Questions for American Greetings

1. The shares of American Greetings are currently trading at an EBITDA
multiple that is at the bottom of its peer group. Do you think a 3.5
times multiple is appropriate for American Greetings? If not, what
multiple of EBITDA do you think is justified? What is the implied
share price that corresponds to your multiple?

EBITDA , which is an acronym for Earnings Before Interest, Taxes,
Depreciation and Amortization is one of the valuation measures that is used
to indicate the financial performance of a company. EBITDA therefore, is
equivalent to Revenue-Expenses (excluding amortization, depreciation,
interest and tax). Thus means that it refers to net income with
amortization, depreciation, taxes and interest added back to it. This
measure can help in the analysis and comparison of profitability between
companies since it eliminates the effects of accounting and financing
decisions (Ferris & Petitt, 2002). Financially, when the EBITDA margin is
higher, it means that less operating expenses will be eating into the
bottom line of the company and this will lead to an operation that is more
profitable. EBITDA multiple according to the article refers to the
Enterprise Value divided by EBITDA. For the case of American Greetings, the
EBITDA multiple being at the bottom of its competitors is encouraging to
investors. This is because the comparatively low EBITDA equates to low
EBITDA margin and when the EBITDA margin is low, the EBITDA multiple will
be high since EBITDA margin is the denominator. At the same time, high
EBITDA margin will result in low EBITDA multiple. However, Therefore, since
high EBITDA means that less operating expenses be eating into the bottom
line of the company and this will lead to an operation that is more
profitable, then I think a 3.5 times multiple, which is the lowest in the
group is appropriate since it means less operating expenses eating into the
company\'s revenues and hence higher profitability. The implied share price
corresponding to this multiple is 12.51.

2. Please model cash flows for American Greetings for fiscal years 2012
through 2015 based on the two sets of ratios in Exhibit 8.

| |Actual 2011|2012 |2013 |2014 |2015 |
|Bull | | | | | |
|Scenario | | | | | |
|Cash Inflow|1747.98 |1676.6 |1684.9 |1693.2 |1701.5 |
|Operating |0.10393 |0.10355 |0.10355 |0.10355 |0.10355 |
|Margin | | | | | |
|Net Working|11.0811 |13.2444 |14.3481 |15.4518 |16.5555 |
|Capital | | | | | |
|Turnover | | | | | |
|Fixed Asset|1675.05 |1675.05 |1675.05 |1675.05 |1675.05 |
|Turnover | | | | | |
|Bearish | | | | | |
|Scenario | | | | | |
|Revenue |1747.98 |1747.98 |1747.98 |1747.98 |1747.98 |
|Growth | | | | | |
|Operating |0.10393 |0.10355 |0.10355 |0.10355 |0.10355 |
|Margin | | | | | |
|Net Working|11.0811 |13.2444 |14.3481 |15.4518 |16.5555 |
|Capital | | | | | |
|Turnover | | | | | |
|Fixed Asset|1675.05 |1675.05 |1675.05 |1675.05 |1675.05 |
|Turnover | | | | | |

3. Based on the discounted cash flows associated with the forecast, what
is the implied enterprise value of American Greetings and the
corresponding share price?

Enterprise Value refers to a measure of the total value of a company. It is
calculated by adding the market capitalization of the company to the
preferred shares, minority interest and debt and subtracting cash
equivalents and total cash. Since the minority preferred equity and
minority interest is zero, then the Enterprise value is obtained by (Share
Price* number of shares)+ debt-cash and cash equivalents. =($12.51*75)-
172. - 938.25-172=766.25. According to the discounted cash flows, the
corresponding share price is 12.52 and the implied enterprise value of the
American Greetings is $766.25

4. What are the key drivers of value in your model?

1) Cutting-edge Technology and Innovation

According to analysts, the product innovation in the company is needed
to drive the interest of the customers in the company\'s goods. The
valuation will improve if technological enhancements are left to be the key
to the company\'s long-term approach. The rolling out of several
complementary interactive goods such as mobile apps is for instance, one of
the innovative moves meant to bolster the company\'s digital position. The
effect of technology is evident from the information provided in the case
study. For instance, with the introduction of social networking sites, some
respondents are claiming that they are sending fewer e-cards that they used
to since most of the greetings are being sent through facebook. This means
that technology is affecting the American Greetings negatively by reducing
the use of greeting cards to send greetings.

2) Brand recognition

In the case study,