Case Study: Comprehensive Business Valuation and Analysis of Lululemon

This case study provides a comprehensive business valuation and analysis of Lululemon using several financial techniques, including the price-earnings ratio model, discounted cash flow (DCF) method, and free cash flow to equity (FCFE) method. The price-earnings ratio model estimates Lululemon's business value at $12,636,479,625.00 based on a P/E ratio of 54.25 and earnings per share of $1.90. The discounted cash flow method, projecting cash flows from 2019 to 2024 and discounting them at a rate of 6%, yields a business value of $3,299,076.53, incorporating a terminal value calculated with a 14.75% cost of capital and a 4% growth rate. The FCFE method further assesses the company's value by considering net income, capital expenditures, depreciation, debt ratio, and changes in working capital. The study concludes that business valuation is highly dependent on the chosen method, with each technique yielding different results, making it difficult to rely solely on any single model. The analysis excludes cash flows from financing activities, focusing instead on operational and investment cash flows to determine the intrinsic business value. Desklib offers a range of similar solved assignments and past papers to aid students in their studies.

Running head: BUSINESS VALUATION AND ANALYSIS
Business Valuation and Analysis
Name of the Student:
Name of the University:
Authors Note:

1
BUSINESS VALUATION AND ANALYSIS
Price earnings ratio model:
As per price earnings ratio model the value of a firm can be calculated by simply
calculating the market price per share. The price earnings ratio is multiplied with earnings per
share of the firm to calculate value of each share. In case of Lululemon the price earnings ratio is
54.25 as pre the GICS table of Consumer Discretionary sector and with the earnings per share of
$1.90 the marker price of each share will be (54.25 x 1.90) = $103.075. The company as in 2018
had 122,595,000 shares outstanding and thus, according to the price earnings ratio model the
value of the business of Lululemon is (122,595,000 x 103.075) = $12,636,479,625.00 (Botosan
& Huffman, 2015).
Using discounted cash flow method:
As per the discounted cash flow method the value of the business of the company is
calculated below.
2
019 2020 2021 2022 2023 2024
Net
income
476,329.0
0
551,494.
00
638,520.
00
739,278.
00
855,936.
00
991,003.
00
Add:
Depreciatio
n
131,678.0
0
152,457.
00
176,515.
00
204,369.
00
236,619.
00
273,957.
00

2
BUSINESS VALUATION AND ANALYSIS
Less: Increase in
working capital
(220,042.
00)
(254,763.
00)
(294,966.
00)
(341,510.
00)
(395,403.
00)
(A): Net cash flow from
operating activities
483,909.
00
560,272.
00
648,681.
00
751,045.
00
869,557.
00
Net cash flow from investing activities
Property equipment
purchased
243,584.
00
282,022.
00
326,525.
00
378,051.
00
437,708.
00
Goodwill acquired 4,748.
00
5,497.
00
6,365.
00
7,370.
00
8,532.
00
Acquisition of other non-
current assets
12,291.
00
14,229.
00
16,476.
00
19,075.
00
22,084.
00
(B): Net cash used in
investing activities
260,623.
00
301,748.
00
349,366.
00
404,496.
00
468,324.
00
Net increase in cash (A-
B)
223,286.
00
258,524.
00
299,315.
00
346,549.
00
401,233.
00
PV factor @6% 0
.94
0
.89
0
.84
0
.79
0
.75

3
BUSINESS VALUATION AND ANALYSIS
Present value of net
increase in cash
210,647.
17
230,085.
44
251,310.
65
274,499.
27
299,824.
64
Total present value of cash flow is $1,266,367.16 over the five years. The terminal value of cash
flow is measured using the following formula:
(299,824.64 / 14.75% - 4%) = $2,032,709.37.
Thus, the value of the firm is ($1,266,367.16 + $2,032,709.37) = $3,299,076.53 by using the
discounted cash flow method.
Note:
It is important to note that the present value of cash flows have been discounted by using 6% per
annum discounting rate. The cost of equity and rate of growth for calculation of terminal value of
cash flow is calculated by using 14.75% as cost of capital and 4% as the rate of growth.
2019 2020 2021 2022 2023 2024
Net income 476,329 551,494 638,520 739,278 855,936 991,003
Add: Depreciation 131,678 152,457 176,515 204,369 236,619 273,957
Less: Increase in working
capital
-220042 -254763 -294966 -341510 -395403

4
BUSINESS VALUATION AND ANALYSIS
(A): Net cash flow from
operating activities
483,909 560,272 648,681 751,045 869,557
Net cash flow from investing activities
Property equipment purchased 243,584 282,022 326,525 378,051 437,708
Goodwill acquired 4,748 5,497 6,365 7,370 8,532
Acquisition of other non-
current assets
12,291 14,229 16,476 19,075 22,084
(B): Net cash used in
investing activities
260,623 301,748 349,366 404,496 468,324
Net increase in cash (A-B) 223,286 258,524 299,315 346,549 401,233
PV factor @6% 0.943396 0.889996 0.839619 0.792094 0.747258
Present value of net increase
in cash
210647.2 230085.4 251310.6 274499.3 299824.6
It is important to note that the present value of cash flows from financing activities have not been
considered in the valuation of business of the company since the cash flows from financing
activities are mainly to finance the business thus, for valuation purpose the cash flows from
financing activities have been completely overlooked (Olbrich, Quill & Rapp, 2015).

5
BUSINESS VALUATION AND ANALYSIS
FCFE:
As per discounted cash flow method the value of a firm is calculated by using the following
formula:
FCFE = Net income – (Net capital expenditures – Depreciation and amortization) (1 – Debt
ratio) – Change in working capital (1 – Debt ratio)
The following formula is used to calculate the value of the business as per FCFE method.
Income
Statement
2019 2020 2021 2022 2023 2024
Net
income
476,329 551,494 638,520 739,278 855,936 991,003
Net capital expenditure
Property equipment
purchased
243,584.
00
282,022.
00
326,525.0
0
378,051.
00
437,708.
00
Goodwill acquired 4,748.
00
5,497.
00
6,365.0
0
7,370.
00
8,532.
00
Acquisition of other
non-current assets
(Trugman. 2016)
12,291.
00
14,229.
00
16,476.0
0
19,075.
00
22,084.
00
Net capital 260,623. 301,748. 349,366.0 404,496. 468,324.

6
BUSINESS VALUATION AND ANALYSIS
expenditure 00 00 0 00 00
Less: Depreciation 152,457 176,515 204,369 236,619 273,957
1 - debt ratio
Debt ratio 0.063852468 0.0638525
4
0.06385263 0.0638524
4
0.0638524
2019 2020 2021 2022 2023 2024
Working
capital
1,394,430 1,614,472 1,869,235 2,164,201 2,505,711 2,901,114
Changes in working
capital
220,042 254,763 294,966 341,510 395,403
FECE 206253.1129 238802.86
1
276481.286 320110.39 328312
Recommendation:
It is clear from the above calculations that valuation of a business to a large extent is dependent
on the method which is being used. Since the different valuation techniques use different
methods to value a business hence, it is quite difficult to trust any particular model as different
methods show different value of companies (Easton & Sommers, 2018).

7
BUSINESS VALUATION AND ANALYSIS
References:
Botosan, C. A., & Huffman, A. A. (2015). Decision-useful asset measurement from a business
valuation perspective. Accounting Horizons, 29(4), 757-776.
Easton, M., & Sommers, Z. (2018). Financial Statement Analysis & Valuation, 5e.
Olbrich, M., Quill, T., & Rapp, D. J. (2015). Business valuation inspired by the Austrian
School. Journal of Business Valuation and Economic Loss Analysis, 10(1), 1-43.
Trugman. (2016). Understanding business valuation: A practical guide to valuing small to
medium sized businesses. John Wiley & Sons.