of products that were being bought, most buyers wouldn’t have much bargaining power over Mattel toys. Mattel is such a large company with many

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differentiated products that most consumers have a relatively low sense of power over them. Competitive Force 5: Bargaining Power of Suppliers Since there are numerous suppliers in the toy industry, companies have a low bargaining power relative to Mattel. Mattel has the ability to choose the supplier with the lowest price. Plastic and rubber are good examples of common resources used to produce toys. They are relatively simple to produce and easily attainable, which forces the suppliers of these materials to compete heavily among themselves. This gives Mattel the opportunity to produce low cost products.

SWOT Analysis

Strengths One of Mattel’s greatest strengths is its ability to gain and maintain strong relationships with other successful companies. Since the 1950’s Mattel has maintained a long lasting relationship with The Walt Disney Company.2 As a strong competitor in the toy industry, Mattel has been able to attract licensing agreements with major children’s companies. Brand names (i.e. Fisher Price) are also a large attribute to Mattel. Brands such as Hot Wheels, Barbie, Fisher Price, and American Girls are well respected and are trusted by families all over the world. Barbie is currently the #1 girls brand worldwide with more than $3.6 billion in retail.2 The Hot Wheels brand of toy cars has been able to attract many young boys and avid collectors of all ages. Mattel increased its dividends by 13% at the end of the 3rd quarter in 2004.1 This increase in dividends shows the company has been profitable and is planning to continue its growth. It is capable of increasing its shareholder value through the recent profits. Weaknesses Thousands of dollars were lost due to recalls associated with the design of the Batman Batmobile and the potential harm it could have caused to children.4B This presents a problem with the costs associated with the lawsuits, liabilities, and consumer appeal.

Mattel took the biggest hit out of its competitors giving up 2% of stock when Toys “R” Us decided to close its toy retailing market.5 Toys “R” Us lost $46 million in 2003 which contributed to US toy sales decreasing 8.3% to $1.1 billion reported in the last quarter of 2004.1A

Opportunities Hasbro, Inc. is recalling nearly 230,000 Super Soaker Monster Rockets in September, 2004.1B This recall by Hasbro helps Mattel maintain a competitive advantage over its main rivals. This also shows consumers that Mattel is not the only company that has had malfunctions with their toys.

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Reviving Barbie in September 2004 could increase its sales forecast. Mattel is currently trying to alter the perception of Barbie by changing her looks and clothing. Barbie’s image will be changed in order to appeal to young children and parents today. An example of this future change will be the creation of the American Idol doll, which will hopefully increase sales in January, once the dolls are scheduled to be released.1C

Threats During the Christmas season of 2003, there was a price war in the toy industry due to Wal-Mart’s low prices. Because Wal-Mart has the capability of lowering its prices so dramatically, they are able to beat their competitors, such as Toys “R” Us. Once these stores are unable to compete with the low prices, they cancel shipments and advertising from the manufacturers, which hurts Mattel. Mattel and other competitors are trying to avoid the Christmas price wars this year by giving less hot buy items to Wal-Mart and more to companies like Toys “R” Us.6

314,000 Batmobiles were recalled in 2004 due to sharp rear tail wings

In 2004, 314,000 Batmobiles were recalled by Mattel which caused the injury of fourteen children, making consumers weary of toys.7 Every year millions of dollars are lost due to toy related lawsuits. Although every toy company experiences this, Mattel tries to avoid these lawsuits at all costs. Another threat to toy manufacturers is the ever-changing popularity of toys. Because toy fads change unpredictably, many toys are left sitting on store shelves.

Competitive Strategy Analysis The toy industry is very competitive, and in most situations there are significant threats of substitute products. Although Mattel does well at being a low cost competitor, its main strategy for creating a competitive advantage lies in the differentiation of its products. Mattel is known for its high quality and cutting edge toys. It invests considerable amounts of money to create innovative designs. This, in part, is why Mattel has been able to dominate the toy industry for so long. Another competitive advantage that Mattel has is its reputation. Industries that are looking to manufacture and sell a certain product to endorse their own company, such as Walt Disney, will look for the large established companies that they know can fill the order and create a quality toy. This means that Mattel not only produces and sells its own toy designs, but those of other companies as well. This asset along with its successful brand names allows Mattel to keep a competitive advantage over its competitors. One more competitive advantage Mattel possesses is the advantage of capital. Since Mattel deals with high amounts of revenue and cash, it has plenty of extra capital to spend on marketing, research and development, and quality assurance of new toys. By having extra capital, Mattel is able to test products to make sure it meets a high standard of quality.

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Accounting Analysis

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Accounting Analysis

n this section we discuss both qualitative and quantitative methods to measure and evaluate the credibility of Mattel’s financial statements. The qualitative method consists of the following five steps: key accounting

policies, potential accounting flexibility, strategy analysis, quality of disclosure, and potential “red flags”. We omitted step six, undo accounting distortions, since we believe Mattel’s financial statements are relatively transparent and not misleading. The quantitative method consists of screening ratios used to assess the reliability of Mattel’s public financial disclosures.

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Accounting Analysis Steps Key Accounting Policies As a manufacturing company, Mattel must compete on product quality and innovation, as well as research and development. To maintain a competitive advantage over its competition, Mattel needs to focus on these key success factors. One of the most important key success factors for Mattel is its product quality. Compared to its competitors, Mattel strives to maintain a high reputation for its superior products by investing large amounts of money to reduce product defects. If it wishes to be one of the top toy manufacturers in the world, Mattel must screen its product lines and concentrate on the efficiency of its production facilities. Throughout the world, Mattel has third-party manufacturing factories located in China, Indonesia, Malaysia, and Thailand. Mattel must keep a careful watch on the management of these facilities to ensure high standards of quality over its products.

Mattel’s key success factors include competing on product quality and innovation, as well as research and development

Another reason that Mattel must strive to keep impeccable quality is because of the strict regulations it faces from the Consumer Product Safety Commission (CPSC).7 Mattel and its products are subject to involuntary recalls to ensure product safety and consumer satisfaction. The CPSC has the authority to issue a recall if it encounters a defect upon inspection of the product. For example, in April of 2004, the CPSC forced Mattel to recall 314,000 Batmobiles from its product line. The toy had a pointy rigid back wing that could potentially injure or harm young children.8A This recall caused the total market to forgo nearly $8.5 million in gross sales (based on a $27 retail price). Mattel lost money that was allocated to producing and distributing the product, as well as taking a loss in brand name reputation. Retail stores also lost a percentage of the selling price.

Research and Development is another key success factor for Mattel. In 2003 alone, Mattel spent $167 million in research and development.9 (pg.7) Mattel must evaluate the target population to understand the consumer’s needs. For example, what do kids like these days? What are the trends and fads in the market that Mattel needs to capitalize on? Not only does Mattel employ its own team of developers, but it also hires independent toy designers to develop new innovative toys for the company. The Mattel accounting policy used to pay toy designers is

Accounting Analysis

12

based on the idea of a royalty, which is calculated using a percentage of the net selling price of the new toy.9 (pg.7)

Potential Accounting Flexibility For manufacturing companies like Mattel, the FASB allows several accounting methods to be used in the areas of depreciation, inventory control, goodwill, and pension plans. Accounting choices are widely available, allowing Mattel to have a flexible financial model to work off of. Because of the many choices that Mattel has, it is necessary to provide explanations within the financial statements. Throughout the financial statements there are many footnotes explaining the different policies implemented by the company. Straight line depreciation is the chosen method for depreciating Mattel’s assets. It is used over an estimated useful life from anywhere to three to 40 years depending on whether the items are machinery, buildings, or equipment. These useful lives are reviewed and changes will be made if needed.

Mattel uses FIFO as its inventory policy

Mattel uses FIFO (First In, First Out), as the chosen inventory accounting policy. Under FIFO liquidation, net income is reported lower, thus altering its true value on the income statement, differing from the LIFO inventory policy. Mattel’s policy for amortizing goodwill follows SFAS No. 142. After SFAS No. 142 was issued, Mattel decided to stop amortizing goodwill starting January 1, 2002. The valuation and estimate of the company’s goodwill is important because it could potentially affect net income and other non-current assets, primarily goodwill. Before this statement was issued in 2002, all goodwill was amortized over 20 to 40 years. Tests for impairment on intangible assets and goodwill are done annually to make sure that the carrying value may still be recoverable. The estimation of pension plans follow SFAS No. 87 and No. 106. Mattel and many of its subsidiaries have plans that cover retirement and postretirement benefits. The long term rate of return for Mattel’s domestic benefit plan has been decreasing in the past 3 years. It was at 11% in 2001, then decreased 1 percentage point to 10%, and in 2003 it was at 8%. This change of 1% in the expected return on plan assets would result in an increase in benefit plan expense of about $2 million.9 (pg. 40) This decreasing rate is due to the stock market and declining economic conditions over the past years. The discount rate for liabilities is used to calculate the projected benefit obligation. “This is done at the end of the fiscal year and it is an estimate of the current interest rate at which the benefit plan liabilities could be effectively settled at the end of the year”.9 (pg. 39) The discount rate during the end of 2003 was 6%, which was lower than the two previous years. Because of this decrease of .5% from the previous year, the benefit plan expense will increase by $2 million.9(pg. 39)

Strategy Analysis In a flexible environment, the accounting policies selected by Mattel seem to point out that Mattel is slightly more conservative than aggressive with regards to its strategy. Mattel’s accounting standards are similar to other large toy manufacturers since companies in this industry are competing on quality as well as

Accounting Analysis

13

price. Because Mattel is such a large and established company, it helps set the industry accounting choices.

Conservative Aggressive Mattel

Mattel’s CEO, Robert Eckert, receives about $1.25 million per year from base compensation. His total compensation is about $16 million, not including stock options. About $14.75 million of his compensation is from bonuses and other pay resulting from company growth and earnings.4 He obviously has an incentive to make the company more profitable from year to year. An unprofitable year could result in him losing his job, which corresponds to about a $14 million loss in personal pay. Therefore, there is some risk that the CEO might manipulate numbers to overstate earnings. The firm did not change any accounting policies in 2003, although there were several FASB changes. Despite these FASB changes, none of them affected the results of Mattel’s operations and financial position. Based on previous annual statements, the estimates of sales and revenues seemed to be closely related. As far as we could tell, there were no suspicious 4th quarter changes in estimates or revenues. Due to holiday sales, such as Christmas, numbers do increase in the fourth quarter. At the same time, inventory also increases, suggesting that there is little chance of channel stuffing. Refer to Table 2 and Table 3 below. Notice in the following income statement that Gross Profit rises in the fourth quarter due to seasonal sales. In the balance sheet that also follows, notice that Mattel’s Inventories fluctuate with seasonal trends. In the second and third quarter, inventory begins to rise due to increased production for the expected increased sales in the fourth quarter. Thus, we can reasonably exclude that Mattel exercises channel stuffing to increase their earnings. The rise in sales is consistent with the inventory increasing, and it is explained by the seasonal nature of toys during the holidays.

Table 2

Quarterly Income Statements (In Millions)

Q2 2004 Q1 2004 Q4 2003 Q3 2003

Net Sales 804.0 780.94 1741.15 1704.67

Cost of Goods Sold 437.65 429.27 876.07 864.61

Gross Profit 366.35 351.68 865.08 840.07

Accounting Analysis

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Table 3

Quarterly Balance Sheet (In Millions)

Q2 2004 Q1 2004 Q4 2003 Q3 2003

Cash 363.52 787.97 1152.68 401.39

Receivables 622.66 546.93 543.89 1258.10

Inventories 557.54 402.56 388.66 619.74

Other Current Assets 266.87 255.65 309.63 283.13

Total Current Assets 1810.59 1993.10 2394.86 2562.36

Quality of Disclosure The quality of financial statements and the information disclosed allows analysts and investors to understand the “business reality”.10 (pg. 8) Mattel helps their analysts and investors see the reality of their business through good accounting disclosures. Mattel discloses detailed accounting policies and explanations of how it accounts for each policy in its footnotes. Details and explanations of accounting policies and their effects are noted along with any new accounting pronouncements that do not have an impact on the results of operations or financial position. The details in Mattel’s accounting policies include its GAAP choices and how they are allocated within the company. For example, inventory is assessed using the FIFO accounting policy, and accounting for depreciation is done using a straight-line basis over the estimated useful lives of 10 to 40 years for buildings, 3 to 10 years for machinery and equipment, and 10 to 20 years, for leasehold improvements. The accounting policies also provide detailed information such as the amortization of tools, dies, molds, fixed assets, and the accounting result when property is sold or retired. Mattel discloses any changes in the manner in which it reports, one example being in the case of revenue recognition. In 2003, Mattel changed the way certain close out sales were classified on the consolidated statement of operations. Along with this, Mattel states what the effects on certain accounts are in regards to this accounting change. Mattel also reports when it has a difference in accounting for certain things such as different income and expense items for financial reporting and income tax purposes.9 (pg. 57)

Mattel tends to practice transparent accounting procedures when disclosing information

Mattel relies on a number of toy segments as key assets in their business strategy. It has three main domestic segments of operations that include the following brands: Mattel, Fisher Price, and American Girl. In its annual report Mattel explains exactly what toy brands are associated with which segment, as well as a description of its international segments. Mattel provides financial information on the gross sales in the four regions it operates. Refer to Table 4 below:

Accounting Analysis

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Table 4

Gross Revenues 2003 (In Millions)

Amount Percentage

Europe $1356.1 62%

Latin America $464.2 21%

Canada $185.8 9%

Asia Pacific $171.6 8%

In its annual report, Mattel states that “this narrative discussion applies to all segments except where otherwise stated”.9 (pg. 3) Mattel breaks its financial statements down into specific segments for accounting purposes in its annual report to show revenues, income, and assets of each. Mattel intricately explains both the negative and positive segments associated with where they are sold. Throughout Mattel’s financial statements, it discloses “bad news” information, which refers to material that is not necessarily profitable for the business. For example, in the description of the different segments, Mattel discloses the decreases in gross sales along with possible reasons for the decline. Mattel also discloses several factors that have had a negative impact on revenue. Mattel provides its investors the information they need to make a thorough analysis of the company. Mattel’s website also provides several ways investors can analyze the company, such as annual reports, financial history, SEC filings, earnings releases, investors FAQs, and a securities analyst list. This list is comprised of twelve analysts that have thoroughly evaluated Mattel as a whole, so as to provide investors with a general overview of the company. Potential “Red Flags” Percentage Change

1999-2000 2000-2001 2001-2002 2002-2003

Accounts Receivable -16% -17% -29% 11% Sales 1.60% 2.80% 1.60% 1.70%

• The decrease in accounts receivable in 2002 can be attributed to the large

write-off due to Kmart going out of business.

1999 2000 2001 2002 2003

Reported Income -82,373 -430,969 298,919 230,101 537,632 CFFO 430,463 555,090 756,793 1,156,084 604,802 % Change -81% -23% 61% 76% 12%

• Mattel did not have an increasing gap between its reported net income

and its cash flow from operating activities.

The gap is actually a decreasing one compared to prior years. The decrease in cash flow from operating activities in 2003 from 2002 can be attributed to an increase in working capital, partially offset by increased income from continuing

Accounting Analysis

16

operations. The increase in working capital came from a lower accounts receivable due to shorter payment terms for customers, improved cash collections, and lower inventory levels. Percent Change

1999-2000 2000-2001 2001-2002 2002-2003

Inventory -10% -.5% -30% 14% Sales 1.60% 2.80% 1.60% 1.70%

Mattel came in to 2003 with relatively lower inventories due to working capital improvements made in 2002. Also stated in the annual report was the following: “Management believes that a shift in consumer buying to late December 2003 reduced the inventory re-order flow from Mattel’s customers and was a primary cause for the increase in year end inventory”.9 (pg. 48)

Screening Ratios

1999 2000 2001 2002 2003

Net Sales/Cash from Sales 1.27 1.22 1.17 1.11 1.12 Net Sales/Net Account Receivables 4.34 5.56 6.89 9.95 9.12 Net Sales/Inventory 10.13 9.53 9.85 14.43 12.76 Declining Asset Turnover (Net Sales/Assets) 1.08 1.08 1.06 1.1 1.1

• The Net Sales/Cash from Sales steadily decreases indicating that more

people are buying on a cash basis, or that Mattel is collecting their accounts receivable very quickly.

• The Net Sales/Net Accounts Receivables number is steadily increasing meaning that accounts receivable is getting smaller, which is consistent with the first ratio.

• Net Sales/Inventory is on a downward trend, but jumps back up in the last two years.

• The Declining Asset Turnover is staying at a pretty constant rate which indicates that the assets are being used in the same proportion to the sales.

Ratio Analysis & Forecast Financials

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he purpose of this report is to perform a financial ratio analysis on Mattel as well as to forecast the company’s financial statements for the upcoming ten years. From the derived ratio analysis data we will be able to

benchmark individual competitors as well as compute an entire industry average. By finding the industry average, this will allow us to more fully understand how Mattel operates in comparison with the rest of the toy industry.

T Ratio analysis is important because it allows us to rate Mattel on an individual basis as well as compare it to other companies within the industry. By conducting ratio analysis, this will help us focus more in depth on Mattel’s underlying strengths and weaknesses. This type of analysis is important to shareholders and investors because it allows us to create insider information from material that is readily available to the public.

Financial Ratio Analysis

2003 2002 2001 2000 1999

Current Ratio 1.63 1.45 1.31 1.17 1.18 Quick Asset Ratio 1.16 1.07 0.82 0.71 0.80 A/R Turnover 9.12 9.95 6.90 5.56 4.59 Days 40.00 36.60 52.90 65.60 79.58 Inventory Turnover 6.51 7.46 5.20 5.25 5.53 Days 56.10 48.90 70.10 69.50 65.90 Working Capital Turnover 5.35 6.60 9.69 18.75 16.04 Gross Profit Margin 0.49 0.48 0.47 0.45 0.47 Operating Expense Ratio 20.22 21.50 19.50 20.70 18.89 Net Profit Margin 0.11 0.10 0.06 -0.09 -0.02 Asset Turnover 1.10 1.10 1.03 1.08 0.98 Return on Assets 0.12 0.11 0.07 -0.10 -0.02 Return on Equity 0.24 0.24 0.17 -0.31 -0.04 Debt to Equity 1.04 1.25 1.61 2.07 1.38 Times Interest Earned 7.51 10.15 4.88 3.63 3.27


18

Liquidity Overall, Mattel has a positive liquidity analysis, with only the working capital ratio being negative. The current ratio shows positive evaluation because of an increase in current assets compared to a slight decrease in current liabilities, thus allowing the firm to increase its liquidity. Through the quick asset ratio we found that the company is in good standing with credit. From 1999 to 2003, Mattel has been able to increase its quick asset ratio by .36. The positive accounts receivable turnover shows the company is able to turnover its sales on credit faster, allowing it to gain more liquidity. In the last five years Mattel has been able to improve its accounts receivable turnover days by about 50 percent, increasing it by 40 days. With a positive increase in inventory turnover and accounts receivable turnover, the company has been able to use its working capital positively. Although inventory turnover has slightly decreased in prior years, overall the past five years has shown an increase of five days. The negative effect working capital has shown is due to an increasing gap between current assets and current liabilities. The difference has grown by 31 percent over the last five years. Sales have increased, while working capital has decreased, allowing for a negative effect on working capital turnover. Mattel’s ability to conduct operations could be negatively impacted should these or other adverse conditions affect its primary sources of liquidity.

Mattel has a positive liquidity analysis

Profitability

Common Size Income Statement

2003 2002 2001 2000 1999

Sales 100.00% 100.00% 100.00% 100.00% 100.00% Cost of Goods Sold 51.00% 51.67% 54.16% 55.01% 52.52% Gross Profit on Sales 48.98% 48.33% 45.84% 44.99% 47.48% Selling & Admin. Exp 20.22% 21.50% 20.57% 20.71% 18.88% Income from Operations 15.84% 15.02% 12.36% 3.64% 6.45% Interest Expense 1.62% 2.33% 3.31% 3.28% 2.86% Income before Taxes 14.94% 12.72% 9.17% 4.83% 3.70% Income Tax Expense 4.10% 3.40% 2.50% 1.18% 1.34% Net Income 10.84% 9.32% 6.67% 3.65% 2.36%

Gross profit on sales (positive effect), operating expense ratio (negative effect), and net profit margin (positive effect) are all used in evaluating overall operating efficiency. The operating efficiency was positive even though there was a rise in


19

the operating expense ratio. In 2003 .10 cents of every dollar was preserved as profit, compared to years 1999 and 2000, where there was a negative profit held. The operating expense ratio changed over the past years due to an increase in the selling and administrative expenses. Using asset turnover we found that Mattel has had a favorable impact in that they have utilized their assets efficiently to generate sales revenue. For every dollar invested in 2003, Mattel generated $1.09 of sales compared to 1999, where every dollar invested only generated 98 cents. This positive asset productivity shows that they are capable of supporting their sales volume. Mattel’s return on assets has shown a favorable impact by 15% because of the increase in net income over the last five years. An increase in both asset turnover and net profit margin influenced the return on assets to have a favorable impact. Mattel’s positive return on equity shows the profitability of the owner’s interest in total assets. This impact has grown from a negative .042 to a positive .24 over the last five years proving that the owner’s have invested a greater interest in total assets. Capital Structure The capital structure ratios of Mattel prove that it acquires its assets efficiently. The debt to equity ratio has had a favorable impact over the last five years because the owner’s equity increased greatly in 2003. In 1999 Mattel was using more debt than equity with a ratio of 1.38 compared to 2003 where the ratio was 1.04. This shows it is using more equity financing now than in 1999. This ratio also indicates that the firm has $1.03 of liabilities for every dollar of owner’s equity. The times interest earned ratio shows that Mattel is earning double the amount in 2003 than it did in 1999 because of a decrease in its interest expense. This proves that Mattel is creditworthy because its overall times interest earned ratio is considerably higher in 2003 than it was in 1999.

Mattel’s capital structure ratios indicate that it acquires its assets efficiently


20

Cross Sectional (Benchmark) Analysis Liquidity Ratios Current Ratio: Year Mattel Jakks Hasbro Industry Average

1999 1.18 3.55 1.03 2.29 2000 1.17 3.08 1.27 2.18 2001 1.31

Current Ratio

0123456

1999 2000 2001 2002 2003

Year

Valu

es

MattelJakks Pac.HasbroIndustry Avg

4.12 1.8 2.96 2002 1.44 3.71 1.48 2.60 2003 1.63 5.46 1.62 3.54

Quick Asset Ratio: Year Mattel Jakks Hasbro Industry Avg 1999 0.78 2.97 0.66 1.82 2000 0.71 2.04 0.66 1.35 2001 0.82

Quick Asset Ratio

01234

1999 2000 2001 2002 2003

Year

Valu

es MattelJakksHasbroIndustry Avg

2.95 1.06 2.01 2002 1.07 3.59 1.09 2.34 2003 1.16 1.20 1.21 1.21


21

Inventory Turnover: Year Mattel Jakks Hasbro Industry Avg

1999 5.53 5.42 4.16 4.79 2000 5.25 4.91 4.99 4.95 2001 5.20

Inventory Turnover

0

2

4

6

8

10

1999 2000 2001 2002 2003

Year

Valu

es Mattel

Jakks

Hasbro

Industry Avg

5.13 5.63 5.38 2002 7.46 4.72 5.78 5.25 2003 6.51 4.26 7.62 5.94

A/R Turnover: Year Mattel Jakks Hasbro Industry Avg 1999.00 4.59 4.83 3.90 4.37 2000.00 5.56 5.36 2.40 3.88 2001.00 6.89 5.18 2.09 3.64 2002.00 9.95 4.64 5.07 4.86 2003.00 9.11 3.67 5.17 4.42

A/R Turnover

02468

1012

1999 2000 2001 2002 2003

Year

Valu

es

MattelJakksHasbroIndustry Avg


22

Working Capital Turnover:

Year Mattel Jakks Hasbro Industry Avg 1999 16.04 1.62 28.15 14.89 2000 18.75 2.90 4.92 3.91 2001 9.69 2.44 2.00 2.22 2002 6.60 2.40 2.36 2.38 2003 5.35 1.36 2.22 1.79

Working Capital Turnover

05

1015202530

1999 2000 2001 2002 2003

Year

Valu

es


Profitability Ratios Gross Profit Margin: Year Mattel Jakks Hasbro Industry Avg

1999 47.5% 41.4% 59.9% 50.6% 2000 44.9% 41.0% 55.8% 48.4% 2001 47.1% 42.2% 57.2% 49.7% 2002

48.3% 42.1% 61.0% 51.5%

2003

49.0% 40.1% 59.0% 49.5%

Gross Profit Margin

0%20%40%60%80%

1999 2000 2001 2002 2003

Year

Perc

ent



23

Operating Expense: Year Mattel Jakks Hasbro Industry Avg 1999 18.9% 27.9% 18.9% 23.4% 2000 20.7% 37.9% 22.8% 30.3% 2001 19.5% 31.5% 23.6% 27.6% 2002 21.5%

Operating Expense Ratio

0%10%20%30%40%

1999 2000 2001 2002 2003

Year

Perc

ent


29.6% 23.3% 26.5% 2003 20.2% 33.5% 21.5% 27.5%

Net Profit Margin: Year Mattel Jakks Hasbro Industry Avg 1999 -1.8% 12.0% 4.5% 8.2% 2000 -9.2% 11.4% -3.8% 3.8% 2001 6.4% 9.9% 2.1% 6.0% 2002 9.9% 10.1% -6.1% 2.0% 2003 10.8% 6.5% 5.0% 5.8%

Net Profit Margin

-15%-10%

-5%0%5%

10%15%

1999 2000 2001 2002 2003

Year

Perc

ent

Mattel

Jakks

Hasbro

IndustryA


24

Asset Turnover: Year Mattel Jakks Hasbro Industry Avg 1999 0.98 0.79 0.95 0.87 2000 1.08 1.01 0.99 1.00 2001 1.04 1.00 0.84 0.92 2002 1.10

Asset Turnover

0.00.20.40.60.81.01.2

1999 2000 2001 2002 2003

Year

Valu

e


0.76 0.90 0.83 2003 1.10 0.59 0.99 0.79

Return on Assets: Year Mattel Jakks Hasbro Industry Avg. 1999 -1.8% 9.4% 4.2% 6.8% 2000 -10.0% 11.5% -3.8% 3.9% 2001 6.6% 9.9% 1.8% 5.9% 2002 10.8% 7.7% -5.4% 1.1% 2003 11.9% 3.8% 5.0% 4.4%

Return on Assets

-15%-10%

-5%0%5%

10%15%

1999 2000 2001 2002 2003

Year

Perc

ent Mattel

JakksHasbroIndustry Avg.


25

Return on Equity: Year Mattel Jakks Hasbro Industry Avg. 1999 -4.2% 11.7% 10.1% 10.9% 2000 -30.7% 14.0% -10.9% 1.6% 2001 17.2% 11.6% 4.4% 8.0% 2002 24.4% 8.7% -14.3% -2.8% 2003 24.3% 5.3% 11.2% 8.3%

Return on Equity

-40%

-20%

0%

20%

40%

1999 2000 2001 2002 2003

Year

Perc

ent Mattel

JakksHasbroIndustry Avg.

Capital Structure Ratios Debt to Equity: Year Mattel Jakks Hasbro Industry Avg

1999 1.38 0.24 1.38 0.81 2000 2.07 0.22 1.88 1.05 2001 1.61 0.16 1.49 0.83 2002 1.25 0.13 1.64 0.89 2003 1.04 0.39 1.25 0.82

Debt to Equity

0.00.51.01.52.02.5

1999 2000 2001 2002 2003

Year

Valu

e



26

Times Interest Earned: Year Mattel Jakks Hasbro Industry Avg 1999 3.27 N/A 4.72 4.72 2000 3.63 N/A -0.91 -0.91 2001 4.88 N/A 2.04 2.04 2002 10.15 N/A 2.83 2.83 2003 7.51 N/A 6.57 6.57

Times Interest Earned

-202468

1012

1999 2000 2001 2002 2003

Year

Valu

es

Mattel

Hasbro

IndustryAvg

Liquidity The decrease in accounts receivable turnover is the most negative factor in the liquidity evaluation. The only company that demonstrates this negative aspect is Jakks Pacific because they ended 2003 with a 3.67 turnover ratio. Jakks Pacific also has the highest current ratio and because of this, the industry average is greater. Mattel is below the average, which could affect the ratio in future years. Mattel is above the industry average for accounts receivable turnover and working capital, which leads to a positive effect for the company. Mattel is below the industry average in other ratios which can either be positive or negative, depending on how it is viewed. We would like to see Mattel’s current ratio and quick asset ratio increase in future years. Profitability Net Profit margin, ROE, and ROA ratios have been above industry average only in the last year. Because these ratios are higher than the industry’s average, Mattel has shown that they are utilizing its assets efficiently to generate sales revenues. Capital Structure Mattel is above the industry’s average for debt to equity and times interest earned. Because of the debt to equity ratio being higher than average, Mattel is more risky than other companies. The reason for the industry average being low is due to the fact that Jakks Pacific is low in comparison with Mattel and Hasbro. Mattel has to work a little harder than Hasbro which makes Mattel’s times interest earned ratio higher. We came to the conclusion that Mattel and Hasbro are strong competitors in this industry. Jakks Pacific is still a competitor, but not as threatening as Hasbro.


27

Financial Statement Forecasting Methodology Income Statement When selecting forecasting methods for the income statement, it is very important to use the most appropriate model for each item listed. The most important number to forecast is the Gross Sales number. If this number is not forecasted accurately, the rest of the incomes statement will not reflect the best estimate—even if all the other numbers are forecasted accurately. Also, it is important to forecast the sales number in consideration of the Maximum Sustainable Growth rate. If the forecast growth percentage is higher than the maximum sustainable growth rate, then there is a problem with the forecast. We computed the MSG by first calculating the Return on Equity for the last three years. We then calculated the payout ratio, and entered the numbers into the maximum sustainable growth rate formula, {SGR=ROE*(1-Payout Ratio)}, to get the result (Table 5).

Table 5 2001 2002 2003 ROE 0.1719298 0.1162885 0.2425774 Dividend Payout Ratio 0.0693 0.0479 0.3251 Max SGR 16.00% 11.07% 16.37%

According to these findings, the average SGR in the past three years is 14.48. This means that Mattel could theoretically grow at about 14% per year. There are several reasons why this number is so high. It doesn’t seem logical to assume that Mattel will grow at 14%. One reason why Mattel has such a high SGR is because it is a very established company that is capable (from past records) of earning quite a bit of cash each year. Mattel has a fairly high earnings retention rate, which means that Mattel invests a large percentage of cash back into the business. Theoretically, by making lots of money, getting a large return on equity, and investing profits back into the business, a company could grow at a fairly high rate. There are other factors, however, which limit the growth rate of Mattel. The market does not allow enough room (open market share) for this kind of growth. In other words, if Mattel decided to increase production by 16% in an attempt to grow at the maximum sustainable growth rate, they would end up producing many products that would not be sold, and the profits of the company would not be able to keep up with the SGR. In light of these facts, we chose to calculate sales forecasts using an average sales growth figure from the last five years. We calculated the growth rate of sales for each of the last five years and averaged the percentages. The average rate at which sales increases from year to year is 1.9 % (Table 6). We used this figure to estimate sales for the following ten years.

Table 6 (In Millions)

1999 2000 2001 2002 2003 Sales 4595.50 4565.50 4687.90 4885.30 4960.10 Average

Implied Growth Rate -0.0066 0.02611 0.04041 0.01508 1.9%

We forecasted the Income Statement using a variety of methods, including a 5 year moving average and a simple average


28

The next number listed on the income statement is the Cost of Sales. To get an accurate forecast of the Cost of Sales, we chose to calculate the average Cost of Sales divided by sales. In Table 7 below, these percentages for the last five years were taken from the common size income statement:

Table 7 Cost of Goods Sold 51% 51.67% 54.16% 55.01% 52.52%

These percentages represent the Cost of Sales as a percentage of Sales. The average of these figures is 52.87%, which is the percentage we used to forecast Cost of Sales for the next ten years. The values of cost of sales are found by multiplying .5287 by the sales number in the respective years. Gross profit can then be calculated by subtracting the Cost of Goods Sold from Sales. To estimate SG&A expenses for the next ten years, we decided to use a five year moving average. This method seems sensible, because these expenses seem to increase or decrease by a small amount, with no apparent pattern or rate. By taking a five year moving average, you get a sensible number that is based on recent historical data, which in this case is reliable. The category “other expenses,” is actually comprised of restructuring charges and amortization of goodwill. The past five years data on each of these categories below is represented in Table 8.

Table 8 (In Millions) 1999 2000 2001 2002 2003

Restructuring Charges 281.10 15.90 15.70 24.60 4.80 Amortization of goodwill 52.00 46.60 46.10 0.00 0.00 Total (Other expenses) 333.10 62.50 61.80 24.60 4.80

As we can see from Table 8, the amortization is paid off in 2001. There is no need to assume any more goodwill amortization payments. The restructuring charges are also following a trend which suggests they are diminishing to an insignificant amount. When totaled, we can see that these expenses have been, for the most part, paid off, and there is no need to assume that Mattel will be incurring these expenses (significant in amount) in the next ten years. Therefore, they are forecasted at zero. Operation Income was forecasted by taking the forecasted gross profit minus the forecasted SG&A and other expenses. The next number to forecast is the Interest Expense/Income, net. It seems as if the numbers in the last five years have declined over some relatively stable figure. By calculating the average percentage change from year to year, we found an average decline rate of 15%. This percentage is then used to calculate the interest expense for the next ten years. The “Other, net” category is a collection of other expenses and incomes which have been netted together to come up with either a positive or negative figure. The numbers are quite small and therefore insignificant. However, we decided to forecast them out so that our net income number would be as accurate as possible. The numbers do not seem to follow any sort of pattern, so we felt the best method of forecast was the simple average. Each year there might be a


29

substantial difference from the forecast and the actual in the future, but the number should converge upon the average over time—assuming Mattel does not make any major changes in the company. This is why we feel that the average number of -1.34 provides a pretty good estimate for this item. Income Before Taxes can be found by taking Interest Expense and Other, net and subtracting them from Operation Income. Tax Expense is obviously just a tax rate multiplied by the Income Before Taxes. We used the past five year’s information to calculate an average tax rate which we could use for the next ten years. The average tax rate is 28.5% (Table 9).

Table 9 (In Millions) 1999 2000 2001 2002 2003

Income Before Tax 170.10 225.40 429.90 621.50 740.90 Income Tax – Total 61.80 55.20 119.10 166.50 203.20 Tax/Income Percentage 0.363316 0.2449 0.27704 0.2679 0.27426 Average tax rate 0.28548

After calculating all of the numbers, we can compile an income statement using the last five years information and forecasting ten years into the future. Although the income statement has been forecasted using the most logical assumptions and calculations, there is always a fair amount of estimating involved, which means there is a margin for error. For instance, we assumed that Mattel would have no goodwill to amortize or any more restructuring charges in the next ten years. Although this is a fair assumption, it definitely has its weaknesses. For example, if Mattel entered into a merger in which it bought out another company next year, there could be a debit to the intangible asset goodwill, and it would have to be written off or amortized as an expense. Without true insider information there is no way to predict such events. Thus, we feel our assumption is logical, but not infallible. Recall that the SGR for Mattel is around 14%. By looking at the Forecasted Income Statement, we can calculate that the average growth of Net Income is 5.5%. This is a very attainable growth rate according to the SGR. It is also very logical that a company could grow at five and a half percent a year when you take into account certain factors. Although the market has little room for growth, sales can grow due to a factor of inflation that can be added in. For instance, if inflation is around 1.5%, we can assume that Mattel would have to adjust its prices by about the same amount, thus increasing its sales in dollar amounts without actually expanding the business. We would also have to take into account that this change may increase some expenses. The 5.5% average change in growth is also partially explained by the lowering of expenses. It seems that on the average, Mattel’s expenses have been declining over the past five years. This change in expenses reflects a positive change in the net income, or a growth over time. Another factor that comes into play when forecasting is extraordinary items. There is no way to forecast extraordinary items because they are, by definition, extraordinary. For example, Mattel could make some changes in its accounting policies which could affect one or all of the financial statements. It could choose


30

to sell a portion of its business or concentrate heavily on a certain product. Mattel could also decide that they need cash to add a new segment to its business. There are numerous examples of extraordinary items that could be discussed, but as we can see, they are quite difficult to predict. There are an infinite number of factors that can affect the potential accuracy of forecasts, but it all depends on the decisions that Mattel makes in the next ten years. If it continues to run the business similar to past operations, we can probably expect our forecasts to be relatively accurate. If, on the other hand, Mattel begins to change the nature or decision making process of their business, our forecasts might be highly inaccurate. A copy of the forecasted income statement is located in Appendix A. Balance Sheet The Balance Sheet was forecasted similar to that of the Income Statement. It was forecasted out ten years using either a moving average or a weighted growth rate. The Current Assets were all computed using a five year weighted average because there wasn’t a perceived growth pattern involved. The Long Term Assets, on the other hand, were computed using a mixture of a weighted growth rate and moving average. We assumed that Property, Plant, and Equipment would steadily grow in the future, therefore, we cut off a portion of the tail and came up with a 5.3% growth rate. The same was done for Accumulated Depreciation, except with a 13% growth rate. The last two items, Intangibles and Other Long Term Assets were both forecasted using a five year moving average since no apparent growth trend could be observed. With the Liabilities section of the Balance Sheet we also used multiple forecasting models. Because Accounts Payable, Other Liabilities, and Long Term Debt didn’t seem to be demonstrating any type of particular growth, we decided to use a moving average to predict these values. Notes Payable and Other/Deferred Tax, on the other hand, did seem to be growing at a certain rate. This rate was calculated to be .31% for Notes Payable and 10% for Other/Deferred Tax. Finally, the Shareholder’s Equity portion of the Balance Sheet, with the exception of Total Shareholder’s Equity, was all forecasted using a five year moving average since no apparent growth trend could really be observed. Total Shareholder’s Equity was computed so that they equal the difference between Total Assets and Total Liabilities. Other Equity has been adjusted so that all the Shareholder’s Equity items will equal the Total Shareholder’s Equity amount. We feel that these two forecasting models (weighted growth rate and five year moving average) did the best job at forecasting Mattel’s Balance Sheet. But, like we mentioned above, there are numerous incidents that can arise within the upcoming years. Forecasting the later years of the Balance Sheet can become quite inaccurate, if not done carefully, especially considering the fact that we really don’t know what the future holds in store for Mattel. A copy of the Balance Sheet can be found in Appendix C.


31

Statement of Cash Flows The Statement of Cash Flows was relatively simple to forecast once we had the other two financial statements estimated. Rather than forecasting the cash flow statement using a particular growth rate, we took our forecasts from the Income Statement and Balance Sheet and used them to calculate our future cash flow streams. The only potential sources of error when forecasting the Statement of Cash Flows could be attributed to miscalculations in estimates. Since all of our cash flow information was derived from the other forecasted financial statements, this could possibly lead to inaccuracies in our forecasted cash flow statement.

Valuations Analysis

32

Valuations Analysis

he purpose of assessing our company is to aid in the valuation and future decision making of Mattel. Every department of a company, from human resources to security analysts, uses valuations to guide their daily decisions.

Valuations are necessary to price such things as initial public offerings, stock prices, and even estimates of a firm’s equity. Valuation is the process of converting a forecast into an estimate of the value of the firm or some component of the firm.10

T Valuations There are six different methods of valuing Mattel, which include the following: method of comparables, discounted dividends, discounted free cash flows, discounted residual income, abnormal earnings growth, and long run average residual income perpetuity based on the P/B ratio. All of these models will help us identify whether the share price is undervalued, overvalued, or reasonably valued. Discounted dividends is a stream of dividends discounted back using the cost of equity. By calculating the cost of equity, we can find the weighted average cost of capital (WACC). When we use the WACC we can determine Ke which is necessary to perform some of the valuation models. There are three main methods to calculate the discounted dividends and discounted free cash flows models. The first method will calculate Ke based on the value of the firm, the cost of debt, and the tax rate. The next method will find Ke using the beta of the risk free rate and the market rate. Method three uses regression to find the beta, and then we insert that number into the formula used in the second method. The method of comparables is used to compute a value which is based on the average multiple of competitors in the industry. There are two direct competitors in the industry which are successful; Hasbro and Jakks Pacific.

Valuations Analysis

33

Method of Comparables Valuation

3rd Quarter 2004 EPS BPS DPS PPS SPS

Hasbro 0.97 8.02 0.24 17.69 16.47 Jakks Pacific 1.38 17.28 0.00 15.76 18.32

Mattel 1.18 5.11 0.40 17.29 11.60

Price/Earnings Hasbro 18.23 Mattel 14.65

Jakks Pacific 11.42 (Not included in average) Average = 14.83 (1.18) = $17.49

Price/Book Hasbro 2.21 Mattel 3.38

Jakks Pacific 0.91 (Not included in average) Average = 1.56 (5.11) = $7.97

Dividend/Price Hasbro 0.01 Mattel 0.02

Jakks Pacific N/A (Not included in average) Average = .01 = .4/P = $40.00

Price/Sales Hasbro 1.07 Mattel 1.49

Jakks Pacific 0.86 (Not included in average) Average = .97 (11.60) = $11.20

The method of comparables is a valuation method that allows us to choose Mattel’s two direct competitors to determine the best indicator of Mattel’s price using numbers from the current year.1 Hasbro, Jakks Pacific, and Mattel are all competitors and represent the bulk of the toy industry. The price/earnings multiple proved to be the best indicator of stock price at $17.49 compared to the actual price of $17.29. The average of the competitor’s price/earnings multiple is the closest in proximity to Mattel’s price/earnings ratio of $14.65, meaning it is the closest to its price. Mattel seems to have the highest growth rate due to the highest price/earnings multiple.

The method of comparables is a good way of directly comparing Mattel with its other industry rivals

The comparison of the price/book multiple reveals a lower price than Mattel’s actual price because both competitors have lower price/book ratios than Mattel. Jakks Pacific may be considered an outlier because it is significantly lower than Hasbro and Mattel. However, by removing Jakks Pacific, the average would simply be the Hasbro multiple. By using Hasbro, the average price would equal $11.29, which is well below the actual price of $17.29. The dividend/price multiple appears to be too high because Jakks Pacific does not pay dividends; therefore the average is based solely on Hasbro. Another reason

Valuations Analysis

34

for the high multiple is because Mattel pays out more dividends than Hasbro. The average, which is based off of Hasbro, is not going to parallel Mattel’s price. The last of the ratios is the price/sales multiple. This ratio depicts a lower price than Mattel’s actual price. Both competitors have a lower price/sales multiple than Mattel because they are earning more and paying out less. For every dollar of sales earned by Jakks Pacific, it has to pay only $0.86, unlike Hasbro, which has to pay $1.07. Mattel’s multiple shows that it has to pay more than the other two companies; therefore the average of the two competitors is not going to be high enough to reach the actual price of Mattel. Although the previous methods of valuation do their job, they contain some weaknesses. The dividend/price multiple does not have a basis for finding Mattel’s actual price since every company pays different dividends and sometimes none at all. Thus, it is difficult to find a conclusive average. The price found by the dividend/price multiple appears to be inaccurate due to the following factors: First, Jakks Pacific is not paying dividends and second, there are only two direct competitors in the toy industry. Another weakness occurs with outliers that can cause inaccuracies in the averages and prices. For example, Jakks Pacific’s price/book multiple is significantly lower than Hasbro’s and therefore distorts the average. Lastly, there is no real intrinsic valuation to these ratios, and therefore no research or investigation helps support the analysis.

Free Cash Flow and Discounted Dividend Models The first two intrinsic methods used to value Mattel were the discounted dividend and free cash flow model. The free cash flow model uses the weighted average cost of capital (WACC) to estimate a share price for the firm based on a stream of free cash flows. First, we had to forecast the cash flow out to some future time period. The forecasted cash flows for the next ten years can be found in Appendix D.

The free cash flow model is a method used to estimate a share price for Mattel that relies on the forecasted cash flow statement

Based on the assumption that these forecasts are accurate, we can now forecast the free cash flow to the firm and use it to estimate the current share price. We used three methods to calculate the share price for the cash flow and dividend models. For the discounted dividend model, we need to forecast the future dividends that Mattel will distribute. In the past, Mattel’s dividends have grown at about two cents per year. Notice that the company only gave a five-cent dividend in 2001 and 2002 (Table 10). This was probably because of an overall slump in the market due to outside factors (September 11th). We will disregard these two years in our estimate, based on the assumption that they are extraordinary and probably will not occur again in the future. We then see that Mattel pays a dividend each year with about a two cent growth. When we use the discounted dividend model, we will rely on a two-cent per year growth rate.

Table 10 1999 2000 2001 2002 2003

Dividends per share 0.34 0.36 0.05 0.05 0.4

Valuations Analysis

35

In the first cash flow and dividend model we must understand the relationship between the Ke and WACC. The relationship can be seen through the weighted average cost of capital equation:

( )( ) eed

ed

ed

d rVV

VTr

VVV

WACC+

+−+

= 1

For Mattel, each component of the equation is computed below:

• Vd = book value of debt = $2,294,000,000

• Ve = (Price per share) * (shares outstanding) = (19.27)*(414,100,000) = $7,977,780,000

• Vf = Vd +Ve

• Kd = weighted average cost of long term debt:

o 150 mil debt at 6.125% o 450 mil debt at 10.15%

o ( ) 015.06125.600150

= ( ) 076.1015.600450

=

o 091.076.015. =+=dK

• Tax = average tax rate from income statement = 28.4%

WACC =2,294,000,000

10,271,780,000.091( ) 1− .284( )+

7,977,780,00010,271,780,000

Ke( )

From this equation we can estimate the WACC if we have a cost of equity, and vice versa. (For the purpose of this report, this formula will be referred to as the WACC/Ke formula.) Method 1 In method one, the idea is to set up a model for cash flows and dividends and then plug in market data to estimate the current share price. This method represents a true sensitivity analysis, in that there is no estimation of WACC or Ke other than just plugging in various numbers to see which results best fit the criteria. Method 1 is illustrated in Appendix E. By plugging in various numbers to see what works best with the current share price, we find two costs of capitals that seem to work fairly well. First, we found that a WACC of 6.88 with zero growth yields a share price of $19.06, which is only a few cents off of the actual share price of $19.27. However, we found in previous research that Mattel is growing at about two to three percent. So with three percent growth and using a sensitivity analysis, we conclude that an 8.55%

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WACC gets a share price of 19.43, which is only a few cents away from the actual share price of $19.27. Using this WACC in the WACC/Ke formula, we find that:

Ke = .0914 We can then insert this Ke into the discounted dividend model in Appendix E, and it yields a share price of $7.43 with 3% growth. This proves to be consistent with the growth in the cash flow model. However, using a straight sensitivity analysis we find that a better Ke would be either 9.14% with 7.46% growth, which yields a share price of $19.24, or a Ke of 3% with zero growth, which yields a share price of $19.33.

Sensitivity Analysis

Ke 0.03 0.05 0.0914 0 19.33 11.36 5.97 Growth 3 N/A 22.96 7.43 5 N/A N/A 9.58

7.46 N/A N/A 19.24 Method 2 In method 2 we use the same models as method one, but we have estimated the Ke using a professionally estimated beta. Method 2 can be found in Appendix F. The formula to estimate beta is given by the following: )( fmjfj RRBRR −+= Rj is our best estimate of Ke. The professionally estimated beta is stated as .0031. The risk free and market rates are 1.75% and 8.5%, respectively11. With these components we conclude that our estimated Ke is 1.8%. Plugging this Ke into the dividend model yields a share price of $32.64 with zero growth. There are several reasons why this number is distorted from the true value. First of all, a Ke of 1.8% is very unrealistic—this signifies that our company’s cost of equity is just below the risk free rate, which means that 1 share of Mattel stock has about the same risk as a US treasury note, which is nearly impossible. Another reason the share price is not accurate could be because the .003 beta is incorrect or has built-in underlying assumptions that we aren’t aware of. When the Ke of 1.8% is plugged into the WACC/Ke formula, it yields a WACC of 2.8%. This 2.8% WACC in turn yields a share price of $55.15 with zero growth. As expected, the company appears overvalued, but in reality, the WACC should never be this low. The primary reason the share price is too high is because the costs of debt and equity are too low. In the sensitivity analysis below, the Ke of 1.8% and WACC of 2.85% are analyzed at zero, three and five percent growths.


Ke 0.018 0.05 0.119

Growth 0 32.64 11.36 4.49 3 N/A 22.96 5.10 5 N/A N/A 5.81


WACC 0.0285 0.0688 0.0855

Growth 0 55.15 19.06 14.11 3 N/A 29.94 19.43

5 N/A 56.48 27.97

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Method 3 Method three is identical to method two, but instead of using a professionally estimated beta, we will estimate our own beta using regression analysis. This method can be found in Appendix G. We will use the capital asset pricing model R j = αo + β j (Rm,t − Rf ,t ) . The “y” variables for the regression (Rj) are the monthly returns from Mattel for the last 60 months, and the “x” variables are the market risk premiums from the last 60 months. When we run a regression analysis using these variables, we calculate a beta of -.1374. Although it seems strange to get a negative beta, it is possible. A negative beta implies that the company’s stock price moves in the opposite direction of the market. Looking at a five year price history, it is easy to see that Mattel seems to move in the opposite direction than the market.

(Msnmoney.com)

Although the beta seems logical, it does not give a good estimate of Ke. When plugged into the formula )( fmjfj RRBRR −+= as in method 2, it yields a Ke of .0082. This would imply that the Ke for Mattel is less than the risk free rate, which is not possible. The regression calculations are given in Appendix L. When the Ke of .0082 is inserted into the discount dividends model, it yields a share price of $72.46. This is severely overestimated because the cost of equity is far too low. Also, a Ke of .0082 yields a WACC of .021 which equates to a share price of $77.53 in the discounted cash flow model. Once again, this cost of capital produces a share price above the actual value. Using a sensitivity analysis, we find some more realistic Ke and WACC values. For example, in the dividend model, a 5% Ke (which is rather low) yields a share price of $22.96, which is only a few dollars off. The problem in this model is that an unrealistically low cost of equity or cost of capital must be assumed to get a realistic share price.

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Ke 0.0082 0.05 0.119

Growth 0 72.46 11.36 4.49 3 N/A 22.96 5.10 5 N/A N/A 5.81


WACC 0.021 0.0688 0.0855

Growth 0 77.53 19.06 14.11 3 N/A 29.94 19.43

5 N/A 46.48 27.97 Conclusions – Cash Flow and Dividend Models (limitations, strengths, weaknesses) The free cash flow and discounted dividend models seem to work well in some cases and not in others. For example, when we plugged in market data to estimate the share price using a pure sensitivity analysis (method 1 above), we found that there were several weighted average cost of capital figures that allowed the discounted free cash flow model to produce a share price close to the actual given growth rates. The problem in this model is that we cannot tell if the market correctly values the company since there are no independent variables. In other words, estimating the WACC by plugging in numbers is a good way to test the model, but not the company. The same is true for method 1 of the discounted divided model. The model is capable of producing nearly realistic results, but without some estimate of what the cost of equity should be, there is no way to tell how the company should really be valued. It is important to note what values of Ke and WACC are being used, however, since they may be proper estimates, assuming the model is working properly. For example, in our model, to get a realistic share price with about 3% of growth (which seems to be the average growth rate of Mattel), a WACC of 8.55% is needed. With the dividend model, there is no cost of equity that even closely resembles the share price with three percent growth, but upon completion of the sensitivity analysis we find that a 7.46% growth rate seems to work well. So, there is some variation in price estimation between the models. In Method 2 we attempted to calculate Ke with a professionally estimated beta and then calculate the WACC based off that data. Using the YahooFinance.com beta of .003 we found a Ke of 1.8%. We did use this number in the dividend model to try to estimate a share price, but as expected, with a cost of equity that is far too low, we concluded that the company should be priced higher. In this case the discounted dividend model suggests that the company is undervalued, and with zero growth it should sell at a price of about $32.64. Although these are the values that the model has given us, we cannot accept the results. There cannot be any growth with this model above the Ke of 1.8%, and furthermore, adding in growth will only overestimate the share price even more. This Ke of 1.8% yields a WACC of 2.85%, which in the free cash flow model overestimates the share price by even more; at zero growth the price is estimated to be $55.15. In conclusion, this model did not work as well as we would have hoped when estimating Ke using a given beta. In method 3, we decided to estimate our own beta to try to achieve better estimates of the Ke. Using a regression analysis to compare the correlations between the market risk premium and Mattel’s monthly returns, we calculated a beta of -13.74%. We also calculated an R2 of .005, which means that the two numbers do not correlate well. Using this beta, we estimated a Ke of about .8%,

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which is nearly half of the risk free rate. As expected, in both models the share price was far overestimated. Few reasons exist why these models do not seem to perform as they should. The first reason includes the possibility that the YahooFinance.com beta of .003 and our estimated beta of -.1374 are both misstated, and therefore our Ke is not properly estimated. It’s also possible that our estimated beta could have been miscalculated in the regression analysis. The YahooFinance.com beta could be relying on several assumptions that are unknown to us. Another reason that these models may not be working well is that our estimated cash flows and dividend forecasts may be inaccurate. There are several assumptions that went into each of these figures. For example, we assumed that our forecasted net income was an accurate measure to derive the future cash flows. We also assumed that the company would not be making any out-of-the-ordinary purchases and expenditures within the next ten years. These are both factors the market could have been taking into account that we were not. If this information could be properly quantified, it would probably be helpful in creating a better model. Also, when using the dividend model, we assumed that Mattel would pay a dividend that would grow at two cents per year. This assumption could be underestimated if the company decides to pay out a larger dividend, or in the case of 2001 and 2002, dividends were diminished in 2001 and 2002. All of these assumptions could affect the estimated share price in these models, and thus, would be beneficial to know if we were an actual company performing valuations on Mattel. Discounted Residual Income Model In the discounted residual income model, we analyze a stream of residual incomes for the next ten years, include a terminal value, and discount all of the numbers back to the present time. This model can be found in Appendix H. We begin by taking the book value of equity per share, adding in earnings per share, and subtracting out dividends distributed. This gives us the ending book value of equity from which we calculate the following year’s beginning equity. We then calculate the normal income which is simply the Ke multiplied by the beginning book value of equity from the previous year. The difference between earnings per share and normal income is the residual income. We then calculate a perpetuity of the continuing terminal value based on a given growth rate which is variable in the sensitivity analysis. All of these residual incomes, or incomes above the cost of equity, are then discounted back to the present time which gives us the estimated share price. We will use the estimated cost of equity of 1.8%, which was calculated using a professionally estimated beta to see if this model works any better than the previous models. With a Ke of 1.8%, this model gives us a current share price of about $57.08 with zero growth. We feel once again that this number is far too high due to the incredibly low Ke. Also, this price of $57.08 does not even include growth, which would suggest that the company should be priced higher if it intends to keep on growing. With our beta of 1.8%, this model shows that Mattel is undervalued by about $20 per share. We do not feel that this can be possible, so instead, we have performed a sensitivity analysis to see if we can achieve a more realistic Ke and growth rate.

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Ke 0.018 0.0688 0.1 0 53.61 17.41 11.58 Growth 3 N/A 22.33 12.56 5 N/A N/A 13.87

From the data above, we can see in blue our estimated Ke based on a beta of .003. We found that the share price drops drastically in this model with an increase in the Ke. By increasing the Ke to 6.88%, the numbers begin appearing a little more realistic. At a 10% cost of equity, the company appears to be overvalued. Based on this model, we must estimate that the market assumes a cost of equity between 5% and 7%. A 7% cost of equity would still be rather low, but more believable than 1.8%. Using our estimated Ke of 1.8%, we cannot conclude that Mattel stock is over or underestimated. We can see a trend, however, between this model and the previous two, that Mattel might be underestimated by a small amount, but certainly not as much as this model predicts. Conclusions – Discounted Residual Income Model There are certain conclusions that we can draw from the model. The residual income model does seem to be working with the sensitivity analysis, and with realistic figures plugged in for Ke, we can see that it does get close to the actual number. Once again, our estimated Ke is far too low to produce accurate results. This model also relies on the assumption that our forecasted earnings per share and dividends per share are accurate. If these figures are even a little out of range, then the share price will be affected. This is one of the main drawbacks of the residual income model. We can see a trend, however, between this model and the previous two, in that Mattel may be undervalued. We know that we have an estimated Ke that is far too small, but it’s quite possible that the market assumes a Ke that is too large. Our best guess is that the true Ke lies somewhere in between our estimate and the market estimate, and that Mattel is slightly undervalued at the share price of $19.27.

Long Run Average Residual Income Perpetuity Based on the P/B Ratio

P = BVE + BVE ROE − Ke

Ke − G⎛

⎝ ⎜

⎞

⎠ ⎟


Ke 0.0180 0.0210 0.0500 0.0665 0.0914

Growth 0.00 71.33 61.14 25.68 19.30 14.05 3.00 N/A N/A 56.18 30.78 18.30 5.00 N/A N/A N/A 61.60 24.55

The analysis above is simply a perpetuity that conforms or converges to the residual income model. By taking Mattel’s price to book ratio and comparing it to a long run perpetuity of the discounted residual income (ROE – Ke), we can try to estimate the firm’s share price. The book value of equity per share is 5.35 and the

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return on equity is about .24. Inserting these numbers into the formula above, we see that with a given cost of equity, we have all the components needed to value the firm. We found in the previous residual income model that a cost of equity of about 6.88% worked well. It is not unanticipated to see this model yielding a similar result with a similar cost of equity. In the sensitivity analysis above you can see that a cost of equity of 6.55 yields a share price of about $19.30. This share price does not include any growth, which is a factor that certainly needs to be added to the model. We found that with our estimated cost of equity of 1.8%, the company seems to be undervalued by about $50. We know that much of the $50 overvalue is from errors in estimating an appropriate Ke. This model does however tend to show that the company may be undervalued by a small margin. With a higher cost of equity, such as 9.14%, we found the share price to be estimated around $14.05 with zero growth and up to $24.55 with 5% growth. With this same cost of equity and about a 3% growth rate, we see that Mattel should have a share price of about $18.30, which means the company may be overvalued by nearly one dollar. Upon seeing the results of this sensitivity analysis, it is hard to determine whether Mattel is over or undervalued. Without a good estimate of the Ke, it is very hard to know which assumptions to rely on. This model is relatively strong because there are few components involved and the model can also be calculated quickly. It is easy to compute the return on equity and the book value of equity if given the balance sheet. The only weakness to the model is that the Ke can only be estimated, and certain assumptions have to be made in order to estimate it. Upon completion of the sensitivity analysis, it is easy to see that the market is assuming a different cost of equity than we are. We estimate that the cost of equity that the market is using is somewhere between 9% and 10% with this model since it gets closest to the market price of the stock. Abnormal Earnings Growth Model The AEG model is a model that takes into account the present value of the investment opportunities of the dividends paid to the shareholders. The AEG model can be found in Appendix I. In other words, when a company pays a dividend, it is not only important to count the dividend, but also to count the money that could be gained in interest on that dividend payment until the next year. The model does not include the dividend payments themselves, but it is implied that they are included in the earnings per share. The value of the investment opportunity, assuming you can invest at the current cost of capital, is added to the model. The abnormal earnings are then computed as the earnings per share plus any dividend investment opportunities less the normal earnings. These abnormal earnings are then discounted back to the present time and set up as a continuing perpetuity to find the value of each share.

In the AEG model, we use the present value of dividend investment opportunities to estimate a share price

This model turned out to be one of the least effective ways to estimate a share price for Mattel. With our estimated Ke of 1.8%, the model yielded a share price of over $200, which we know is not possible. This model requires that the cost of equity be pretty accurate because many components of the model are affected by it. For example, when the Ke is changed, this will lead to a change in the investment opportunities, normal earnings, abnormal earnings, as well as the present values of the AEG and its corresponding continuing value. Not only will

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all of these items change, but the perpetuity set up for the present time will also change. This is one of the major weaknesses of the model—it relies too heavily on the cost of equity. If an accurate Ke cannot be estimated, the model is not going to produce results that we want.


Ke 0.018 0.05 0.066

Growth 0 267.25 36.55 22.69 3 N/A 42.71 22.79 5 N/A N/A 23.07

Knowing that our estimated Ke was far too low, we conducted a sensitivity analysis to see if we could estimate a proper Ke that would yield a share price closer to the actual price of $19.27. A 6.6% cost of equity is the closest we could achieve, with a value of about $22. This particular model does not seem to be working well for our data set. We need to further evaluate our estimates of earnings per share and dividends for the next ten years. The fact of the matter is that if these estimates are inaccurate, this method will simply not produce the results we are looking for. One thing we did notice about this model is that growth does not seem to affect the results as much as we thought it would. Refer to the sensitivity analysis above: by holding Ke constant, an increase in the growth rate does not seem to increase the value of the share price very much. This model does, however, follow the trend of overshooting the share price of Mattel, implying that the company might be undervalued. Conclusion The previous models used to estimate the share price of Mattel lead us to several conclusions. First, we have concluded based upon each model that our estimated cost of equity of 1.8% is far too low. It is still unknown, however, what the true cost of equity is. We have concluded, based on the valuation models, that the true cost of equity lies within the range of 6%-10% and that the growth rate is somewhere in the range of 3%. We came to this conclusion using pure sensitivity analysis of each of the models listed above. Secondly, we have concluded that Mattel is either properly valued or just a little undervalued. Based on our models, Mattel is not overvalued. There is not enough evidence to support a statement on whether it is undervalued by much, possibly a few dollars at the most. Our prediction is that this small change (if any change) in the stock price will be seen in the next couple of weeks as the market is constantly analyzing information. We do not predict the stock price to rise above $22 or fall below $18. We are fairly confident that these estimates in stock price are reasonably accurate. It would, however, be helpful if we had more information to use in these models. For instance, if we knew exactly what dividends Mattel was planning to give out in the next few years, we would not have to assume a certain rate, and our estimates would be much more precise. Also, information about upcoming factors such as expansion, new product lines, or new business ventures in the future would be helpful in estimating the stock

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price. To the best of our knowledge, Mattel is accurately valued in the market, and we don’t see any drastic changes or volatility in the stock price in the near future.

Appendix

44

Appendix

Appendix A: Forecasted Income Statement

1999 2000 2001 2002 2003 Asssumed Method/Rate 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Sales 4595.50 4565.50 4687.90 4885.30 4960.10 Average Growth = 1.9% 5054.34 5150.37 5248.23 5347.95 5449.56 5553.10 5658.61 5766.12 5875.68 5987.32

Cost of Sales 2413.50 2572.20 2539.00 2524.40 2530.60 Avg Cost/Sales = 52.8% 2668.69 2719.40 2771.07 2823.72 2877.37 2932.04 2987.75 3044.51 3102.36 3161.30

Gross Profits 2182.00 1993.30 2148.90 2361.00 2429.50 Sales - Cost of Sales 2385.65 2430.98 2477.17 2524.23 2572.19 2621.06 2670.86 2721.61 2773.32 2826.01

SG&A Expenses 1552.50 1560.20 1507.80 1602.80 1639.00 5 yr moving average 1572.46 1576.45 1579.70 1594.08 1592.34 1583.01 1585.12 1586.85 1588.28 1587.12

Other Expenses 333.10 62.50 61.80 24.60 4.80 See Explanation 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Operating Income 296.40 370.60 579.30 733.60 785.70 GP-(SG&A+Other Exp) 813.19 854.52 897.46 930.15 979.85 1038.06 1085.75 1134.76 1185.04 1238.90

Interest Expense/Income (Net) (131.60) (142.00) (139.70) (96.20) (61.60) Avg Decline Rate = 15% (52.36) (44.51) (37.83) (32.16) (27.33) (23.23) (19.75) (16.79) (14.27) (12.13)

Other, Net 5.30 (3.20) (9.70) (15.90) 16.80 Simple Average (1.34) (1.34) (1.34) (1.34) (1.34) (1.34) (1.34) (1.34) (1.34) (1.34)

Income Before Tax 170.10 225.40 429.90 621.50 740.90 Opps income + net exp 759.49 808.68 858.29 896.65 951.18 1013.48 1064.66 1116.63 1169.43 1225.43

Income Tax - Total 61.80 55.20 119.10 166.50 203.20 Average Tax Rate = 28.4% 216.45 230.47 244.61 255.55 271.09 288.84 303.43 318.24 333.29 349.25

Net Income 108.30 170.20 310.80 455.00 537.70 Income - Tax 543.03 578.21 613.68 641.11 680.09 724.64 761.23 798.39 836.15 876.18

Implied Growth 0.065 0.061 0.045 0.061 0.066 0.050 0.049 0.047 0.048

Average Growth Rate 0.055

Appendix

45

Appendix B: Common Size Forecasted Income Statement

1999 2000 2001 2002 2003 Method/rate 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sales 100% 100% 100% 100% 100% 5yr Moving Average 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of Goods Sold 53% 55% 54% 52% 51% 5yr Moving Average 53% 53% 53% 52% 52% 53% 53% 52% 52% 52% Gross Profit on Sales 47% 45% 46% 48% 49% 5yr Moving Average 47% 47% 47% 48% 48% 47% 47% 48% 48% 48% Selling & Admin. Exp 19% 21% 21% 22% 20% 5yr Moving Average 20% 21% 21% 21% 21% 21% 21% 21% 21% 21% Income from Operations 6% 4% 12% 15% 16% 13.4% average rate 18% 20% 23% 26% 30% 34% 34% 34% 34% 34% Interest Expense 3% 3% 3% 2% 2% 5yr Moving Average 3% 3% 3% 2% 2% 3% 2% 2% 2% 2% Income before Taxes 4% 5% 9% 13% 15% 15% average rate 17% 20% 23% 26% 30% 35% 35% 35% 35% 35% Income Tax Expense 1% 1% 3% 3% 4% 30% average rate 5% 7% 9% 12% 15% 20% 26% 33% 33% 33% Net Income 3% 4% 6% 10% 11% 12% 13% 14% 14% 15% 15% 9% 2% 2% 2%

Appendix

46

Appendix C: Forecasted Balance Sheet 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Assets Current Assets Cash $247.4 $232.4 $616.6 $1267.0 $1152.7 $703.2 $794.4 $906.8 $964.8 $904.4 $854.7 $885.0 $903.1 $902.4 $889.9 Accounts Receivable $1002.0 $839.6 $665.8 $490.8 $543.9 $708.4 $649.7 $611.7 $600.9 $622.9 $638.7 $624.8 $619.8 $621.4 $625.5 Inventory $436.3 $489.7 $487.5 $338.6 $388.7 $428.2 $426.5 $413.9 $399.2 $411.3 $415.8 $413.3 $410.7 $410.1 $412.2 Other Current Assets $166.2 $189.8 $291.9 $292.5 $309.6 $250.0 $266.8 $282.2 $280.2 $277.8 $271.4 $275.7 $277.4 $276.5 $275.7 Total Current Assets $1851.9 $1751.5 $2061.9 $2389.0 $2394.9 $2089.8 $2137.4 $2214.6 $2245.1 $2216.4 $2180.6 $2198.8 $2211.1 $2210.4 $2203.5 Long Term Assets Tangibles Property, Plant, & Equipment - Gross $955.8 $952.7 $1022.5 $1485.3 $1621.1 $1707.0 $1797.4 $1892.7 $1993.0 $2098.7 $2209.9 $2327.0 $2450.3 $2580.2 $2717.0 Accumulated Depreciation $422.1 $473.0 $550.1 $885.7 $995.2 $1124.5 $1270.7 $1435.9 $1622.6 $1833.5 $1457.5 $1524.0 $1574.7 $1602.5 $1598.4 Property, Plant, & Equipment - Net $533.6 $479.7 $472.4 $599.6 $625.9 $582.4 $526.7 $456.8 $370.4 $265.1 $752.4 $803.0 $875.6 $977.7 $1118.5 Intangibles $1200.6 $1136.9 $1089.4 $703.2 $722.2 $970.4 $924.4 $881.9 $840.4 $867.9 $897.0 $882.3 $873.9 $872.3 $878.7 Other Long Term Assets $1087.9 $945.3 $886.2 $767.9 $768.0 $891.0 $851.7 $833.0 $822.3 $833.2 $846.2 $837.3 $834.4 $834.7 $837.2 Total Long Term Assets $2822.1 $2561.9 $2448.0 $2070.7 $2116.1 $2443.9 $2302.8 $2171.7 $2033.2 $1966.2 $2495.7 $2522.6 $2583.9 $2684.7 $2834.4 Total Assets $4674.0 $4313.4 $4509.8 $4459.7 $4511.0 $4533.7 $4440.2 $4386.2 $4278.3 $4182.6 $4676.3 $4721.4 $4795.0 $4895.2 $5037.8 Liabilities Current Liabilities Accounts Payable $293.3 $339.0 $334.2 $296.3 $289.7 $310.5 $313.9 $308.9 $303.9 $305.4 $308.5 $308.1 $307.0 $306.6 $307.1 Notes Payable $369.5 $226.4 $38.1 $25.2 $19.6 $13.5 $9.3 $6.4 $4.4 $3.1 $2.1 $1.5 $1.0 $0.7 $0.5 Other Current Liabilities $902.6 $937.0 $1193.9 $1327.3 $1158.5 $1103.8 $1144.1 $1185.5 $1183.8 $1155.2 $1154.5 $1164.6 $1168.7 $1165.4 $1161.7 Total Current Liabilities $1565.4 $1502.4 $1566.2 $1648.8 $1467.7 $1427.9 $1467.4 $1500.9 $1492.2 $1463.6 $1465.1 $1474.2 $1476.7 $1472.6 $1469.3 Long Term Liabilities Long Term Debt $982.9 $1242.4 $1020.9 $640.1 $589.1 $895.1 $877.5 $804.5 $761.3 $785.5 $824.8 $810.7 $797.4 $795.9 $802.9 Total Long Term Liabilities $982.9 $1242.4 $1020.9 $640.1 $589.1 $895.1 $877.5 $804.5 $761.3 $785.5 $824.8 $810.7 $797.4 $795.9 $802.9 Other/Deferred Tax $163.0 $165.5 $184.2 $192.1 $237.9 $261.6 $287.8 $316.6 $348.2 $383.1 $421.4 $463.5 $509.9 $560.8 $616.9 Total Liabilities $2711.3 $2910.3 $2771.4 $2480.9 $2294.7 $2584.6 $2632.7 $2622.0 $2601.7 $2632.2 $2711.3 $2748.4 $2783.9 $2829.4 $2889.1 Shareholders' Equity Common Stock $433.6 $435.6 $436.3 $437.2 $441.2 $436.8 $437.4 $437.8 $438.1 $438.3 $437.7 $437.8 $437.9 $438.0 $437.9 Paid-In Capital $1729.0 $1706.6 $1639.0 $1541.2 $1599.3 $1643.0 $1625.8 $1609.7 $1603.8 $1616.3 $1619.7 $1615.1 $1612.9 $1613.6 $1615.5 Retained Earnings $401.6 -$144.4 $132.9 $341.1 $707.4 $287.7 $265.0 $346.8 $389.6 $399.3 $337.7 $347.7 $364.2 $367.7 $363.3 Other Equity -$601.5 -$594.7 -$469.7 -$340.9 -$531.7 -$418.4 -$520.7 -$630.1 -$754.9 -$903.5 -$430.0 -$427.6 -$403.9 -$353.5 -$268.0 Total Shareholders' Equity $1962.7 $1403.1 $1738.5 $1978.7 $2216.2

$1949.2 $1807.5 $1764.2 $1676.6 $1550.4 $1965.0 $1973.0 $2011.1 $2065.7 $2148.8

Appendix

47

Appendix D: Forecasted Cash Flow Statement

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Net Income 543.03 571.21 613.68 641.11 680.09 724.64 761.23 798.39 836.15 876.18 Depreciation Expense 129.30 146.20 165.20 186.70 210.90 (376.00) 66.50 50.70 27.80 (4.10) Amortization of Intangibles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Increase in Accounts Receivable (net) 164.50 (58.70) (38.00) (10.80) 22.00 15.80 (13.90) (5.00) 1.60 4.10 Increase in Inventory 39.50 (1.70) (12.60) (14.70) 12.10 4.50 (2.50) (2.60) (0.60) 2.10 Increase in Accounts Payable 20.80 3.40 (5.00) (5.00) 1.50 3.10 (0.40) (1.10) (0.40) 0.50 Net Cash From Operations 489.13 781.21 824.48 848.31 858.39 331.44 843.73 855.59 862.55 866.38 *Amortization of Intangibles is not applicable because Mattel finished amortizing goodwill in 2001.

Appendix

48

Appendix E: Free Cash Flow & Discounted Dividends Method 1

Free Cash Flow 11/1/2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Cash Flow From Operations (forecasts) 781.21 824.48 848.31 858.39 331.44 843.73 855.59 862.55 866.38 Cash Provided (used) by Investing Activities (forecasts) (90.40) (95.30) (100.30) (105.70) (111.20) (117.10) (123.30) (129.90) (136.80) Free Cash flow (to firm) 690.81 729.18 748.01 752.69 220.24 726.63 732.29 732.65 729.58

Discount two Months 0.16667 1 2 3 4 5 6 7 8 9 Discount Rate (WACC) 0.0855

Discount Factors 0.9864 0.9212 0.8487 0.7818 0.7202 0.6635 0.6113 0.5631 0.5188 0.4779 Present Value of Free Cash Flows 636.40 618.84 584.81 542.12 146.13 444.15 412.36 380.07 348.66 Total Present Value of Annual Cash Flows 4057.68 4113.54 Continuing (Terminal) Value (assuming no growth) 6282.20 Sensitivity Analysis Value of Continuing Perpetuity 13145.59 Value of the Firm (end of 2003) 10339.87 WACC 0.04 0.0688 0.0855 Growth Rate 0.03 Book Value of Debt and Preferred Stock 2294.70 Growth 0 37.42 19.06 14.11 Value of Equity (end of 2003) 8045.17 3 130.25 29.94 19.43 Estimated Value Per Share 19.43 5 N/A 56.48 27.97

Discounted Dividend

Discount Rate (Ke) 0.0914 Discount Factors 0.986 0.916 0.840 0.769 0.705 0.646 0.592 0.542 0.497 0.455

Actual Dividends Per Share (Forecasted) 0.44 0.46 0.48 0.50 0.52 0.54 0.56 0.58 0.60 Present Value of Forecast Dividends 0.40 0.39 0.37 0.35 0.34 0.32 0.30 0.29 0.27 Sum of Dividend Present Values 2.99 3.03 Value of Perpetuity of Dividends in 2003 Dollars 16.25 Sensitivity Analysis Value of Continuing Perpetuity 35.71 Estimated Share Value (sum of above two items) 19.24 Ke 0.03 0.05 0.0914 Growth Rate 0.0746 Growth 0 19.33 11.36 5.97 3 N/A 22.96 7.43

Actual Price Per Share 19.27 5 N/A N/A 9.58 Shares Outstanding 414.1 7.46 N/A N/A 19.24

*In millions of dollars

Appendix

49

Appendix F: Free Cash Flow & Discounted Dividends Method 2

Free Cash Flow 11/1/2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Cash Flow From Operations (forecasts) 781.21 824.48 848.31 858.39 331.44 843.73 855.59 862.55 866.38 Cash Provided (used) by Investing Activities (forecasts) (90.40) (95.30) (100.30) (105.70) (111.20) (117.10) (123.30) (129.90) (136.80) Free Cash flow (to firm) 690.81 729.18 748.01 752.69 220.24 726.63 732.29 732.65 729.58 0.166667 1 2 3 4 5 6 7 8 9

Discount Rate (WACC) 0.0285 Discount Factors 0.9953 0.9723 0.9453 0.9192 0.8937 0.8689 0.8448 0.8214 0.7987 0.7765

Present Value of Free Cash Flows 671.67 689.33 687.53 672.67 191.37 613.89 601.52 585.14 566.54 Total Present Value of Annual Cash Flows 5254.99 5279.66 Continuing (Terminal) Value (assuming no growth) 19878.76 Sensitivity Analysis Value of Continuing Perpetuity 25599.30 Value of the Firm (end of 2003) 25133.76 WACC 0.0285 0.0688 0.0855 Growth Rate 0 Book Value of Debt and Preferred Stock 2294.70 Growth 0 55.15 19.06 14.11 Value of Equity (end of 2003) 22839.06 3 N/A 29.94 19.43 Estimated Value Per Share 55.15 5 N/A 56.48 27.97 Discounted Dividend


Actual Dividends Per Share (Forecasted) 0.44 0.46 0.48 0.50 0.52 0.54 0.56 0.58 0.60 Present Value of Forecast Dividends 0.43 0.44 0.45 0.47 0.48 0.49 0.49 0.50 0.51 Sum of Dividend Present Values 4.25 4.27 Value of Perpetuity of Dividends in 2003 Dollars 28.39 Estimated Share Value (sum of above two items) 32.64 Sensitivity Analysis Value of Continuing Perpetuity 33.33 Ke 0.018 0.05 0.119 Growth Rate 0 Growth 0 32.64 11.36 4.49

Actual Price Per Share 19.27 3 N/A 22.96 5.10 Shares Outstanding 414.1 5 N/A N/A 5.81


Appendix

50

Appendix G: Free Cash Flow & Discounted Dividends Method 3 Free Cash Flow 11/1/2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Cash Flow From Operations (forecasts) 781.21 824.48 848.31 858.39 331.44 843.73 855.59 862.55 866.38 Cash Provided (used) by Investing Activities (forecasts) (90.40) (95.30) (100.30) (105.70) (111.20) (117.10) (123.30) (129.90) (136.80) Free Cash flow (to firm) 690.81 729.18 748.01 752.69 220.24 726.63 732.29 732.65 729.58

0.166667 1 2 3 4 5 6 7 8 9 Discount Rate (WACC) 0.021

Discount Factors 0.997 0.980 0.959 0.940 0.921 0.902 0.883 0.865 0.847 0.830 Present Value of Free Cash Flows 676.6544 699.6025 702.9627 692.8661 198.581 641.7458 633.492 620.8159 605.5465 Total Present Value of Annual Cash Flows 5453.42 5472.267 Continuing (Terminal) Value (assuming no growth) 28945.82 Sensitivity Analysis Value of Continuing Perpetuity 34874.76 Value of the Firm (end of 2003) 34399.23 WACC 0.021 0.0688 0.0855 Growth Rate 0 Book Value of Debt and Preferred Stock 2294.70 Growth 0 77.53 19.06 14.11 Value of Equity (end of 2003) 32104.53 3 N/A 29.94 19.43 Estimated Value Per Share 77.53 5 N/A 56.48 27.97 Discounted Dividend


Actual Dividends Per Share (Forecasted) 0.44 0.46 0.48 0.50 0.52 0.54 0.56 0.58 0.60 Present Value of Forecast Dividends 0.44 0.45 0.47 0.48 0.50 0.51 0.53 0.54 0.56 Sum of Dividend Present Values 4.48 4.48 Value of Perpetuity of Dividends in 2003 Dollars 67.99 Estimated Share Value (sum of above two items) 72.46 Sensitivity Analysis Value of Continuing Perpetuity 73.17073 Ke 0.0082 0.05 0.119 Growth Rate 0 Growth 0 72.46 11.36 4.49

Actual Price Per Share 19.27 3 N/A 22.96 5.10 Shares Outstanding 414.1 5 N/A N/A 5.81


Appendix

51

Appendix H: Residual Income Residual Income

11/1/2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Beginning BE (per share) 5.35 6.24 7.20 8.22 9.29 10.43 11.66 12.96 14.33 15.77 EPS 1.31 1.40 1.48 1.55 1.64 1.75 1.84 1.93 2.02 2.12 DPS 0.42 0.44 0.46 0.48 0.50 0.52 0.54 0.56 0.58 0.60 Ending BE (per share) 5.35 6.24 7.20 8.22 9.29 10.43 11.66 12.96 14.33 15.77 17.28 "Normal" Income 0.10 0.11 0.13 0.15 0.17 0.19 0.21 0.23 0.26 0.28 Residual Income (RI) 1.22 1.28 1.35 1.40 1.48 1.56 1.63 1.69 1.76 1.83 N 0.1667 1 2 3 4 5 6 7 8 9 PV Factors 0.98 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 Present Value of RI 1.17 1.12 1.05 1.01 0.97 0.92 0.87 0.82 0.78

Sum of Present Values (2005 dollars) 8.70 BV Equity (per share) 5.35 Total PV of RI (discounted to 11/1) 8.56 Sensitivity Analysis Ke 0.018 Continuation (terminal) Value 101.78 Ke 0.018 0.0688 0.1 Growth 0 PV of Terminal Value 43.17 Growth 0 57.08 17.41 11.58 Estimated Value Per Share 57.08 3 N/A 22.33 12.56 Actual Value Per Share (current) 19.27 5 N/A N/A 13.87 *In millions of dollars

Appendix

52

Appendix I: Abnormal Earnings Growth

Abnormal Earnings Growth 2005 2006 2007 2008 2009 2010 2011 2012 2013 EPS 1.298 1.311 1.396 1.482 1.548 1.642 1.750 1.838 1.928 2.019 2.116 DPS 0.420 0.440 0.460 0.480 0.500 0.520 0.540 0.560 0.580 0.600 DPS Invested at Ke 0.008 0.008 0.008 0.009 0.009 0.009 0.010 0.010 0.010 Cum-Dividend Earnings 1.404 1.490 1.556 1.651 1.759 1.848 1.938 2.029 2.126 Normal Earnings 1.335 1.421 1.509 1.576 1.672 1.781 1.871 1.963 2.056 Abnormal Earning Growth (AEG) 0.069 0.068 0.048 0.075 0.087 0.066 0.066 0.067 0.071 N 0.1667 1 2 3 4 5 6 7 8 9 PV Factors 0.997 0.982 0.965 0.948 0.931 0.915 0.898 0.883 0.867 0.852 PV of AEG 0.068 0.066 0.045 0.070 0.080 0.059 0.059 0.058 0.060 Nov-04 2005 $ Total PV of AEG 0.563 0.564 3.348 Continuing (terminal) Value 3.348 PV of Terminal Value 2.851458 Growth 0.000 Total PV of AEG 4.811 Sensitivity Analysis Ke 0.018 Capitalization Rate (perpetuity) 0.018 Ke 0.018 0.05 0.066 Growth 0 267.25 36.55 22.69 Value Per Share (Nov 1, 2004) 267.25 3 N/A 42.71 22.79 Actual Value Per Share 19.27 5 N/A N/A 23.07 *In millions of dollars

Appendix

53

Appendix J: Mattel Earnings Rate Date Open High Low Close Volume Days held/Month Dividend*Days held % Returns VWRETD SPRTRN

Dec-98 33.56 34.17 20.69 22.88 3844272 4-Jan-99 23 23.61 20.93 22.08 2647268 -0.035 0.0385 0.0410 1-Feb-99 22.69 27.74 22.69 25.67 3268278 0.163 -0.0381 -0.0323 1-Mar-99 25.49 25.88 22.04 24.36 1943426 -0.049 0.0381 0.0388

10-Mar-99 Dividend .08 0.08 0.71 0.06 1-Apr-99 23.69 29.61 23.38 25.27 3133357 0.037 0.0489 0.0379 3-May-99 25.33 28.63 24.42 25.82 3120735 0.022 -0.0207 -0.0250 1-Jun-99 25.76 26.13 20.96 25.61 2455481 -0.006 0.0511 0.0544

9-Jun-99 Dividend .09 0.09 0.73 0.07 1-Jul-99 25.92 26.23 22.8 23.16 2954771 -0.096 -0.0305 -0.0321

2-Aug-99 23.23 23.59 20.9 20.96 2131613 -0.095 -0.0100 -0.0063 1-Sep-99 20.9 23.81 18.4 18.7 2470152 -0.105 -0.0226 -0.0286

8-Sep-99 Dividend .09 0.09 0.77 0.07 1-Oct-99 18.7 18.76 11.5 13.23 8334928 -0.293 0.0621 0.0625 1-Nov-99 13.29 15.07 12.67 14.09 3802685 0.065 0.0370 0.0191 1-Dec-99 14.03 15.35 11.89 13 3240422 -0.072 0.0840 0.0578

8-Dec-99 Dividend .09 0.09 0.77 0.07 3-Jan-00 12.75 13.68 9.91 10.34 3466205 -0.205 -0.0396 -0.0509 1-Feb-00 10.46 12.38 9.22 9.53 5074821 -0.078 0.0319 -0.0201 1-Mar-00 9.6 11.19 8.94 10.5 4450695 0.109 0.0539 0.0967

8-Mar-00 Dividend .09 0.09 0.77 0.07 3-Apr-00 10.88 13.06 10.31 12.31 3524810 0.172 -0.0597 -0.0308 1-May-00 12.13 14.25 10.31 13.56 3611945 0.102 -0.0390 -0.0219 1-Jun-00 13.5 15.12 12.56 13.19 2432745 -0.024 0.0516 0.0239

16-Jun-00 Dividend .09 0.09 0.50 0.05 3-Jul-00 13.19 14 10.94 11.06 1826925 -0.161 -0.0172 -0.0163

1-Aug-00 11.25 11.69 9.88 9.89 3237342 -0.106 0.0763 0.0607 1-Sep-00 9.94 12.75 9.75 11.5 3215785 0.170 -0.0514 -0.0535

6-Sep-00 Dividend .09 0.09 0.83 0.08 2-Oct-00 11.19 13.25 10.44 12.94 2224768 0.125 -0.0246 -0.0050 1-Nov-00 13.06 14 12.44 12.62 1477128 -0.025 -0.1031 -0.0801 1-Dec-00 12.75 14.52 12.3 14.44 2192440 0.144 0.0196 0.0041 2-Jan-01 14.2 16.04 13.52 14.86 2398914 0.029 0.0396 0.0346 1-Feb-01 15.4 17.5 14.87 16.96 3535773 0.141 -0.0994 -0.0923 1-Mar-01 17 19.05 16.53 17.74 3132463 0.046 -0.0702 -0.0642

Appendix

54

2-Apr-01 17.6 18 15 16.15 2546535 -0.090 0.0842 0.0768 1-May-01 16.15 18.45 15.39 17.8 2657145 0.102 0.0106 0.0051 1-Jun-01 17.8 18.97 17 18.92 1634623 0.063 -0.0173 -0.0250 2-Jul-01 18.8 19.6 17.6 17.9 1843966 -0.054 -0.0182 -0.0108

1-Aug-01 18 18.38 17.27 17.99 1561773 0.005 -0.0596 -0.0641 4-Sep-01 17.8 18.98 14.25 15.66 2886960 -0.125 -0.0916 -0.0817

6-Sep-01 Dividend .09 0.09 0.83 0.08 1-Oct-01 15.42 19.2 14.85 18.93 2338569 0.209 0.0280 0.0181 1-Nov-01 18.69 19.92 17.75 18.41 2112728 -0.027 0.0788 0.0752

21-Nov-01 Dividend .05 0.05 0.33 0.02 3-Dec-01 17.95 19.09 16.97 17.2 1960650 -0.066 0.0179 0.0076 2-Jan-02 17.2 19.1 16.63 19 2758104 0.105 -0.0160 -0.0156 4-Feb-02 19 19.05 16.6 18.95 2199372 -0.003 -0.0221 -0.0208 1-Mar-02 18.9 21.24 18.43 20.84 2643490 0.100 0.0446 0.0367 1-Apr-02 20.6 21.6 19.76 20.64 2432276 -0.010 -0.0497 -0.0614 1-May-02 20.4 21.24 19.6 21.24 1943431 0.029 -0.0109 -0.0091 3-Jun-02 21.04 22.36 20 21.08 2430805 -0.008 -0.0705 -0.0725 1-Jul-02 21.01 21.16 16.8 18.81 2524195 -0.108 -0.0811 -0.0790

1-Aug-02 18.55 21.05 17.28 19.43 1428518 0.033 0.0077 0.0049 3-Sep-02 19.03 20.52 17.06 18.01 1541765 -0.073 -0.0998 -0.1100 1-Oct-02 18.25 19.17 15.05 18.36 3360752 0.019 0.0745 0.0864 1-Nov-02 18.18 20.8 18.02 20.62 1917295 0.124 0.0613 0.0571

22-Nov-02 Dividend .05 0.05 0.30 0.02 2-Dec-02 20.97 21.35 18.67 19.15 1575776 -0.071 -0.0534 -0.0603 2-Jan-03 19.1 20.56 18.7 20 2242433 0.044 -0.0231 -0.0274 3-Feb-03 21 22.05 19.85 21.32 2737757 0.066 -0.0152 -0.0170 3-Mar-03 21.32 23.05 19.68 22.5 2256714 0.055 0.0103 0.0084 1-Apr-03 22.59 23.2 20.83 21.74 2810252 -0.034 0.0825 0.0810 1-May-03 21.74 23 21 21.51 2426819 -0.011 0.0631 0.0509 2-Jun-03 21.6 21.93 18.6 18.92 3879628 -0.120 0.0164 0.0113 1-Jul-03 19.12 20.9 19.06 19.43 2827690 0.027 0.0230 0.0162

1-Aug-03 19.46 20.25 18.57 19.32 2072780 -0.006 0.0254 0.0179 2-Sep-03 19.57 20.38 18.89 18.96 2496852 -0.019 -0.0093 -0.0119 1-Oct-03 19 20.72 18.63 19.36 3866565 0.021 0.0602 0.0550 3-Nov-03 19.36 20.3 18.64 20.24 3121521 0.045 0.0165 0.0071 1-Dec-03 20.35 20.5 18.76 19.27 2484654 -0.030 0.0455 0.0508

4-Dec-03 Dividend .4 0.4 0.90 0.36

Appendix

55

Appendix K: Estimated Beta

Date Mattel % Ret VWRETD Fed Funds Rates (Yrly) Fed Funds Rates (monthly) Rm-Rf Beta Intercept R2 T-stat

Jan-99 -0.03 0.0385 0.0475 0.0040 0.0345 -0.13738 0.002751076 0.005359409 0.22 Feb-99 0.16 -0.0381 0.0475 0.0040 -0.0420 Mar-99 -0.05 0.0381 0.0475 0.0040 0.0341 Estimated Ke 0.008171559 Apr-99 0.04 0.0489 0.0475 0.0040 0.0449 May-99 0.02 -0.0207 0.0475 0.0040 -0.0246 Jun-99 -0.01 0.0511 0.0500 0.0042 0.0470 Jul-99 -0.10 -0.0305 0.0500 0.0042 -0.0347

Aug-99 -0.09 -0.0100 0.0525 0.0044 -0.0144 Sep-99 -0.10 -0.0226 0.0525 0.0044 -0.0269 Oct-99 -0.29 0.0621 0.0525 0.0044 0.0577 Nov-99 0.07 0.0370 0.0550 0.0046 0.0324 Dec-99 -0.07 0.0840 0.0550 0.0046 0.0794 Jan-00 -0.20 -0.0396 0.0550 0.0046 -0.0442 Feb-00 -0.08 0.0319 0.0575 0.0048 0.0271 Mar-00 0.11 0.0539 0.0600 0.0050 0.0489 Apr-00 0.17 -0.0597 0.0600 0.0050 -0.0647 May-00 0.10 -0.0390 0.0650 0.0054 -0.0444 Jun-00 -0.02 0.0516 0.0650 0.0054 0.0462 Jul-00 -0.16 -0.0172 0.0650 0.0054 -0.0226

Aug-00 -0.11 0.0763 0.0650 0.0054 0.0709 Sep-00 0.17 -0.0514 0.0650 0.0054 -0.0568 Oct-00 0.13 -0.0246 0.0650 0.0054 -0.0300 Nov-00 -0.02 -0.1031 0.0650 0.0054 -0.1085 Dec-00 0.14 0.0196 0.0650 0.0054 0.0142 Jan-01 0.03 0.0396 0.0600 0.0050 0.0346 Feb-01 0.14 -0.0994 0.0600 0.0050 -0.1044 Mar-01 0.05 -0.0702 0.0500 0.0042 -0.0744 Apr-01 -0.09 0.0842 0.0450 0.0038 0.0805 May-01 0.10 0.0106 0.0400 0.0033 0.0072 Jun-01 0.06 -0.0173 0.0375 0.0031 -0.0204 Jul-01 -0.05 -0.0182 0.0375 0.0031 -0.0213

Aug-01 0.01 -0.0596 0.0350 0.0029 -0.0626 Sep-01 -0.13 -0.0916 0.0300 0.0025 -0.0941

Appendix

56

Oct-01 0.21 0.0280 0.0250 0.0021 0.0259 Nov-01 -0.03 0.0788 0.0200 0.0017 0.0771 Dec-01 -0.07 0.0179 0.0175 0.0015 0.0164 Jan-02 0.10 -0.0160 0.0175 0.0015 -0.0174 Feb-02 0.00 -0.0221 0.0175 0.0015 -0.0235 Mar-02 0.10 0.0446 0.0175 0.0015 0.0431 Apr-02 -0.01 -0.0497 0.0175 0.0015 -0.0512 May-02 0.03 -0.0109 0.0175 0.0015 -0.0123 Jun-02 -0.01 -0.0705 0.0175 0.0015 -0.0720 Jul-02 -0.11 -0.0811 0.0175 0.0015 -0.0826

Aug-02 0.03 0.0077 0.0175 0.0015 0.0063 Sep-02 -0.07 -0.0998 0.0175 0.0015 -0.1013 Oct-02 0.02 0.0745 0.0175 0.0015 0.0731 Nov-02 0.12 0.0613 0.0125 0.0010 0.0602 Dec-02 -0.07 -0.0534 0.0125 0.0010 -0.0544 Jan-03 0.04 -0.0231 0.0125 0.0010 -0.0241 Feb-03 0.07 -0.0152 0.0125 0.0010 -0.0163 Mar-03 0.06 0.0103 0.0125 0.0010 0.0092 Apr-03 -0.03 0.0825 0.0125 0.0010 0.0814 May-03 -0.01 0.0631 0.0125 0.0010 0.0620 Jun-03 -0.12 0.0164 0.0100 0.0008 0.0155 Jul-03 0.03 0.0230 0.0100 0.0008 0.0221

Aug-03 -0.01 0.0254 0.0100 0.0008 0.0246 Sep-03 -0.02 -0.0093 0.0100 0.0008 -0.0101 Oct-03 0.02 0.0602 0.0100 0.0008 0.0593 Nov-03 0.05 0.0165 0.0100 0.0008 0.0156 Dec-03 -0.03 0.0455 0.0100 0.0008 0.0446 *http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

Appendix

57

Appendix L: Regression Check

Summary Output

Regression Statistics Multiple R 0.073207987 R Square 0.005359409 Adjusted R Square -0.011789566 Standard Error 0.098215909 Observations 60 ANOVA df SS MS F Significance F Regression 1 0.003014688 0.003014688 0.312520666 0.578289755 Residual 58 0.559489156 0.009646365 Total 59 0.562503844 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 0.002751076 0.012682003 0.216927595 0.829026026 -0.02263471 0.028136863 -0.02263471 0.028136863 X Variable 1 -0.137384988 0.245753612 -0.559035478 0.578289755 -0.629314287 0.35454431 -0.629314287 0.35454431

Sources

58

Sources

1. www.Yahoo.finance.com A. http://www.fool.com/News/mft/2004/mft04112221.htm?source=eptyholnk303100&logvisit=y&

npu=y B. http://biz.yahoo.com/ap/040909/toy_recall_2.html C. http://yahoo.businessweek.com/bwdaily/dnflash/nov2004/nf20041122_7661.htm

2. www.Mattel.com 3. www.CBSMarketwatch.com

4. Wall Street Journal

A. “U.S. is Going After Unsafe Toys”. Christopher Conkey, 11-23-04. 5. www.MSN.com 6. “Toy Makers Begin to take stand against Wal-Mart”.

A. http://www.tdn.com/articles/2004/02/12/biz/news02.txt

7. www.cpsc.gov 8. www.CNNMoney.com

A. http://money.cnn.com/2004/04/14/news/fortune500/mattel_batmobile/?cnn=yes 9. Mattel’s 2003 Earnings Report

A. http://www.shareholder.com/mattel/downloads/2003_Mattel_Annual_Rprt.pdf

10. Business Analysis and Valuation Using Financial Statements. Palepu, Healy, Bernard. 11. www.Bloomberg.com

12. New York Fed

A. http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

http://yahoo.businessweek.com/bwdaily/dnflash/nov2004/nf20041122_7661.htm

http://www.mattel.com/

http://www.cbsmarketwatch.com/

http://www.msn.com/

http://www.tdn.com/articles/2004/02/12/biz/news02.txt

http://www.cpsc.gov/

http://money.cnn.com/2004/04/14/news/fortune500/mattel_batmobile/?cnn=yes

http://www.shareholder.com/mattel/downloads/2003_Mattel_Annual_Rprt.pdf

http://www.bloomberg.com/

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