Teuer furniture a case solution

©2014 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Mitchell A. Petersen with the research assistance of Varun Bhatnagar, Beverly Clingan, Tiffany Li, Kara Moore, and Tanisha Patni. Teuer Furniture is a fictional company whose profile was created based on data from real industry leaders. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise— without the permission of Kellogg Case Publishing.

MITCHELL A. PETERSEN KEL788

Teuer Furniture (B): Multiples Valuation

Teuer Furniture had regained its financial footing by the end of 2012. A number of long-term investors, including several of Teuer’s original non-management investors, now want to sell their shares. Jennifer Jerabek, the chief financial officer of Teuer, and her team put together an extensive valuation of the company based on a discounted cash flow (DCF) analysis. One criticism of the DCF valuation is that the resulting stock value depends upon the assumptions of the model. There are often dozens or hundreds of assumptions that go into a sophisticated DCF valuation model. When the model was presented to investors, a number of them disagreed with the results. Some investors considered the value too high and others considered the value too low. Jerabek was instructed to produce a valuation that did not depend upon assumptions about future growth, profitability, and capital investment needs or the discretion of the finance team. She was asked to value Teuer using a multiples approach.

Multiples Approach to Valuation

Multiples valuation is relatively straightforward as compared to a sophisticated DCF analysis. To value a firm or division using a multiples approach, one needs only two inputs: a set of comparable firms and a set of valuation metrics. For each comparable firm and valuation metric, the team calculates the ratio of the comparable firm’s market value to the valuation metric.1 Unlike DCF, for which Jerabek’s team was required to make a large number of assumptions, a multiples approach requires the team to make only one assumption—that the valuation ratio for the comparable firm(s) (which can be observed) is the same as the valuation ratio for Teuer Furniture (which cannot be observed).

A large number of possible valuation metrics can be derived from the income statement, balance sheet, and cash flow statement of a company. Valuation metrics ca