Q EPS. Revenues (In $ Thousands) Investment Recommendation: BUY 1,000 shares at $ for a NAV of $104,340

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1 Thavi Ekanayake Miro Getov Nino Naridze Investment Recommendation: BUY 1,000 shares at $ for a NAV of $104,340 Company Snapshot PEG (5-year expected) 2.75 Beta week range $71-$ Margin of Safety 18% P/E (ttm) P/S (ttm) 2.60 P/B (mrq) 7.24 EV/EBITDA (ttm) ROE (ttm) 37.71% EPS (ttm) $3.78 Great prospects for growth No long-term debt Unique positioning in the beer market Popular brand name Innovations in beer and operations SAM BREW TAP STZ Times Interest Earned Return on Assets 24.3% 5.9% 5.4% 7.8% Return on Equity 35.9% 9.0% 8.8% 21.9% TATO Q EPS $1.26 $1.14 $1.05 Shares Outstanding million Revenues (In $ Thousands) $0.07 SAM BREW TAP STZ 0 Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q

2 Table of Contents Qualitative Analysis Historical Snapshot... 2 Product Portfolio Timeline... 2 Boston Beer Company Today... 3 Innovative Strategies... 3 Competitors in the Microbrewery Segment... 4 Competitors in the Stock Market Potential Risks... 6 Awards and Recognitions... 7 Recent News... 8 SWOT Analysis Sums Up the Performance of The Boston Beer Company... 9 US Economy Factors Influencing the Industry Beer Brewing Industry Better Beer Sub-Industry Inter-Industry Competition Porter s Five Forces Quantitative Analysis Trends from Current Financial Statements Pro Forma Income Statement Assumptions The Resulting Pro Forma Income Statements for Comparative Income Statement Figures Pro Forma Balance Sheet Assumptions Pro Forma Balance Sheets Financial Ratios Market-based Valuations Discounted Cash Flow Model H-Model DCF Valuation Residual Income Valuation Analyst Opinion Conclusion Appendices Student Managed Fund Stock Proposal Spring

3 Historical Snapshot 1 In 1983, James Koch and his former secretary Rhonda Kallman started The Boston Beer Company after raising additional capital from family and friends. Originally, the Company contracted with Pittsburg Brewing to make beer using Koch s great-greatgrandfather s home brewing recipe. After steadily solidifying its roots in the craft-brewing subsector and expanding to the Western U.S. through new contractor breweries, in 1997 Boston Beer stepped into hard cider market, launching HardCore Cider, and purchased a small brewery in Cincinnati. A year later, Boston beer crossed the U.S. boundaries and started distributing its beer in Japan and Australia. Product Portfolio Timeline Introduced a Flagship brand of Samuel Adams Boston Lager 1996 Released LongShot line of beers 1997 Moved into hard cider market and launched HardCore Cider brand 1998 Expanded distribution to Australia and Japan 1999 Introduced Millennium Ale 2000 Launched BoDean's Twisted Tea, a malt-and-tea based beverage 2001 Started a new beer line, Sam Adams Light, that sold in most of its top U.S. markets 2003 Placed on the market Utopia brew, a beverage with 25% alcoholic content 2003 Released a limited edition of Samuel Adams Chocolate Bock 2004 Added Chocolate Bock to the section of Extreme Beers that already included Millennium and Triple Bock 2007 Contracted with City Brewing in order to brew City s Latrobe brand beer 2010 Launched limited edition ale, Infinitum, which was developed in Germany's Weihenstephan Brewery, the world s oldest brewery 2011 Introduced Samuel Adams Scotch Ale, Samuel Adams Revolutionary Rye Ale, and Samuel Adams White Ale 2011 Developed and launched three new ciders under the brand of Angry Orchard 2011 Released a new beer, Boston 26.2 Brew, to commemorate 115 th Boston Marathon 1 Hoovers.com 2 Hoovers.com, bostonbeer.com Student Managed Fund Stock Proposal Spring

4 Boston Beer Company Today 3 Today, The Boston Beer Company is recognized as the largest microbrewer in the U.S. Over the course of its existence, it has acquired breweries in Cincinnati, Boston, and Breinigsville, Pennsylvania. In addition to producing beer through contractor breweries, SAM brews its own beer in its three locations. In 2011, Boston Beer sold around 2.5 million barrels of alcoholic beverages, a 9% increase from the prior year. Evidently, after the tough economic environment of 2008, the Company was able to rebound its sales rather fast and regain its position in the market. SAM operates in the Better Beer sub-segment and directly competes with imported beers like Heineken and Corona. The core beverages that compose the majority of its income are Samuel Adams Brewmasters Collection, Samuel Adams Boston Lager, Samuel Adams Seasonals, and its Twisted Tea drinks. These beverages can be obtained in most of the grocery stores, bars and restaurants and other retail outlets. Innovative Strategies 4 The Better Beer sub-industry has experienced increasing competition from the wine and spirits category. In order to maintain its competitive advantage, the Company follows the strategy of periodically offering seasonal beer, introducing limited edition beverages and temporarily discontinuing different lines of beers. For instance, in 2010 SAM discontinued Samuel Adams Honey Porter and Twisted Tea Green Citrus Hard Iced Tea, which might be reintroduced or appear as part of a variety pack. This way, SAM keeps the consumers anticipating and thus increases brand loyalty, which is essential for the success in the better beer category. The Boston Beer Company also tries to develop its beer product lines not only through internal research and development process, but through direct input of the customers as well. SAM promotes the annual LongShot American Homebrew Contest where the customers and employees can submit homebrews for inclusion in the LongShot six-pack in the following year. Boston Beer pioneered ground-breaking innovation into the craft beer industry (microbreweries and quality imports) through the Freshest Beer Program. The program reduces the wholesaler s beer inventory up to a week, increasing the freshness of the beers at the retail and restaurants. Moreover, SAM does not keep warehoused beer at the brewery, since all the beer brewed is pre-ordered by distributors. Currently, SAM has 50% of its volume on the Freshest Beer Program and is hoping to increase this number to 75% by the end of Hoovers.com, Standard & Poor s Net Advantage 4 The Boston Beer Company K Report Student Managed Fund Stock Proposal Spring

5 Competitors in the Microbrewery Segment: Competitor Annual Sales Breweries Employees Famous Brand North American Breweries $54.5 mil Magic Hat #9 Deschutes Brewery, Inc. New Belgium Brewing Company, Inc. $44.34 mil $37.5 mil Jubelale Fat Tire Competitors in the Stock Market Craft Brew Alliance (BREW) Craft Brew Alliance is a company consisting of three distinct breweries: Redhook Ale Brewery, Widmer Brothers Brewing, and Kona Brewing Company. Redhook has two operations, in Woodinville, Washington, and in Portsmouth, New Hampshire. Redhook comes in many different varieties: Pilsner, IPA, Copperhook, and Nut Brown. Widmer has one brewery, operating in Portland, Oregon. Widmer is available in Pale Ale, Hefeweizen, Blonde, and Black IPA. Kona joined the Craft Brew Alliance most recently, in Kona has one brewery, operating out of Hawaii s Big Island. Their brands include Longboard Lager, Fire Rock Pale Ale, Wailua Wheat Ale, and Koko Brown. Craft Brew Alliance has 600 employees, revenues of $149.2 million, and EPS of $0.51 for FY Mendocino Brewing Co (MENB) Mendocino was founded in 1983 in Hopland, California on the site of the second brewpub opened in the US after the end of Prohibition. The company has an iconic status within microbreweries because of its history and its brands, which include Red Tail Ale, Blue Heron Pale Ale, Imperial IPA and Kingfisher. The last brand is produced by Mendocino s wholly-owned subsidiary in the UK. Kingfisher is distributed in 55 countries, most of which are in Europe. Mendocino s other brands are available only in 43 of the 50 states. Mendocino has 65 employees, revenues of $40 million, and EPS of $0.08 for FY Student Managed Fund Stock Proposal Spring

6 Molson Coors Brewing Company (TAP) Molson Coors is the fifth-largest brewer in the world, with 18 breweries in the US, Canada, UK and one in China. The company has created a joint venture with SABMiller called MillerCoors, and through it markets brands such as Coors Light, Blue Moon, Pilsner Urquell, Keystone, Miller High Life, and Grolsch in North America, Europe, Turkey, Russia, China, Japan and the Philippines. Along with AB InBev, TAP accounts for 90% of domestic beer production. In 2010, two out of the Top 10 beer brands ranked by sales belonged to Molson Coors. Molson Coors has 14,660 employees, revenues of $3,515 million, and EPS of $3.63 for FY Constellation Brands, Inc. (STZ) Constellation Brands is a wine, beer and spirits company that emphasizes on the perceived quality of its products. It was founded in 1945 as a distributor of bulk wine to bottlers. Throughout the years the company grew through the acquisitions of other wine companies and today is the leading wine company in the US, Canada, and overall in the world. The company is based in New York State and operates in 125 countries. The company s joint venture with Grupo Modelo, the leader of the Mexican beer market, allows it to import Corona, St. Pauli Girl and Tsingtao on the US market. Corona is one of the top competitors to Sam Adams in the Better Beer market, and SAM s Twisted Tea and cider beverages target the same markets as the majority of STZ s brands. Wines and spirits accounted for 58% of the revenue in FY 2011, while the Crown Imports joint venture brought in the remaining 42%. Constellation Brands has 4,300 employees, revenues of $3,332 million, and EPS of $2.67 for FY Student Managed Fund Stock Proposal Spring

7 Potential Risks 5 When considering investing in a certain stock, investors should take into account the risks that the company bears. The table below describes SAM s potential risks for investors consideration. Company Risks * Countermeasures** Competition from larger beer companies Emphasizing microbrewery image to distinguish self and drive up sales. Achieving unique positioning by having higher-quality products than larger beer conglomerates and having larger operations than any other microbreweries. Freshest Beer Program might adversely affect short-term operating results An increase in hops price coupled with existing hops purchase commitments Currency fluctuations might cause losses on contracts payable in Euros and Pounds Sterling Class B Stock might influence the company s decisions, since it is exclusively held by one person None but expect to derive future benefits from the program, such as reduced inventory costs and lower expenses on buying back stale beer. None. The Company is vulnerable to price increase in inputs. Regularly reviewing a possibility to hedge currency exposure. None, since C. James Koch is the Chairman of the Board of Directors, and would (hopefully) have the best interest of the company in mind. * Company Risks column outlines the risks mentioned in the sources below. ** Countermeasures column indicates the possible countermeasures that SAM could take to battle or avoid mentioned risks. 5 Scottrade, Morningstar, Thomson Reuters, Craftbrew.com, Value Line, Molsoncoors.com, SAM 10-K, S&P Industry Report on Alcohol and Tobacco, Hoovers, Mendobrew.com, Cbrands.com Student Managed Fund Stock Proposal Spring

8 Perceived Quality The Boston Beer Company (SAM) Awards and Recognitions 6 SAM was voted as the The Best Beer in America : The Great American Beer Festival's Consumer Preference Poll announced SAM as "The Best Beer in America". Since 2000, Samuel Adams has won more awards in international beer tasting competitions than any other brewery in the world. Boston Beer Company holds a World Guinness Record for extraordinary beer with high alcohol volume Never satisfied just to make his own version of existing beer styles, Jim pioneered the extreme brewing movement in the early-1990s, and holds a record in the Guinness Book of World Records for Samuel Adams Utopias, an extraordinary beer with high alcohol by volume. Boston Beer Company Receives Founders Award for Corporate Philanthropy Congratulations to The Boston Beer Company for receiving this years Founders Award at the 10th Annual Excellence Awards in Corporate Philanthropy for their Samuel Adams Brewing the American Dream Loan Fund in partnership with ACCION USA. For those who aren t familiar with our work together, ACCION USA and the Boston Beer Company have been working for the last two years to provide New England small business owners in the food and beverage industry with the resources necessary to grow independently According to Beer Me, a website consisting of brewery information worldwide, SAM s beers have won a plethora of awards. You can find a partial list in the Appendix 2. As you can see from the graph below, the recognitions SAM has received for its beer translate into a high price and high quality position, which turns into a positive perception from the customers. 7 Mike's Hard Lime Smirnoff Ice Twisted Tea Woodchuck Hard Cider Sam Adams Sierra Nevada 5 4 Coors Keystone Long Trail Heineken Pale Ale Bud Light Miller Lite Corona Blue Moon Magic Hat 3 Circus Boy 2 Carlsberg Elephant 1 0 $- $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 Price per 24-pack 6 Bostonbeer.com 7 The prices on the graph were acquired from Student Managed Fund Stock Proposal Spring

9 Recent News 6 Boston Beer Reports Fourth Quarter 2011 Results February 22, 2012 The Boston Beer Company, Inc. (NYSE: SAM) reported net income for the fourth quarter of $17.8 million, or $1.33 per diluted share, an increase of $5.6 million, or $0.46 per diluted share, from the fourth quarter of This increase was primarily due to increased core shipment volume and the favorable impact of a state income tax settlement in the fourth quarter, partially offset by increased advertising, promotional and selling expenses. Alchemy & Science Joins Forces with The Boston Beer Company January 24, 2012 Alan Newman, who founded Magic Hat Brewing in 1994, and Jim Koch, founder and brewer of The Boston Beer Company, have been friends and colleagues for more than 15 years. Recently, they met over a beer, and Jim urged Alan to return to the craft beer industry. They talked about how they might collaborate. Out of this came Alchemy & Science, a craft brew incubator headquartered in Burlington, Vermont, that will be funded by Boston Beer Company. Newman is joined in this venture by Stacey Steinmetz, his longtime business associate from Magic Hat. Samuel Adams Adds Cheer to Patriot s Day In Honor of the 2012 Boston Marathon February 23, 2012 The Boston Beer Company, brewers of Samuel Adams beers, announced today that it s helping to celebrate one of Boston s greatest traditions The Boston Marathon. The brewery will be the official beer sponsor of the 2012 Boston Marathon, one of the most revered and challenging races in the world. To celebrate, the Samuel Adams brewers are developing a special commemorative beer to mark the heralded event. This is the first time Samuel Adams has partnered with the Boston Athletic Association for the Marathon The biggest brewers slipped in 2011 January 16, 2011 A regional brewer from Pennsylvania saw big improvements in shipping in 2011, while giants of the industry saw shipments fall, a trade newsletter said. The behemoths of Anheuser-Busch, MillerCoors and Heineken USA all saw shipments fall in Anheuser-Busch saw a 2.9 percent drop in shipments, while MillerCoors saw a 3 percent drop, a newsletter from Beer Marketer's Insights said But Yuengling, a regional beer out of Pottsville, Pa., had shipments rise 16.9 percent. Another small firm, Boston Beer Co., which makes Samuel Adams beers, shipped 8 percent more suds in 2011 than it did in 2010, the newsletter said. Student Managed Fund Stock Proposal Spring

10 SWOT Analysis Sums Up the Performance of The Boston Beer Company: 8, 9 Strengths: Brand Name: A strong brand name helps SAM stay near the top of the Better Beer subindustry. The Company is going to spend $8-$12 million dollars more next year on advertising and selling. One distinct strategy the Company uses to keep customers loyal to their brand name is to continuously offer new beverages while temporarily discontinuing others. Freshest Beer Program: Aims at shortening the time beer spends as inventory, so that it is fresher when it arrives at the final customer. The Company expects to benefit from this in the future, but for now is incurring a large amount of implementation costs. Alchemy and Science: This is the Company s R&D subsidiary. It aims to expand the flavors and techniques of their beer. Tangible Assets: 99% of the Company s book assets are tangible and contribute to revenue production. SAM has no group of hot air assets on its books. Weaknesses: U.S.-based: SAM relies almost entirely on sales from U.S, and it does not look like the Company is going international just yet Piles of Cash, No Debt: SAM does not make the best use of its short-term funds and ability to borrow. We can see that with the excessive amount of cash on its balance sheet, which is ⅓ of its net fixed assets, and with the absence of any long-term debt. The Company might be missing out on an even lower WACC if they took on more debt, which would most probably not impair their ability to repay obligations. No dividends: The Company does not pay dividends Opportunities: Market Leader: As the largest microbrewer in the U.S., SAM has some ability to dictate pricing in the sub-industry as well as to invest large amounts in innovation International Expansion: SAM will greatly benefit from contracting Sam Adams beer to be produced in other countries, most notably Germany Expansion Beyond Beers: Twisted Tea and ciders help diversify the company into the wines & spirits market, which covers more diverse customer groups than beers Threats: Intruders: New entrants in the Better Beer market, such as beer industry giant AB InBev, have increased competition and the need for product differentiation. Acquisition Target: The large companies in the industry are expanding through inorganic growth, and it is possible that one of them might try to acquire SAM, with all the excess cash it has on its balance sheet. Currency risks: SAM currently does not hedge its foreign currency contracts for hops. 8 Bostonbeer.com K Report 9 Standard & Poor s NetAdvantage Student Managed Fund Stock Proposal Spring

11 U.S. Economy 10 Alcoholic beverages are generally considered as staples which means that overall the companies within this industry have stable sales regardless of the economic conditions. Yet sub-industries are rather segmented out in the alcoholic beverage market, therefore it is important to consider economic indicators like real GDP, real DPI, and CPI. Real GDP growth in the inflation-adjusted Gross Domestic Product is a measure of the health of the economy. U.S. Department of Commerce reported an YTD real GDP growth of 1.7% in 4 th quarter 2011, while Standard & Poor s Economics Department was forecasting a real GDP rise of 1.9% in Real DPI real Disposable Personal Income shows the inflation-adjusted income after taxes and indicates how much buyers spend on consumer goods. Bureau of Economic Analysis estimates the 1.4% YTD change in U.S. DPI. CPI - Consumer Price Index measures the fluctuation in the price of the consumer basket of goods and services. This consequently influences the pricing trends in the alcoholic beverage industry. The CPI for all consumer products increased 0.4% in February 2012 form last month due to the sharp increase in the gasoline prices. Factors Influencing the Industry 11 Government regulations concerning purchasing and distribution of the alcoholic beverages continue to be one of the restraints to the entities in alcohol business. Yet the most current regulations have had a minimal impact on the firm s margins since most of the states retain power to dictate in-state regulation on such matters. Globalization expanding trade borders and merger of international producers of alcoholic beverages allow the U.S. alcoholic beverage industry to remain highly profitable and outperform the market. Compared to the low 12%-14% operating margins of the Packaged food companies, the U.S. alcoholic beverage companies on average enjoy operating margins as high as 20%. Emerging Markets to battle competition, U.S. alcoholic beverage companies strive to take advantage of the improved distribution capacity, increase diversification, and realize cost savings through acquiring or merging with the foreign companies. The current spotlight is on China, Eastern Europe, and Latin America, where the presence of U.S. firm partnership has increased exponentially since Standard & Poor s Net Advantage Student Managed Fund Stock Proposal Spring

12 Beer Brewing Industry 12 SAM operates in the beer brewing industry which has reached its mature stage. Its highly concentrated environment includes the two brewing giants, Anheuser-Busch InBev and MilerCoors LLC, that collectively take up over 90% of the beer production in the U.S. SAM competes in the Better Beer sub-industry which means that the Company also competes with most imports. Better Beer Sub-Industry 13 The Better Beer category (that mostly includes microbreweries) has experienced a strong growth of 15% in Analysts see this as the increase in the product demand that will aid the Company s brands, which are the third largest, behind the imports Corona and Heineken. SAM s products also compete within the wine and spirits markets, both of which gained market share due to the domestic brewers like The Boston Beer Company. Despite the neutral outlook for the other beer categories, the Better Beer category continues to take advantage of favorable pricing and is believed to increase prices even further within the next 12 months. Yet, the challenges still persist due to the strong presence of the established imported beers. Additionally, the competition is tense because of close pricing and specific target customers, thus the competition is expected to remain tense. In 2011 the Better Beer category was up 6%, while total beer category was down 1% to 2%. Overall, the craft industry is expected to outperform the industry despite of the trend of increasing commodity prices. As you can see from the table above, The Boston Beer Company remains a leader among the local craft brewers in terms of sales and market share. Its strong brand equity and loyal customers allow Boston Beer to keep the lead in the Better Beer sub-industry. 12, 11 Standard & Poor s Net Advantage, Boston Beer Company K Student Managed Fund Stock Proposal Spring

13 Inter-Industry Competition 14 SAM also competes within the flavored malt beverage (FMB) category of the beer industry through its Twisted Tea product line. Based on information for the K report, the FMB category comprises approximately 2% of United States beer consumption. FMB includes flavored malt beverages like Twisted Tea, Smirnoff Ice, and Mike s Hard Lemonade, which usually are priced competitively with Better Beers. 50% 40% Beer Wine Liquor 41% v 32% 36% v 35% 30% 20% 10% 0% The graph above demonstrates the results of a Gallup Poll in 2011, presented by Beer Institute. 15 As we see, the competition from wines has increased since 1992 and peaked in 2005, when the preference for wine was higher than that for beer. Although in 2011 the survey participants preferred beer over wine and liquor, the competition between beer and wine lovers seems very tight. Thus, we see that the Better Beer category faces fierce pressure from malt beverages and wines that target similar demographics and carry similar prices. But on the bright side, the craft beer segment has an advantage over the general beer category and has very promising growth prospects, as illustrated in the table below: 16 Wine Liquor Beer Tiers Share Growth Share Growth Share Growth High 26% 21% 24% 5% 17% 7% Middle 33% 16% 36% 2% 54% -2% Low 41% -14% 40% 0% 28% -3% Total 100% 2% 100% 2% 100% -1% 14 Bostonbeer.com - Boston beer Company 10-K 15 Beer Institute, Gallup Poll, 2011: Do you most often drink beer, wine, or liquor? 16 Beer Institute, 2011 (Beer Marketers Insights, Discus, Beverage Information Group) Student Managed Fund Stock Proposal Spring

14 Porter s Five Forces Threat of substitute products: MODERATE Although beer is a rather different beverage compared to liquor and has its own set of customers who favor it over any other hard liquor, there is a substantial chance of substituting beer for other alcoholic beverages. Yet, since SAM also offers other types of alcoholic beverages like HardCore, it has diversified the risk of its beer products being substituted. Threat of new entrants: LOW Brewing beer is a very specialized business and requires not only exceptional level of expertise but necessary connections within the supplier and distribution networks. Although the capital requirements for setting up a brewery are not extremely high, the cost of brewing is high, so the threat of new entrants into the beer brewing sub-industry is low. Bargaining power of buyers: LOW Switching cost for the Better Beer buyers is quite low and the substitute products are readily available in the form of other alcoholic and nonalcoholic beverages. Yet, the uniqueness of beers is very important and demand for beer products is based on the strong preference from the buyer s side. Moreover, buyers have no direct influence on the supply, therefore the bargaining power of buyers can be classified as low. Bargaining power of suppliers: LOW The suppliers in the beer industry do not have much power, since the inputs needed for the beer brewery are fairly stable in price, while the suppliers in the market are abundant. Furthermore, the switching costs for the breweries are not very high, and therefore the supplier power is low. Competitive Rivalry: MODERATE The rivalry in the beer market is quite high since the market is driven by the competition on the local, national and international level. The beer companies compete with imported beers from all over the world, some of which have a rather established presence in the U.S. beer industry. With this being said, it is hard to substitute one brand for another because of the solid fan followings some brands such as Boston Beer s have. Student Managed Fund Stock Proposal Spring

15 Trends From Current Financial Statements: 0 $84,278 Q $128,701 $128,785 $110,467 $126,108 $118,851 $117,479 $88,331 Q Q Q Q Revenues (In $ Thousands) Q Q Q $153,857 $141,158 $135,957 $146,014 $147,002 $126,285 $111,409 $102,470 Q Q Cost of Goods Sold (As % of Revenues) Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Student Managed Fund Stock Proposal Spring

16 EPS in $ (Excluding Non-recurring Items) Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Revenues have historically been the weakest in the first quarter, after which they have shot up to a year s high in Q2 and then gradually declined to a level higher than Q1 for the last two quarters. The last quarter of 2011 broke this pattern by setting a record for sales, which may or may not be replicated in the future. What we can be sure of is that revenues for every quarter have been growing throughout the years, with a notable jump from 2009 to 2010, followed by a gradual rise in The cost of goods sold as a percentage of revenues has historically been the highest in Q1, followed by Q3, Q2 and lastly by the volatile Q4. Most importantly, the percentage for the first three quarters has been declining over the years. Earnings Per Share have drastically increased, especially if we compare years 2008 and Although EPS in the first two quarters of 2010 exceeded EPS of the first two quarters in 2011, the EPS soared towards the end of the year and exceeded Q4 of 2010 by 0.5 in Student Managed Fund Stock Proposal Spring

17 Pro Forma Income Statement Assumptions: Seasonality is the strongest factor to consider when projecting revenues for beer companies, which is why we have broken down the pro forma income statement for 2012 into four quarters. For our projections, we used the following reasoning for each scenario: Pessimistic Revenues will increase at a small rate, the same one by which the rest of the Better Beer sector is growing. Cost of goods sold will not improve, but will stay at the 2011 level. Advertising, promotional and selling expenses will grow by two percent from last year for all quarters. All of these items were adjusted up or down depending on the historical performance of the quarter they were in. General and administrative expenses will stay at a four-year historical average. Most Likely Revenues will increase at a rate that is closer to the rate for the last two years. Cost of goods sold will follow the historical trend and decrease by one percent. Advertising, promotional and selling expenses will grow by four percentage points, as part of management s efforts to in search of higher sales. All of these items were adjusted up or down depending on the historical performance of the quarter they were in. General and administrative expenses will again stay at a four-year historical average. All the values by which we increased revenues and calculated expenses for each quarter are summarized in the following tables: Student Managed Fund Stock Proposal Spring

18 Pessimistic Scenario: Q1 Q2 Q3 Q4 Growth Total Revenues 8.0% 6.0% 8.0% 7.0% Excise taxes 8.4% 8.4% 8.4% 8.4% Cost of goods sold 44.7% 39.6% 40.0% 40.3% Advertising, promotional and selling exp. 33.9% 29.7% 28.8% 29.2% General and administrative expenses 9.2% 7.4% 7.4% 7.8% Provision for income taxes as % of EBT 38.0% 38.0% 38.0% 38.0% As % of Revenue Most Likely Scenario : Q1 Q2 Q3 Q4 Growth Total Revenues 12.4% 6.5% 11.3% 14.7% Excise taxes 8.4% 8.4% 8.4% 8.4% Cost of goods sold 43.7% 38.6% 39.0% 39.3% Advertising, promotional and selling exp. 35.9% 31.7% 30.8% 31.2% General and administrative expenses 9.4% 7.5% 7.1% 8.1% Provision for income taxes as % of EBT 38.0% 38.0% 38.0% 38.0% As % of Revenue As a conservative estimation, we excluded all non-recurring items from our pro forma income statement. These items are: A gain of $20.5 million from a court settlement in Q This reduced the 2011 EPS from $5.08 to $3.53. Any projections for other income or expense for $3 million of packaging services revenue from contracts with MillerCoors and Nestle Vitality, which the Company does not expect to renew in 2012, which reduced our estimated 2012 EPS by $0.24. Student Managed Fund Stock Proposal Spring

19 The Resulting Pro Forma Income Statement for 2012: Pessimistic Scenario: In $ Thousands Q Q Q Q Revenue $120,322 $154,775 $158,762 $164,627 Less excise taxes $10,057 $12,937 $13,270 $13,760 Net revenue $110,265 $141,838 $145,492 $150,867 Cost of goods sold $53,786 $61,357 $63,485 $66,303 Gross profit $56,478 $80,481 $82,007 $84,564 Operating expenses: Advertising, promotional and selling expenses $40,759 $46,045 $45,656 $48,122 General and administrative expenses $11,123 $11,413 $11,809 $12,868 Total operating expenses $51,883 $57,458 $57,465 $60,991 Operating income $4,596 $23,023 $24,542 $23,573 Provision for income taxes $1,746 $8,749 $9,326 $8,958 Net income $2,849 $14,274 $15,216 $14,615 Net income per common share basic $0.23 $1.13 $1.21 $1.16 Net income per common share diluted $0.16 $1.06 $1.14 $1.09 Most Likely Scenario: In $ Thousands Q Q Q Q Revenue $125,185 $155,540 $163,552 $176,419 Less excise taxes $10,465 $13,003 $13,673 $14,749 Net revenue $114,719 $142,537 $149,879 $161,671 Cost of goods sold $50,132 $55,076 $58,438 $63,488 Gross profit $64,587 $87,460 $91,441 $98,183 Operating expenses: Advertising, promotional and selling expenses $41,156 $45,254 $46,099 $50,492 General and administrative expenses $15,000 $16,000 $15,000 $17,000 Total operating expenses $56,156 $61,254 $61,099 $67,492 Operating income $8,431 $26,206 $30,342 $30,691 Provision for income taxes $3,204 $9,958 $11,530 $11,663 Net income $5,227 $16,248 $18,812 $19,028 Net income per common share basic $0.42 $1.29 $1.49 $1.51 Net income per common share diluted $0.16 $1.06 $1.14 $1.09 Student Managed Fund Stock Proposal Spring

20 Comparative Income Statement Figures SAM In $ Thousands Pessimistic 2012 Most Likely Revenue $ 453,446 $ 505,870 $ 558,282 $ 595,606 $ 617,816 Less excise taxes 38,393 42,072 45,282 50,025 51,890 Net revenue 415, , , , ,926 Cost of goods sold 201, , , , ,134 Gross profit 213, , , , ,791 Operating expenses: Advertising, promotional and 121, , , , ,001 selling expenses General and administrative 36,938 39,112 43,485 47,214 63,000 expenses Total operating expenses 159, , , , ,001 Operating income 54,271 81,178 83,155 72,854 92,790 Other income: Interest income Other income (expense), net: (16) (149) (209) - - Total other income (expense), net 96 (70) (155) - - Income before provision for 54,367 81,108 83,000 72,854 92,790 income taxes Provision for income taxes 23,249 30,966 37,441 28,779 36,355 Net income 31,118 50,142 45,559 44,075 56,436 Net income per common share basic Net income per common share diluted $ 2.17 $ 3.52 $ 3.26 $ 3.13 $ 4.11 Student Managed Fund Stock Proposal Spring

21 Pro Forma Balance Sheet Assumptions Assets: Cash We reduced cash by $21 million to account for the completion of the Company s share buyback program. However, this was more than offset when we used Cash as the plug for Assets to equal Liabilities and Stockholders Equity, which resulted in a net increase in cash of $16.13 million Accounts Receivable We do not expect significant changes, so this is an average of historical values. Inventories The Freshest Beer Program will reduce inventories for wholesalers by two weeks, and it should also reduce inventory for the Company itself. For 2011, SAM carried 54.5 days of inventory on its books. Participating wholesalers are expected to increase from 50% to 75% in 2012, so we estimated that one quarter of the inventory will be reduced from 54.5 to 40.5 days. This gives us a weighted new days sales inventory of 51 days (using 0.75 x old DSI x new DSI). We applied this ratio to the projected 2012 cost of goods sold in order to arrive at inventories. Prepaid Expenses We do not expect significant changes, so this is an average of historical values. Deferred Income Taxes We do not expect significant changes, so this is an average of historical values. Property, Plant and Equipment The Company plans significantly higher capital expenditures in 2012 at $40 to $60 million, up from almost $20 million in Our median estimate increase in PPE of $50 million was partially offset by the expected depreciation for 2012 of $19 million. Other Assets We do not expect significant changes, so this is an average of historical values. Goodwill The Company acquired through its Alchemy and Science subsidiary Angel City Brewing Company for an estimated $1.8 million. There is no publicly available information as to the premium paid on the acquisition, if any. Thus, we kept the same amount of Goodwill on the books as last year. Student Managed Fund Stock Proposal Spring

22 Pro Forma Balance Sheet Assumptions Liabilities: Accounts Payable We do not expect significant changes, so this is an average of historical values. Accrued Expenses We do not expect significant changes, so this is an average of historical values. Long-term Debt We do not expect to see this item on the balance sheet any time soon. Any expansions will most probably be funded by cash. The Company has an existing $50 million revolving credit facility, which at fiscal year-end 2011 had no outstanding amounts. Deferred Income Taxes We do not expect significant changes, so this is an average of historical values. Other liabilities We expect this account to decrease by $1,122,000 due to the repayment of a lease obligation. Pro Forma Balance Sheet Assumptions Stockholder s Equity: Class A Common Stock We are expecting a $21 million share buyback, which can be estimated to occur at a price close to $100, around which the stock has been fluctuating lately. Since the stock has a par value of $0.01 and the estimated amount of shares bought back is 210,000, we expect this account to decrease by $2,100. Class B Common Stock - We do not expect any changes in the balance of this account. Additional Paid-In Capital Historically, this account has grown steadily because of the exercise of stock options, issuance of stock awards and stock-based compensation. Last year, all of these items increased the account by $16,320,000, and we expect at least the same amount for next year. Accumulated Other Comprehensive Loss This account changes primarily due to the three defined benefit plans for employees, established in 1991, and the retiree medical plan. Boston Beer Company has had to contribute to these programs $400,000 in 2011 and $79,000 in We assumed that next year the Company will have to contribute the average of the last two years amounts. Retained Earnings We added to this account the projected net income for 2012, which was 30% of our pessimistic estimate added to 70% of our most likely estimate, a total of $52,727,480. We decreased that by the difference between the price paid for the shares and the par value, which is $20,997,900. The overall change to this account is an increase of $31, Student Managed Fund Stock Proposal Spring

23 Pro Forma Balance Sheet In $ Thousands Assets Cash and equivalents $ 48,969 $ 49,450 $ 65,580 Accounts Receivable $ 20,017 $ 23,233 $ 19,427 Inventories $ 26,614 $ 34,072 $ 36,623 Prepaid expenses $ 12,756 $ 14,605 $ 11,101 Deferred income taxes $ 3,648 $ 4,363 $ 3,452 Total Current Assets $ 112,004 $ 125,723 $ 136,183 PPE $ 142,889 $ 143,586 $ 174,586 Other assets $ 2,260 $ 1,802 $ 2,000 Goodwill $ 1,377 $ 1,377 $ 1,377 Total Assets $ 258,530 $ 272,488 $ 314,146 Liabilities Accounts Payable $ 19,423 $ 18,806 $ 20,279 Accrued Expenses $ 52,776 $ 48,243 $ 47,351 Total Current Liabilities $ 72,199 $ 67,049 $ 67,630 Long-term Debt $ - $ - $ - Deferred Income taxes $ 17,087 $ 17,349 $ 11,741 Other liabilities $ 3,656 $ 3,345 $ 2,223 Total Liabilities $ 92,942 $ 87,743 $ 81,594 Stockholders' Equity Class A Common Stock $ 93 $ 87 $ Class B Common Stock $ 41 $ 41 $ 41 Additional Paid-In Capital $ 122,016 $ 138,336 $ 154, Accumulated comprehensive loss $ (438) $ (838) $ (1,078) Retained Earnings $ 43,876 $ 47,119 $ 78,848 Total Stockholder's Equity $ 165,588 $ 184,745 $ 232,552 Total Liabilities and Equity $ 258,530 $ 272,488 $ 314,146 Student Managed Fund Stock Proposal Spring

24 Financial Ratios Liquidity Above Average Current Ratio Quick Ratio (Cash + AR) Cash Ratio SAM Peer Average BREW MENB TAP STZ Current Ratio Quick Ratio Cash Ratio Boston Beer Company has been steadily improving its liquidity over the last few years and will have no problem covering its current liabilities, even using only cash and factoring of receivables. It is one of the more liquid companies in the business it consistently places second within its peers and is well above the average for all three ratios. While the current ratio is not the 2.0 that William Stone looks for in his two-minute drill, it is very close to that. MolsonCoors (TAP) is the only company that has accumulated more cash to cover its liabilities. Asset Management Excellent Average Collection Period Days Sales Inventory Average Payment Period Cash Conversion Cycle Fixed Asset Turnover Total Asset Turnover SAM Peer Average BREW MENB TAP STZ Average Collection Period Days Sales Inventory Average Payment Period Cash Conversion Cycle Fixed Asset Turnover Total Asset Turnover Student Managed Fund Stock Proposal Spring

25 In the last five years, Boston Beer Company has decreased both the time it takes to disburse and to collect payments. While the days sales inventory was at a constant level , the implementation of the Freshest Beer Program increased this ratio to 54 days. We are expecting that as the program continues to be implemented with more and more of Boston Beer Company s suppliers, the ratio will start decreasing. Because of the technical difficulties and the time needed to develop reliable new procedures, we expect the ratio to start coming closer to that of peers during The days sales inventory is what is keeping the Company from having a cash conversion cycle shorter than the average, because the two other ratios that go into CCC are much better. For the purpose of the first four ratios, we have excluded STZ from the peer average. Boston Beer Company is managing its fixed assets very effectively, squeezing out $3.56 for every $1 in PPE. It is the leader among its peers, along with Mendocino (MENB). Mendocino has a slightly higher total asset turnover, but Boston Beer Company is a close second, with more than twice the peer average. This shows that SAM s management knows how to get the most benefit out of its assets. With TAP and STZ, we can see how the presence of goodwill and other intangible assets brings down the asset turnover from over 2.0 to below 0.5. Debt Management Excellent Times Interest Earned Debt/Equity ST Debt/Equity SAM Peer Average BREW MENB TAP STZ Times Interest Earned Debt/Equity Short-term Debt/Equity Over time, Boston Beer Company has had either negative interest coverage, meaning it had more interest income than expense, or one that was in the few hundreds, effectively showing interest expense was negligible. The debt-to-equity ratio has historically been around 0.50, meaning that only one-third of assets were financed by debt and the other two-thirds by equity. The short-term debt-to-equity ratio shows that the larger part of the obligations of the Company has borne a shortterm interest rate, if any, and also that the Company will probably have no trouble with any obligations maturing in the longer term. Compared to its peers, SAM is the industry leader by far. While it might have a slightly larger short-term debt-to-equity ratio than some of its companies, the larger current obligations keep it from amassing long-term obligations and debt-to-equity ratios of 3.0 or higher. Student Managed Fund Stock Proposal Spring

26 While the Company s strategy regarding debt makes for a financially stable company, it might raise some questions about profitability and the cost of capital. See Profitability, DuPont Analysis and DCF Valuation for details. Profitability Excellent Gross Margin 55.4% 46.2% 51.5% 55.3% 55.6% EBIT Margin 11.0% 3.4% 13.1% 17.3% 20.1% Net Profit Margin 6.6% 2.0% 7.5% 10.8% 12.9% Return on Assets 11.4% 3.6% 11.8% 19.4% 24.3% Return on Equity 16.8% 5.7% 18.0% 30.3% 35.9% SAM Peer Average BREW MENB TAP STZ Gross Margin 55.6% 34.0% 30.7% 27.9% 41.7% 35.7% EBIT Margin 20.1% 16.7% 14.0% 4.8% 25.4% 22.4% Net Profit Margin 12.9% 12.0% 8.2% 3.8% 19.2% 16.8% Return on Assets 24.3% 6.9% 5.9% 8.2% 5.4% 7.8% Return on Equity 35.9% 30.9% 9.0% 83.8% 8.8% 21.9% Over time SAM has maintained a gross margin of about 50% to 55%, the largest among its peers. Its EBIT margin has experienced a great rise since 2008 and now is at a comfortable 20.1%, above the peer average. The margin lead shrinks when we get to the net profit margin, which is in line with its peers. This must mean that SAM pays too much in taxes, since it has negligible interest expenses. The bottom line is not bad and has improved a lot since 2008, but it should be better considering the other two margins. The returns on assets and equity are where SAM shows its strength. The Company knows how to make the best use of its assets, earning a return from them that is three and a half times as large as that of the peer group. The return on equity is second only to that of Mendocino, and still a full five percent over the peer average. The return on equity is discussed in detail in the next section, DuPont Analysis. Student Managed Fund Stock Proposal Spring

27 DuPont Analysis Excellent Net Profit Margin 6.59% 2.01% 7.49% 10.80% 12.87% Total Asset Turnover Equity Multiplier Return on Equity 16.84% 5.71% 17.97% 30.25% 35.87% SAM Peer Average BREW MENB TAP STZ Net Profit Margin 12.87% 12.03% 8.25% 3.85% 19.23% 16.79% Total Asset Turnover Equity Multiplier Return on Equity 35.87% 30.89% 9.04% 83.77% 8.81% 21.93% Historically, SAM has increased its return on equity six times, from 5.71% in 2008 to 35.87% last year. The primary driver for this increase has been the net profit margin, with the improving total asset turnover being a secondary factor. The equity multiplier has shown no real movement in the past five years. When we look at the competitors return on equity breakdown we see that although some other companies are much more highly leveraged than SAM, they do not necessarily produce a higher return on equity. The only one that does produce a higher return is MENB with an equity multiplier of 10.21, which along with a total asset turnover comparable to SAM s more than compensates for its dismal net profit margin. In the long term, financial stability and consistent higher margins are rewarded and excessive borrowing is not, so the 83.77% return on equity does not mean that MENB is a better investment than SAM. We expect the return on equity to continue improving, with the Freshest Beer Program reducing the inventory held and thus pushing the total asset turnover even higher. Student Managed Fund Stock Proposal Spring

28 Market-Based Valuations Price-to-Earnings Historical P/E Multiples Average SAM BREW MENB TAP STZ P/E Multiple EPS $ 3.50 $ 4.48 Price per share Probability Weighted Price per share $ Current Price $ Margin of Safety 19.7% Boston Beer Company has had a high P/E ratio for the last five years, with the highest level being in 2008, after which the ratio returned to the market average for a year, and then started rising back up. Per the most recent data, the market loves SAM and pays over $26 for every dollar of its earnings. This is $10 more than its closest peer, MENB. For the 2012 P/E Valuation, we assumed that the market is going to continue paying top dollar for SAM s earnings and that the P/E is going to increase, as it has done in the last three years. For our pessimistic scenario P/E we used the 2011 value, while for the most likely we increased the same value to 31x, which is still under the 35.87% return on equity that the Company has experienced in We also used the pro forma earnings per share for each corresponding scenario. The target price we received is slightly above the current price, giving potential investors a 19.7% discount. Student Managed Fund Stock Proposal Spring

29 Price-to-Book Historical P/B Multiples Average SAM BREW MENB TAP STZ P/B Valuation P/B Multiple Book Value per share $ $ Price per share Probability Weighted Price per share $ Current Price $ Margin of Safety 22.7% Historically, the price-to-book ratio has been declining until 2009, after which it doubled in 2010 and reached a new high in The market again has high expectations for SAM and last year paid $6.57 for every dollar of its stockholders equity, giving it a multiple three times as large as the second highest one (MENB). For our pessimistic 2012 P/B Valuation, we assumed that the P/B is going to stay the same and multiplied it by the book value per share derived from plugging in our pessimistic scenario earnings into the pro forma balance sheet. For our most likely valuation, we increased the P/B multiple by 0.50 to 7.07x and multiplied it by the shareholders equity per share in the most likely case. Please note that neither book value per share corresponds to the actual book value per share in our pro forma balance sheet because the balance sheet equity was calculated using a 30%/70% weighted average of our two pro forma income statement scenarios. The Price per Book valuation gave us a margin of safety of 22.7%. Student Managed Fund Stock Proposal Spring

30 Price-to-Sales Historical P/S Multiples Average SAM BREW MENB TAP STZ P/S Valuation P/S Multiple Sales per share $ $ Price per share Probability Weighted Price per share $ Current Price $ Margin of Safety 17.4% In the last five years, the price-to-sales ratio has been relatively low, with the above described historical trends in P/E and P/B reflected here as well. SAM s P/S reached a high of 2.17 in 2011, which was the second highest of its competitors, behind TAP. For our pessimistic 2012 P/S Valuation, we used the 2011 P/S multiple and the sales per share from the pessimistic pro forma income statement scenario. We assumed that investors would once again recognize the potential of the stock and be willing to pay a premium for every dollar of its sales. For our most likely valuation, we increased the 2011 P/S multiple by 0.50 and multiplied it by the most likely pro forma sales per share. This valuation gave us a margin of safety of 17.4%, which is slightly below the margins we have with the other two price multiples. Student Managed Fund Stock Proposal Spring

31 Enterprise Value-to-EBITDA Historical EV/EBITDA Multiples Average SAM BREW MENB TAP STZ EV/EBITDA Valuation (Dollar amounts are in Thousands) Pessimistic Most Likely EBIT $ 72,854 $ 92,790 Plus Depreciation and $ 19,000 $ 19,000 Amortization EBITDA $ 91,854 $ 111,790 Times EV/EBITDA Multiple Enterprise Value $ 1,041,624 $ 1,603,069 Minus Debt $ 50,000 $ 50,000 Plus Cash $ 65,580 $ 65,580 Market Capitalization $ 1,097,201 $ 1,618,649 Number of shares outstanding 12,590 12,590 Price per share $ $ Probability Weighted Price $ Current Price $ Margin of Safety 10.4% We included $50 million credit facility as debt to be on the conservative side, although none of it was outstanding at year end. Boston Beer Company s EV/EBITDA multiple reached a high point of in 2008 and since then has fallen to half that level. SAM s multiple is the same as that of STZ, and the two of them are the largest in the peer group. BREW has a multiple that is ten times smaller than theirs, and no information could be found about MENB. For our 2012 EV/EBITDA Valuation, we used the pessimistic EBIT and the 2011 multiple for the pessimistic scenario. For the most likely scenario, we used the most likely EBIT and we increased the 2011 multiple by 3, in accordance with the historical trend since After arriving at the projected market cap for each scenario by subtracting the maximum debt and adding the cash available from our pro forma balance sheet, we divided by the anticipated number of shares after the buyback and weighed both scenarios 30%/70%. This gave us a positive 10.4% margin of safety. Student Managed Fund Stock Proposal Spring

32 Discounted Cash Flow Model 2011 Variable Justification Current FCFF 48, Free Cash Flow to the Firm Outstanding shares 12,590 Shares outstanding after the planned $21 million buyback Equity Beta 0.85 Google Finance Risk-free rate 2.25% 10-year Treasury rate from March 23, 2012 Equity Risk Premium 6.00% Estimate Cost of Debt 3.25% Interest rate of SAM s revolving line of credit Cost of Equity 7.35% Result of above variables in CAPM Marginal Tax Rate 38% Management estimate for 2012 Equity Proportion of stockholder s equity in assets Debt Proportion of liabilities in assets LT Debt 50,000 Maximum amount of revolving credit line WACC 5.63% Result of weighted equity and debt costs TR 380, , , , , , , ,495 10% 10% FCFF 5, ,661 82,609 39,517 48,816 18,282 65,762 72,338 EBIT 36,885 14,062 54,271 81,178 83,575 86, , , % 16.8% 16.8% Tax rate Depreciation 6,654 12,503 16,919 17,427 18,792 22,629 22,629 24,892 2% 3% 4% 3% 3% 3% 3% 3% CapEx 37, ,488 16,989 13,588 20,000 50,000 20,168 22,185 10% 23% 4% 3% 4% 3% 3% NWC -15,672 67,862-51,636 14,490 3,297 6,112 6,723 7,395-4% 15% -11% 3% 1% 1% 1% 1% TR 813, , ,587 1,024,618 1,086,095 1,140,400 1,186,016 TV 10% 9% 8% 7% 6% 5% 4% FCFF 79,571 63,333 93, , ,242 95, ,017 2,107,902 EBIT 136, , , , , , , % 16.8% 16.8% 16.8% 16.8% 16.8% 16.8% Tax rate Depreciation 27,381 29,845 32,233 34,489 36,558 38,386 39,922 3% 3% 3% 3% 3% 3% 3% CapEx 24,403 50,000 28,728 30,739 32,583 50,000 35,580 3% 3% 3% 3% 3% NWC 8,134 8,867 9,576 10,246 10,861 11,404 11,860 1% 1% 1% 1% 1% 1% 1% Student Managed Fund Stock Proposal Spring

33 SAM 2012P 2013P 2014P 2015P 2016P 2017P 2018P 2019P 2020P 2021 TV FCFF 18,282 72,338 79,571 63,333 93, , ,242 95, ,017 2,060,174 65,762 Discount Rate Discounted FCFF 17,307 58,937 61,374 63,912 48,157 67,429 68,303 68,541 58,489 67,079 1,191,170 Total FCFF 1,770,700 Long-term Debt 50,000 Total Value 1,720,700 # Shares 12,590 Value per share Price Margin of Safety 32.4% For the discounted cash flow model we projected the EBIT as a percentage of revenues. Historical average revenue growth for the last four years has been 10%, which we assumed can be sustained only through 2015, after which it will slowly deteriorate to a more sustainable 4%, to be reached in data is taken from our pro forma income statement. EBIT margin has been an average of 13% since 2007, but if we exclude the dismal 2008 results and the distant 2007 margin, the average for the last three years is 16.8%, which we projected through We kept the tax rate constant at 38% and the depreciation at its historical percentage of revenues (3%). We assumed that capital expenditures will be 3% of revenues as well, except for every four years, when investment in new production facilities will be necessary. The change in net working capital was hard to predict, since in the past few years its relationship to revenues has been very volatile, so we just kept it at a constant 1% of sales. We discounted our annual cash flows by the weighted-average cost of capital and after adding up the maximum debt we came up with a value of the Company, which per share is 32.4% higher than the current one. Student Managed Fund Stock Proposal Spring

34 Three-stage H-Model DCF Valuation V3 FCFF Growth rate 10.00% 10.00% 10.00% FCFF $ 48,282,000 $ 53,110,200 $ 58,421,22 $ 64,263,342 $ 1,340,462,348 WACC 5.63% 5.63% 5.63% 5.63% 5.63% Number of periods PV of CF's $ 50,279,467 $ 52,359,569 $ 54,525,727 $ 1,340,223,181 Part 1: ($ 64,263,342.00*4%)/ )= $ 157,701, Part 2: ($ 64,263,342.00*5* )/( )= $ 1,182,760, V3: Part1+Part2 = $ 1,340,462, EV( PV of CF's + PV of V3) $ 1,497,387,943 (-)Total Debt/Total liabilities $ 87,743,000 (+)Cash $ 49,450,000 Market cap = EV+TD-Cash $ 1,459,094,943 Shares outstanding (9,288,015+4,107,355) $ 12,590,000 Target Price $ Current Price $ MOS 11.0% Assumptions: Short-term growth rate: We used the short term historic revenue growth rate of 10%. Long-Term Growth rate: We used the same percentage as our spreadsheet calculation, 4%, for our projected steady-state perpetual growth rate. Length of Period of Declining Growth: We assumed that would take 10 additional years after 2015 before SAM would enter its steady-state mature growth stage. WACC: We used the average WACC located within the EVA calculation for For our H-Model DCF valuation, we added the total present values of the forecasted yearly cash flows with the present value of our projected terminal value to arrive at the forecasted enterprise value of $ 1,497,387, We then deducted our current total debt and added back current levels of cash in order to arrive at the market cap. Finally, we divided this figure by the number of shares outstanding to arrive at our estimated intrinsic value for SAM s stock. Student Managed Fund Stock Proposal Spring

35 Residual Income Valuation: This valuation shares the idea of the Economic Value Added that only after we subtract the cost of both equity and debt capital can we see the true value that the Company has added, or if we look at the income statement, the true income that is freely available to the Company. Since the income statement already subtracts the cost of debt, we forecasted the earnings per share through 2021 and subtracted the 7.35% cost of equity. For 2012, we accounted for the fact that the Company will pay a dividend of sorts, with the $1.67 decreasing the residual earnings. The main driver of this model is the return on equity, which in 2011 was 35.87%. Since this is a very high return, we assumed that it could not be kept up for longer periods of time, but will rather deteriorate. We factored this is in with a decrease in ROE of two percentage points for every year until we reached 20% in In 2021, we factored in a sharp drop to a sustainable long-term rate of 15%, which is still below SAM s 21.3% five-year average, which we used to estimate the terminal value of the Company (all amounts are in dollar per share. Because we are using the return on the book value per share, the projected earnings for 2012 of $5.29 are different from our weighted pro forma earnings of $4.19. The two amounts can be reconciled by adding other comprehensive income to the pro forma earnings, such as $1.30 from sale of stock options and subtracting $0.20 for pension plan contributions. We can also arrive at the 2012 book value in two ways: 1. Start with 2011 Equity divided by the number of shares after the buyback ($184,745/12590=$14.67) Result: $18.29 Add 2012 EPS of $4.19 Add 2012 projected increase in equity due to redemption of stock options, $1.30 Subtract 2012 projected decrease in equity due to pension plan contributions, $0.20 Subtract 2012 planned share buyback of $21 million worth of stock, $ Start with 2011 Equity divided by the number of shares after the buyback ($184,745/12590=$14.67) Add the product of the projected 2012 return on equity of 35.87% and the 2011 book value of $14.67 to arrive at the projected earnings Subtract dividends paid out by the Company of $1.67/share Result: $18.26 The two values differ only because of rounding of the estimates, otherwise they both represent the new book value per share for Student Managed Fund Stock Proposal Spring

36 Year Projected Earnings Dividend Book Forecasted ROE K E Equity Charge Residual Income PV of RI 2011 $ $ $ 5.26 $ 1.67 $ % 7.35% $ 1.34 $ 3.92 $ $ 6.21 $ % 7.35% $ 1.80 $ 4.41 $ $ 7.83 $ % 7.35% $ 2.37 $ 5.46 $ $ 9.69 $ % 7.35% $ 3.09 $ 6.60 $ $ $ % 7.35% $ 3.95 $ 7.81 $ $ $ % 7.35% $ 4.98 $ 9.00 $ $ $ % 7.35% $ 6.17 $ $ $ $ % 7.35% $ 7.53 $ $ $ $ % 7.35% $ 9.04 $ $ $ $ % 7.35% $ $ 8.05 $ 3.96 TV 7.35% $ $ Target Price $ Actual Price $ Margin of Safety 14% We see that the overall discounted book value of the Company will be $ per share, 14% higher than its current price. P/E P/B P/S EV/EBITDA DCF Stylized Residual Income Target Price Weight Weighted Target Price Current Price (March 29 Close) Margin of Safety 18% We gave long-term valuations twice the weight of the market-based valuations because they better express the intrinsic value of the Company over time and account for SAM s potential for growth. Therefore, after weighing all valuations with appropriate weights, we calculated a margin of safely of 18% for The Boston Beer Company. Student Managed Fund Stock Proposal Spring

37 Student Managed Fund Stock Proposal Spring