Tara Solution

8/11/2019 Tara Solution

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Tara Inc.Case Solution

Emerging Markets

Campbell Harvey

March 8th, 2001

Yves McMullen

Jason Kam

Uche Osuji

Tara A Buhist savi!r"g!ess #ith numer!us $!rms%


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James Sherrill

2


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The following 10 steps tae !ou through the case writers solution to the Tara case" #t is important to

note that it is essential to follow along with e$cel portion of the solution as it will %etail the mo%el

&uilt an% the un%erl!ing factors 'figures of the e$cel mo%el have &een inclu%e% for !our convenience("

#t is also important to note that this is the case writers interpretation of the case an% there are more thanone possi&le solution"

&tep 1' (!recasting )evenues *&ee (igure 1 !r )ev Assumpti!ns in the E+cel spreasheet

The first step in anal!)ing Tara is to forecast the revenues" The case gives the si)e of the U"S" *thletic

shoe maret an% gives an in%ication into the growth rate for the future" The maret is suppose% to

e$pan% less than +,- or at 1"./ a !ear" orecasting this growth rate out gives the total sales volume

for the ne$t 12 !ears 'the case alwa!s uses 12 !ears &ecause the writers felt this was an a%euate time

frame for the compan! to sta&ili)e(

Total athletic shoe volume %oesnt help much &ecause Tara is focusing on 3unning an% 4ross Training

shoes" Total maret sales nee% to &e &roen %own into those two categories &! using the percentages

state% in the case '3unning is 15/ an% 4ross Training is 1."6/ of total athletic shoe sales("

Once volume sales have &een calculate% the ne$t step is the price" Taras strateg! is to &e a low cost

provi%er of ualit! shoes" The average athletic shoe price is given in the case &ut it is also mentione%

that 3unning an% 4ross Training segments cost significantl! more than the average athletic shoe" 7e

are choosing 'accor%ing to the case( to estimate our price as the average for the total shoe in%ustr!nowing that this will &e a&out 20/ lower than the in%ustr! average for 3unning an% 4ross Training"

urthermore8 an! price use% nee%s to inclu%e inflation8 which we estimate% to grow at 9/ over the

ne$t 12 !ears"

The last piece is to forecast maret share" This is a critical component to case an% one that will nee%

to &e forecaste% later using statistical techniues" or now8 it is important to note that maret share

will never grow in e$cess of 1/ of the aforementione% maret segments" The case writers grew

maret share &! "1/ &eginning the !ear after start:up '2009( an% stoppe% growth with it reache% "6./maret share 'in 2005(" The last step is an o&vious one; 3evenues < Total Maret Sales = Maret

Share = -rice"

&tep 2' (!recasting C!st !$ -!!s &!l Assumpti!ns *&ee (igure 2 !r C-& Assumpti!ns in the

E+cel spreasheet

There are two wa!s to calculate 4ost of +oo%s Sol% '4+S( in this case" The first is &! using an

in%ustr! &enchmar" 4+S in the shoe in%ustr! averages aroun% >./ of sales8 thus taing ">. =

revenues will give a rough estimate for the reuire% num&er" This metho%8 however8 is not

recommen%e% &ecause a critical component to the case is %oing &usiness in +a&on an% it nee%s to &eun%erstoo% how fluctuations in +a&on will affect our la&or costs"

The secon%8 an% preferre% metho% is to forecast out 4+S &! &reaing it %own into la&or8 materials8 an%

overhea% an% forecasting them in%ivi%uall! as a percentage of sales" This metho% will allow for

statistical variations to the inflation8 which will affect ?a&or" ?a&or is roughl! 96/ of sales" This will

give a @har%A estimate num&er for the 4+S an% this num&er can &e carrie% throughout the valuation &!

fluctuating +a&ons inflation rate" +a&ons currenc! is pegge% to the ranc an% the chance of them

removing the peg is capture% in the 4ost of 4apital" Material an% overhea% &oth can &e taen as a

percentage of sales throughout 'material is 1BC of sales an% overhea% is B/ of sales"

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(igure 1 )evenues Assumpti!ns

Tara Inc.

Revenue Assumptions ($MM)2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Size of US shoe marketPairs of Shoes- Total 1180.0 1197.6 1215.5 1233.6 1251.9 1270.6 1289.5 1308.7 1328.2 1348.0 1368.1 1388.5 1409.2 1430.2Pairs of Shoes- Athleti 413.0 419.2 425.4 431.7 438.2 444.7 451.3 458.1 464.9 471.8 478.8 486.0 493.2 500.6Pairs of Shoes- !"##i#$ 78.5 100.6 102.1 103.6 105.2 106.7 108.3 109.9 111.6 113.2 114.9 116.6 118.4 120.Pairs of Shoes- %ross Tr. 64.8 65.8 66.8 67.8 68.8 69.8 70.9 71.9 73.0 74.1 75.2 76.3 77.4 78.6

A&$ ost 'er Athleti Shoe 45.21( 46.56( 47.96( 49.40( 50.88( 52.41( 53.98( 55.60( 57.27( 58.98( 60.75( 62.58( 64.45( 66.39(

Total ( for Athleti Shoe 18)671( 19)517( 20)402( 21)328( 22)295( 23)306( 24)363( 25)467( 26)622( 27)830( 29)092( 30)411( 31)790( 33)231(Total ( for !"##i#$ Shoe 3)547( 4)684( 4)897( 5)119( 5)351( 5)593( 5)847( 6)112( 6)389( 6)679( 6)982( 7)299( 7)630( 7)976(Total ( for %ross Tr. Shoe 2)931( 3)064( 3)203( 3)348( 3)500( 3)659( 3)825( 3)998( 4)180( 4)369( 4)567( 4)774( 4)991( 5)217(

% of Maret !"are*ike 42.0+

A,i,as-Salomo# A.. 17.5+!eeok 11.1+

A#,1 1.8+Tara 0.10+ 0.20+ 0.30+ 0.40+ 0.50+ 0.60+ 0.70+ 0.75+ 0.75+ 0.75+ 0.75+

Total Shoes Sol, 0.2 0.3 0.5 0.7 0.9 1.1 1.3 1.4 1.4 1.5 1.5#ara Revenues - - 8.47 17.70 27.76 38.69 50.55 63.41 77.34 86.62 90.55 94.65 98.95

Ass"m'tio#s/

Pairs of shoes- Total- ha&e histori %A! of 1.5+Pairs of Shoes- Athleti- 'ete, to mai#tai# #ear 35+ of totalPairs of Shoes- !"##i#$- re "ikl to 19+) e'ete, to e aro"#, 24+ of athletiPairs of Shoes- %ross Trai#i#$- 'ete, to e #ear 17+ of shoes sol,

A&$ ost 'er Athleti Shoe- Stea, rise ith i#flatio# 3+

stimate


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ara Inc.

'! Assumptions ($MM)2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

st of oo,s Sol,/Total Shoes Sol, - - 0.17 0.35 0.53 0.72 0.91 1.11 1.31 1.43 1.45 1.47

aor 16.89( 17.40( 17.92( 18.46( 19.02( 19.60( 20.20( 20.86( 21.54( 22.30( 23.52( 24.75( (

aterial 8.38( 8.63( 8.89( 9.16( 9.43( 9.72( 10.01( 10.31( 10.62( 10.94( 11.26( 11.60( (&erhea, 3.73( 3.84( 3.95( 4.07( 4.19( 4.32( 4.45( 4.58( 4.72( 4.86( 5.01( 5.16( (

Total Per Shoe 29.00( 29.87( 30.77( 31.69( 32.64( 33.63( 34.66( 35.75( 36.88( 38.10( 39.79( 41.51( (:#,"str A&era$e 30.27( 31.17( 32.11( 33.07( 34.06( 35.09( 36.14( 37.22( 38.34( 39.49( 40.67( 41.90( (+ ;iffere#e 95.8+ 95.8+ 95.8+ 95.8+ 95.8+ 95.9+ 95.9+ 96.0+ 96.2+ 96.5+ 97.8+ 99.1+

&'! 0 0 5.3 11.0 17.3 24.1 31.5 39.6 48.4 54.3 57.6 61.0:#,"str A&era$e


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&tep .' C!mpiling the /nc!me &tatement *&ee (igure . !r the /nc!me &tatement in the E+cel

spreasheet

The ne$t step is to forecast the #ncome Statement" 7e alrea%! have our revenues an% 4+S num&ers

from the previous 2 steps" De$t8 we nee% to calculate Selling8 +eneral C *%ministrative e$penses'S+C*(8 3C,8 #nterest #ncome" S+C* inclu%es mareting e$penses so this num&er is e$pecte% to &e

large in the first few !ears" The case hints that Tara having to spen% 10 million on mareting costs inthe first few !ears" Starting after the initial mareting e$pen%iture8 it is e$pecte% that S+C* will level

off to in%ustr! stan%ar%s '6/ of sales("

3C, is another critical component to Taras strateg! an% reuires significant e$pen%iture" Tara is

going to have to rel! on ualit! shoes with relative fashion an% the case mentions that it will reuire

10 million %ollars to %esign a shoe that is a%euate for the US maret" Once the initial e$pen%iture is

outlai%8 3C, shoul% revert closer to the in%ustr! average of 11/ of sales"

#nterest #ncome comes %irectl! from the %e&t raise% 'which will &e %iscusse% later(" The #4 an%

%evelopment &ans are e$pecte% to tae a su&or%inate %e&t of 6/ in or%er to stimulate economic

return" The calculation of this num&er can &e %one through either the capital assumptions or the

&alance sheet8 &oth of which are in the following steps"

inall!8 Taras income ta$es are lower &ecause of its positioning in a low ta$ )one" There will &e a 2/

ta$ an% it is important to remem&er to carr! ta$ loses forwar%" or the first few !ears8 Tara will have a

negative net income"

&tep ' Creating lant, r!perty an Euipment Assumpti!ns *&ee (igure !r the E

Assumpti!ns in the E+cel spreasheet

-lant8 -ropert! an% Euipment '--E( e$pen%itures will &e another place of large investments for Tara"

These e$pen%itures inclu%e lan%8 infrastructure8 factor!8 an% machiner!" Fecause these e$pen%itures

are high an% can ver! upon %ifferent scenarios8 it is also important to loo at statistical scenarios here

as well"

?an% is the easiest component to thin of" 7e e$pect that the necessar! lan%8 locate% near a port for%istri&ution cost8 will cost roughl! 1". million U"S" %ollars 'US,(" ?an% o&viousl! %oes not

%epreciate"

#n or%er to assure that +a&on has the proper facilities for us to import8 e$port8 an% operate efficientl!8

we will also nee% invest %irectl! into +a&ons infrastructure" This %oes not inclu%e @economic

investmentA into the countr! an% is simpl! nee%e% to get Tara up an% running" The case mentions that

it will cost appro$imatel! >"B million US, in infrastructure in +a&on"

Taras factor! will cost nearl! 19 million US, to get starte%" This mone! inclu%es not onl! the

assem&l! plant &ut also the cost of the offices an% facilities for the e$patriates that are nee%e% to help

run the plant" Once the plant an% facilities are up an% running8 we assume that it will cost 100thousan% US, a !ear to eep the plant an% facilities maintaine%"

inall!8 machiner! is an important investment for a shoe compan!" #t will cost aroun% 6"G million

US, to acuire the necessar! machiner! an% 900 thousan% US, to maintain the newest machines"

inall!8 the case writers use a G:!ear straight:line %epreciation for all %eprecia&le assets8 as it is

important to reali)e that +a&on is risier an% we wante% to use conservative estimates" ,epreciation%oes not affect the capital nee%e%8 as it %oes not affect the cash flow"


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ara Inc.

ome !tatement ($MM)2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

e#"es 0.0 0.0 8.5 17.7 27.8 38.7 50.6 63.4 77.3 86.6 90.5 94.7

t a#, 'e#ses/%ost of Sales 0.0 0.0 5.3 11.0 17.3 24.1 31.5 39.6 48.4 54.3 57.6 61.0S>A i#l",es ,e'reiatio# 0.0 12.3 4.6 5.1 1.9 2.7 3.5 4.4 5.4 6.1 6.3 6.6!>; 10.0 0.0 0.9 1.9 3.1 4.3 5.6 7.0 8.5 9.5 10.0 10.4#terest 'e#se 0.2 1.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

ther :#ome?'e#se 0.0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.8 0.9 0.9 0.9Total %osts a#, 'e#ses 10.2 13.8 13.4 20.8 25.1 34.0 43.6 54.2 65.6 73.3 77.3 81.5

ome A- 10 millio# start-"' marketi#$ ost i# 2002. :#,"str a&$ is 31+ of %S "t *ike s'e#,s 11+ of re&e#e 37.5 of %S) -Sikk is 6.5+ or re&e#"e27+ of %S. Be e'et to s'e#, 15+ of re&e#"e after i#itial ost ,"e to o"r marketi#$ strate$

#terest 'e#se- The :C% ill take a 7+ s"or,i#ate ,et

ther :#ome?'e#se- Tarrifs a#, other ill e"al 1+ of re&e#"e.#ome Taes- As a 'art of the lo ta zo#e) e e'et to 'a 2+ i# taes

stimate

(igure . /nc!me &tatement

B


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(igure lant, r!perty 3 Euipment Assumpti!ns

10


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&tep 4' Estimating Capital Assumpti!ns *&ee (igure 4 !r Capital Assumpti!ns in the E+cel

spreasheet

3aising 4apital is o&viousl! an essential part to Taras case" How much capital remains inconclusive

an% if !ou want to %eviate from the amount the amount the case writers assume feel free to %o so" Thecase writers assume that the amount of capital nee%e% is roughl! .. million US," This covers the

larger portion of the start:up costs inclu%ing --E8 Mareting8 an% 3C," Most importantl!8 however8

the cash raise% eeps Tara cash flow positive for the first few !ears"

Taras financing will come in two wa!s8 through issuing %e&t an% euit!" The %e&t portion will &e

roughl! 9. million US, an% will &e raise% through the #nternational inance 4ompan! '#4( an%

other %evelopment &ans" The #4 is assume% to tae 6./ of the %e&t position while the remaining

2./ is with the %evelopment &ans" #n a%%ition8 &oth %e&t hol%ers are assume% to charge 6/ interest

for their su&or%inate %e&t an% it will &e pai% off in 10 !ears"

Euit! is where Tara %iffers from most countries" *s %escri&e% in the case8 Taras true euit! hol%ers

are the impoverishe% people of +a&on" rom a financial perspective8 however8 it is O$fam an% the4hristians 4hil%ren un% who pa! in the euit! portion" *ccor%ing to the case8 Tara is tr!ing to raise

20 million US, in euit! an% the case writers assume that this will &e a .0I.0 split" Foth %e&t an%

euit! positions will &e hel% on the &alance sheet"

&tep 5' Creating the Balance &heet *&ee (igure 5 !r the Balance &heet in the E+cel spreasheet

an als! the 6ey )ati!s in the E+cel spreasheet

4reating a &alance sheet that maes since is essential for an! start:up compan!" The &est wa! to

forecast the &alance sheet is through using in%ustr! compara&les" Through %oing this8 !ou are creating

a realistic scenario that will &e use% to estimate cash flows an% help i%entif! the capital nee%e% to start:

up the compan!"

4ash 'the first input(8 is actuall! last as it will &e the plug to mae the &alance sheet &alance" #t is

essential8 however8 that cash mae since an% that it is ept aroun% the in%ustr! average of 1B/ of

sales" *ccounts 3eceiva&les 'which inclu%es allowance of %ou&tful accounts(8 #nventories8 an%

-repai% E$penses all are in accor%ance to in%ustr! stan%ar%s '5"B/ of sales8 1.">/ of sales8 an% ."5/

of 4+S respectivel!(" inall!8 --E assumptions come %irectl! from the --E assumptions sprea%sheet"

*ccounts -a!a&le an% *ccrue% ?ia&ilities also come %irectl! from in%ustr! percentages although*ccrue% ?ia&ilities is less than the in%ustr! average &ecause Tara spen%s less a%vertising %ollars '."1/

of 4+S for *ccounts -a!a&le an% >"G/ of S+C* for *ccrue% ?ia&ilities" 4urrent -ortion of ?ong

Term ,e&t an% ?ong Term ,e&t &oth come %irectl! from the 4apital *ssumptions"

Sharehol%ers euit! inclu%es the capital investe% &! sharehol%ers 'in this case 20 million US,(" The

,ivi%en%s -ai% Out to +a&on come from the upcoming step @Economic alueA an% retaine% earningsis o&viousl! &rought over from the #ncome Statement" Total Sharehol%ers Euit! is net of the

%ivi%en%s pai% out to +a&on"

inall!8 as state% &efore8 it is important to loo at e! ratios an% compare them to in%ustr! averages

a%s this will &enchmar the realit! of Taras &usiness an% wor to eep !our mo%el in line with

plausi&le outcomes"

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ra Inc.

pita+ Assumptions ($MM)2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

#erm et

:C% S"''orte, ;et 2.25 14.25 9.75 0.75 0 0 0 0 0 0 0 0 0

;e&


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Tara Inc.

a+ane !"eet ($MM)2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Assets

%"rre#t Assets/%ash a#, e"i&ale#ts 0.8 0.8 1.0 0.2 4.4 8.1 10.3 12.4 15.1 19.5 25.2 30.8 36.9

Ao"#ts reei&ales i#l ,o"tf"l 0.0 0.0 0.8 1.7 2.7 3.8 5.0 6.2 7.6 8.5 8.9 9.3 9.7:#&e#tories 0.0 0.0 1.3 2.8 4.3 6.0 7.9 9.9 12.1 13.5 14.1 14.8 15.4Pre'ai, e'e#ses 0.0 0.7 0.3 0.3 0.1 0.2 0.2 0.3 0.3 0.4 0.4 0.4 0.4

Total Current Assets 0.8 1.5 3.5 5.0 11.6 18.1 23.3 28.8 35.0 41.9 48.6 55.2 62.4

PP - a#, > :#frastr"t"re 4.0 6.7 8.1 8.1 8.1 8.1 8.1 8.1 8.1 8.1 8.1 8.1 8.1PP - Pla#t > ahi#er 4.0 9.0 18.5 20.4 20.8 21.2 21.5 21.9 22.3 22.7 23.1 23.5 23.9

A"m"late, ;e'reiatio# 1.0 3.3 7.9 13.0 17.2 20.2 21.0 21.3 21.7 22.1 22.5 22.9 23.3

Total Assets 7.8 14.0 22.2 20.5 23.3 27.2 32.0 37.4 43.7 50.6 57.2 63.9 71.1

iai+ities

%"rre#t iailities%"rre#t 'ortio# of lo#$ term ,et 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Ao"#ts Paale 0.0 0.0 0.3 0.6 0.9 1.2 1.6 2.0 2.4 2.7 2.9 3.0 3.2Ar"e, iailities 0.0 0.8 0.3 0.3 0.1 0.2 0.2 0.3 0.3 0.4 0.4 0.4 0.4

Total Current Liabilities 0.0 0.8 0.6 0.9 1.0 1.4 1.8 2.3 2.8 3.1 3.3 3.5 3.6

o#$ term ,et 3.0 22.0 35.0 36.0 36.0 36.0 36.0 36.0 36.0 36.0 36.0 36.0 36.0Total iailities 3.0 22.8 35.6 36.9 37.0 37.4 37.8 38.3 38.8 39.1 39.3 39.5 39.6

!"are"o+ers .uit,

%ommo# stok &al"e 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0;i&i,e#,s - :#&estme#t :# ao# 0.0 0.0 0.0 0.0 0.0 1.2 2.4 4.1 5.8 6.5 6.5 6.5 7.1

!etai#e, ea#i#$s 10.2 23.8 28.4 31.4 28.7 25.2 20.8 15.8 10.1 3.5 3.0 9.4 16.5Total Sharehol,erGs "it 4.8 8.8 13.4 16.4 13.7 10.2 5.8 0.8 4.9 11.5 18.0 24.4 31.5

Total ialities D Sharehol,erGs 7.8 14.0 22.2 20.5 23.3 27.2 32.0 37.4 43.7 50.6 57.2 63.9 71.1

Ass"m'tio#s/%ash a#, e"i&ale#ts- !o"$hl mai#tai#e, at i#,"str a&$ of 18+ 'ame#t of ,i&i,e#,s i#&estme#t i# ao#

Ao"#ts !eei&ale- %om'a# om'arales sho a# a&$ of 9.8+ of sales:#&e#tories- %om'arales a#, i#,"str a&$ oth sho ro"$hl aro"#, 15.6+ of sales ase, o# :C metho,Pre'ai, e'e#ses - :#,"str a&era$e of 5.9+ of %SPP - a#, > :#frastr"t"re - See PP Ass"m'tio#sPP - Pla#t > ahi#er - See PP Ass"m'tio#s;e'reiatio# - See PP Ass"m'tio#s%"rre#t 'ortio# of lo#$ term ,et - See a'ital ass"m'tio#s

Ao"#ts Paale- :#,"str a&era$e is 5+ of %SAr"e, iailities - Bell elo i#,"str of of 17.+ of of SA ea"se of loer a,&ertisi#$ osts ,"e to om'a# strate$ 6.4+o#$ term ,et- see %a'ital Ass"m'tio#s%ommo# Stok Eal"e- see a'ital ass"m'tio#s

stimate

(igure 5 Balance &heet

1G


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&tep 7' Creating the &tatement !$ Cash (l!#s *&ee (igure 7 !r &tatement !$ Cash (l!#s in the

E+cel spreasheet

The Statement of 4ash lows is a compilation of the previous steps" #n starting out a new compan!8cash is o&viousl! of paramount concern" The net cash position comes from the Falance Sheet8 as %oes

most of the information containe% within" There are the o&vious lins to net income an% --Eassumptions &ut one of the main lins is the connection to %ivi%en%s" #n or%er for the &alance sheet

cash assumptions to mae since8 the statement of cash flows has to mae since" 7ith the cash that

Tara has the! can either pa! out %ivi%en%s or invest in positive D- projects" The case states that

since Tara is a profit:ma$imi)ing firm8 if the! have a positive D- project to invest in the! shoul% %o

so" Since we are assuming there are no such projects availa&le8 %ivi%en% pa!out to +a&on is what

places the Falance Sheet8 #ncome Statement8 an% Statement of 4ash lows in harmon!"

&tep 8' E+amining Ec!n!mic alue *&ee (igure 8 an (igure 9 !r Ec!n!mic alue in the E+cel

spreasheet

Economic value is of critical importance to Tara" This is the %ivi%en% pa!out an% this is the

foun%ation for Taras strateg! an% purpose" The case writers assume% a %ivi%en% pa!out of 2./starting in 200> an% increasing to .0/ in 2005" This helpe% maintain an appropriate level of cash

while accomplishing Taras mission of investing su&stantial mone! into +a&on"

The metho%olog! of investing into +a&on is to first set:up the necessar! infrastructure an% then wal%own Ma)lows hierarch! of nee%s 'i"e" after the infrastructure &uilt &uil%ing up agriculture8 hospitals8

housing an% schools(" *fter the total amount of cash ha% &een assigne%8 the case writers also assume%

%iffering levels of investment in the %ifferent nee%s" This was %one allocating a percentage of cash to

each project to &uil% up the reuire% facilities an% sustaining a proper amount of cash investment in

the !ears ahea%"

#n total8 there woul% &e a G0 million US, investment in +a&on up until 2019 'un%er the &ase

assumptions(" This %oes not inclu%e taing into account the life of the project to perpetuit!8 nor %oes ittae into account the time value of mone!" or theoretical purposes8 an% in or%er to &etter un%erstan%

if the euit! investors shoul% invest in this project8 !ou can tae the project to perpetuit! an% %iscount

that &ac at the ris free rate" This gives an estimation of how much the project is worth to the euit!

investors compare% to the opportunit! cost of putting mone! into a ris free investment" Un%er the

&ase case assumption8 Tara invests 20"> million US, into +a&on in present value terms" The euit!

investors invest 20 million US, into the project so the &ase case scenario is marginall! &etter than aflat investment in +a&on"

One important factor to note a&out %etermining the economic value is that this is just the %irect

investment in +a&on that is &eing measure%" There are man! other %etermines of economic return thatthe #4 an% %evelopment &ans will &e measuring that %o not involve %irect investments" These other

factors inclu%e such things as emplo!ment8 health 'life e$pectanc!(8 e%ucation8 countr! infrastructure'not inclu%ing Taras %irect investments(8 imports8 an% e$ports" *ll of these will have a su&stantial

impact to Taras nominal +-, an% will pla! an influential role in whether the #4 an% other &ans will

involve themselves with the project" The case writers assume% percentages &ase% upon the changes to

+a&ons +,- that ha% a net affect of 1."9/ 'the estimate is inclu%e% at the &ottom of the Economic

alue igure an% Sprea%sheet(

1.


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(igure 7 &tatement !$ Cash (l!

Tara Inc.

!tatement of &as" +os ($MM)2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

&as" +o from perations/

*et :#ome 10.2 13.6 4.6 3.0 2.7 4.6 6.8 9.1 11.5 13.1 13.0 12.9

:#ome %har$es #ot affeti#$ ash/

;e'reiatio# 1.0 2.3 4.6 5.1 4.2 3.0 0.8 0.4 0.4 0.4 0.4 0.4

%ha#$es i# orki#$ a'ital/

:#rease ;erease i# i#&e#tories 0.0 0.0 1.3 1.44 1.6 1.7 1.9 2.0 2.2 1.4 0.6 0.6:#rease ;erease i# ao"#ts reei&ale 0.0 0.0 0.8 0.9 1.0 1.1 1.2 1.3 1.4 0.9 0.4 0.4

:#rease ;erease i# Ar"e, iailities 0.0 0.8 0.5 0.0 0.2 0.0 0.1 0.1 0.1 0.0 0.0 0.0

:#rease ;erease i# ao"#ts 'aale 0.0 0.0 0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.3 0.2 0.2

Cash flow from operations 9.2 10.6 2.4 0.1 4.4 5.3 5.0 6.7 8.9 11.4 12.5 12.5

&as" *rovie , nvestin Ativities

PP - a#, > :#frastr"t"re 4.0 2.7 1.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

PP - Pla#t > ahi#er 4.0 5.0 9.4 1.9 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4

Cash se! b" #n$estin% A&ti$ities 8.0 7.7 10.8 1.9 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4

&as" *rovie , inanin Ativities

A,,itio#s to o#$ Term ;et 3.0 19.0 13.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

!e,"tio#s i# lo#$-term ,e't i#l",i#$ "rre#t 'o 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

;i&i,e#,s- i.e. :#&estme#t i# ao# 0.0 0.0 0.0 0.0 0.0 1.2 2.4 4.1 5.8 6.5 6.5 6.5

Cash se! b" 'inan&in% A&ti$ities 18.0 18.3 13.5 1.0 0.2 1.2 2.4 4.1 5.8 6.6 6.5 6.5

*et %ha#$e i# %ash 0.8 0.0 0.3 0.9 4.2 3.7 2.1 2.1 2.7 4.5 5.7 5.6

%ash i#


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ara Inc.

ret nvestment ($MM)2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

mo"#t Alloate, to 'e#,it"re'e#,it"res/

:#frastr"t"re - - - - - 1.2 1.2 1.0 0.6 0.7 0.6 0.6

A$ri"lt"re - - - - - - 0.6 1.0 1.7 2.0 1.9 1.9

Ios'ital - - - - - - 0.6 2.0 0.6 0.7 1.3 1.3 Io"si#$ - - - - - - - - 2.9 3.3 1.9 1.3 Shools - - - - - - - - - - 0.6 1.3

Total ',it"res 0.0 0.0 0.0 0.0 0.0 1.2 2.4 4.1 5.8 6.5 6.5 6.5

Total ',it"res ;iso"#te,


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&tep 9' C!ming up #ith the C!st !$ Capital *&ee (igure 10 an (igure 11 !r C!st !$ Capital in

the E+cel spreasheet

The cost of capital will o&viousl! have a large impact on the valuation an% therefore the goIno go%ecision" 7hen thining a&out the cost of capital8 it is important that it have &oth a theoretical an%

practical &asis an% that it simpl! maes since"

The first &enchmar for figuring the cost of capital is to loo at the U"S" cost of capital for a similar

project" Historical projects that mirror Taras have a &eta of 1"01" Using a levere% &eta &ase% on

Taras %e&t:to:euit! structure an% using the 4*-M mo%el !iel%s a U"S" %iscount rate of 12"0./"

O&viousl! our ris %oes not mirror U"S" ris &ecause we are sourcing from onl! one location an% there

is su&stantial ris associate% with that sourcing"

* @theoreticalA project lie Taras in +a&on woul% have a @theoreticalA %iscount rate of 2>"0./" This

comes from using a mo%el lie the +ol%man:Sachs integrate% mo%el where !ou tae the countr! cre%it

rating 'in this case 22(8 calculate the sovereign !iel% sprea% 'in this case 1G/( an% a%% that to the U"S"

cost of capital" Once again8 this is onl! h!pothetical since all of our revenues are U"S" &ase% an% we

from a sourcing stan%point we have mitigate% riss that are associate% with the project"

Dow that we have a gui%eline as to the range our cost of capital8 the ne$t step is to i%entif! the riss

an% separate them into project riss or sovereign riss" It is important to note that these risks are risks

associated with the project that are not included in the U.S. cost of capital 'i"e" project specific rissassociate% with sourcing from +a&on(" The case &reas %own project riss into completion timing8

electricit!8 la&or strie8 la&or ualit!8 information costs8 an% technolog!" These riss8 an% their

mitigating factors8 can &e uantifie% an% use% to a%just the cash flows" Each can happen in separate

!ears 'i"e" completion ris woul% onl! incur in the !ear that ris is vali%(" To uantif! these riss8 !ou

tae the pro&a&ilit! of the occurrence an% the estimate% impact to cash flows" You then multipl! them

together an% a%just the cash flows &! that percentage amount for each given !ear"

Once the cash flows have &een a%juste% for project ris" The ne$t step is to come up with a %iscountrate to use in or%er to tae the present value of the adjusted cash flows" To %o this8 first thin of the

U"S" cost of capital as a &enchmar" rom there8 sovereign riss that occur &ut that are not im&e%%e%

in a U"S" cost of capital can &e a%%e%" Sovereign riss inclu%e currenc!8 inflation8 h!perinflation8

creeping e$propriation8 war8 corruption8 an% negotiation failure" These too can &e mo%ifie% &!

estimating the pro&a&ilit! an% their impact an% then a%%e% to the U"S" cost of capital" *n interesting

si%e note is that regular +a&on inflation is not inclu%e% in the case writers mo%el &ut this ris wasactuall! im&e%%e% %irectl! in the mo%el 'an% therefore in the cash flows(" This was %one in or%er to

use statistical metho%s to see the affect of inflation changes in +a&on 'this is covere% in the ne$t8 an%

final8 step("

Un%er the &ase case assumptions8 the %iscount rate use% is 1>"G./" This %oes not inclu%e the rate that

cash flows were %iscounte%" #n total8 the %iscount rate range% from 20:2G/ %epen%ing on the given!ear" This is a ver! high %iscount rate &ut falls within our range" #t also passes the most important

step:: %oes the %iscount rate mae sense The riss surroun%ing Tara are ver! large an% although there

are mitigating circumstances8 there are clearl! a lot of potential pro&lems that can occur &! using an

economicall! impoverishe% nation lie +a&on as a sourcing alternative"

1B


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*ro=et Riss Mitiatin ators

Teh#olo$ The teh#olo$ies are k#o# a#, ell estalishe,

Ailti to o#&i#e :C% to i#&est ProJet oi#i,es ith their m issio# stateme#t

:C relatio#s ,eteriorate As lo#$ as $o&er#me#t o#ti#"es i ts maroeo#omi'oli reforms) relatio#shi' sho"l, o#ti#"e to $ro

%om'letio# !isks Bell estalishe, i#,"str a#, US o"t'ost

letriit Same so"ri#$ as oil om'a#ies

aor Ii$h "#em'lome#t rate. %om'a# missio# to assist loal

'o'"latio# ill attrat em'loees

:#formatio# %ost 'erie#es ma#a$ers oth eter#al a#, i# ao# illo'erate 'la#t

aor Skills a#,ator em'loee trai#i#$ orksho's

US risk 'remi"m for Shoe 'roJet :#l",es risks of o'erati#$ i# a# a&era$e shoe

ma#"fat"rer i# the US

!overin Ris Mitiatin ators

%"rre# #l laor ost is affete,

I'er :#flatio# To the ete#t Tara ill #ee, loal "rre#) this ill #otaffet om'a# m"h as lo#$ as '"rhasi#$ 'arit hol,s

%ree'i#$?%om'lete 'ro'riatio# A aJorit of after ta 'rofits are ret"r#e, to the o"#tr.

%a'ital %o#trol A$ai#) maJorit of A.T. 'rofits are hel, ithi# o"#tr

Bar Sli$ht ha#e for this o"ra#e a#, loatio# #et to US"t'ost

%orr"'tio# ost likel i# small amo"#ts. :C% offsets lar$e orr"'tio#fators

(igure 10 r!:ect an &!vereign )isks


18/25

(igure 11 C!st !$ Capital

Tara Inc.

&ost of &apita+ > ?na=uste ree &as" +os ($MM)2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *erpetuit,

&as" +o rom perations 9.2 10.6 2.4 0.1 4.4 5.3 5.0 6.7 8.9 11.4 12.5 12.5 13.6-lus '1:t( interest pa!ments 0.2 1.5 2.4 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

Minus 40# 8.0 7.7 10.8 1.9 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4

?n>a=uste ree &as" +os 17.0 16.8 10.8 0.6 6.5 7.4 7.0 8.7 11.0 13.5 14.6 14.5 15.7 102.07

ree &as" +os A=ustments st< *ro< isnt*ro< A=< Rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *erpetuit,

*ro=et Riss%om'letio# Timi#$ 25+ 100+ -24.4+ 2.63

letriit 10+ 10+ -1.0+ 0.17 0.17 0.11 0.01 0.07 0.07 0.07 0.09 0.11 0.14 0.15 0.15 0.16 1.02

aor Strike 10+ 40+ -3.8+ 0.64 0.63 0.40 0.02 0.24 0.28 0.26 0.33 0.41 0.51 0.55 0.55 0.59 3.83

aor K"alit 25+ 5+ -1.3+ 0.13 0.01 0.08 0.09 0.09 0.11 0.14 0.17 0.18 0.18 0.20 1.28

:#formatio# %osts 10+ 3+ -0.3+ 0.03 0.00 0.02 0.02 0.02 0.03 0.03 0.04 0.04 0.04 0.05 0.31

Teh#olo$ 1+ 40+ -0.2+ 0.02 0.00 0.01

%ash Clo A,J"stme#t 'er Hear 4.8+ 4.8+ 30.9+ 6.5+ 6.5+ 6.3+ 6.3+ 6.3+ 6.3+ 6.3+ 6.3+ 6.3+ 6.3+ 6.3+

A=uste &as" +os 16.2 16.0 7.5 0.6 6.1 6.9 6.6 8.2 10.3 12.7 13.7 13.6 14.7 95.6

@* ?sin Ris A=uste &as" +os#erm< 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *erpetuit,

Hear 1 2 3 4 5 6 7 8 9 10 11 12 13 13

!overin Riss%"rre# 20+ 5+ 1.0+

:#flatio# :#l",e, i# %rstal


19/25

&tep 10' ;sing &tatistical (!recasting t! Make the -!ecisi!n% *&ee (igure 12 !r Crystal

Ball in the E+cel spreasheet

,oing a simple D- anal!sis an% economic valuation is not enough to %etermine whether Tara is an

accepta&le project of not" The case is &uilt aroun% numerous assumptions an% each assumption nee%sto &e e$amine%" There are man! statistical pacages that allow for simulations to &e run &! var!ing

plausi&le outcomes" The case writers chose to use 4r!stal Fall8 one such pacage8 in or%er to testthese possi&le outcomes"

There are also a num&er of %ifferent metho%s to choose from to tr! an% %etermine which assumptions

to test" The two most common metho%s8 an% the metho%s the case writers chose8 were sensitivit!

anal!sis an% torna%o charts" There are also o&vious assumptions that stan% out 'such as maret share(

in our case( that clearl! nee% to &e teste%"

igure 11 shows all of our teste% assumptions in green an% all the outcomes we wante% to measure in

&lue" The num&ers that are showing now are our &ase case assumptions" *roun% each num&er is an

im&e%%e% %istri&ution that changes the num&er an% therefore the results of the mo%el"

The maret share num&ers have %istri&utions assigne% to them that mae them a @ran%om walA" Thismeans that each !ear the maret share is contingent upon the !ear &efore" The %istri&utions are normal

&ut un%er the &ase case scenario8 the! never rise a&ove 1/ an% never fall &elow G./ 'starting in

200.("

The --E also varies in %ifferent scenarios" Each num&er has a %istri&ution that allows for8 on average8

a .0/ swing on the e$pen%iture" The %istri&utions have fairl! tight stan%ar% %eviations8 as the case

num&ers are fairl! accurate in terms of e$pen%itures" #n a%%ition8 starting in 200> there is the chance

of a ran%om occurrence that a large e$pen%iture nee%s to &e %one"

The thir% assumption that we wante% to test was the +a&on inflation rate" 3emem&er that we %i% not

inclu%e this in the %iscount rate un%er the cost of capital" This in%ustr! is heavil! reliant on la&or an%

an!thing that affects the cost of that la&or grossl! affects the cost of goo%s sol%" Un%er our simulation8we var! +a&ons inflation rate8 again in a @ran%om walA fashion" This num&er fee%s into the cost of

goo%s sol% an% %epen%ing on the outcome8 increases our cost of goo%s sol% as high as 62/ of revenue

an% as low as >2/ 'the in%ustr! average is >./("

The final assumption that coul% potentiall! &e varie% is the cost of capital" This woul% o&viousl! have

the most significant impact 'unless there are %rastic changes to the maret share(" The &ottom line is8@how comforta&le %o !ou feel a&out !our cost of capitalA #f the cost of capital is such where it can &e

%efen%e%8 then var!ing the assumptions will %ecrease the clarit! of the &usiness an% strategic

%ecisions" #f !ou feel there is a nee% to %efen% !our cost of capital logic8 then running a separate

simulation for the cost of capital is a%vise%"

There are reall! onl! two results that are reuire% to mae the goIno go %ecision" irst8 what is theproject D- This is o&viousl! the most important uestion &ecause it ass whether or not value is

&eing create% or %estro!e%" * positive D- is the strongest argument to go ahea% with the project"

The other important uestion in this case is whether or not the euit! hol%ers are seeing a return to

+a&on 'given that is there mission(" ?ooing at an D- of net investment in +a&on is one wa! to

attempt to uantif! that uestion" Overall8 however8 there are other non:o&vious impacts to +a&on an%

it is not eas! to get a clear answer" The answers to these two uestions will %eci%e whether or not to

go ahea% with the project"

22


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Tara Inc.

&r,sta+ a++2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Assumptions/

!e&e#"e/

arket Share 0.10+ 0.20+ 0.30+ 0.40+ 0.50+ 0.60+ 0.70+ 0.75+ 0.75+ 0.75+ 0.75+U#ale to Pe#etrate kt 1.0

Ale to Pe#etrate ith L3+ market share -

Ale to erise !eal 'tio# -

PP %ost/

a#, 1.0 0.5

:#frastr"t"re 3.0 2.2 1.4

Pla#t 4.0 4.0 4.0 0.9 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

ahi#er 1.0 5.4 1.0 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

%ost of oo,s Sol,/

ao# :#flatio# 1.0+ 1.0+ 1.0+ 1.0+ 1.0+ 1.1+ 1.2+ 1.4+ 1.7+ 2.2+ 4.6+ 6.9+ 5.4+

oreast/

*PE 5.58

Total ;iret :#&. i# ao# 39.94

*PE of :#& i# ao# 20.64

A&era$e arket Share 0.53+

stimate

(igure 12 Crystal Ball &imulati!n

Finar! varia&les use% to alter scenarios"

,escri&e% in the @resultsA section"


21/25


22/25

re.uen, &"art

%ertai#t is 65.80+ from 0.00 to D:#fi#it

.000

.008

.016

.024

.032

0

8

16

24

32

-10.71 -4.48 1.75 7.97 14.20

1;000 #ria+s 10 ut+iers

oreast/ *ro =et @*

re.uen, &"art


.000

.008

.017

.025

.033

0

8.25

16.5

24.75

33

25.00 31.25 37.50 43.75 50.00


oreast/ #ota+ iret nv< in 'aon

re.uen, &"art


.000

.008

.015

.023

.030

0

7.5

15

22.5

30

11.28 15.61 19.94 24.28 28.61

1;000 #ria+s 1 ut+ier

oreast/ @* of nv in 'aon

re.uen, &"art

.000

.008

.017

.025

.033

0

8.25

16.5

24.75

33

0.40+ 0.46+ 0.51+ 0.57+ 0.63+


oreast/ Averae Maret !"are

Tara Inc.

&r,sta+ a++ > ase &ase Assumptions

(igure 1. Crystal Ball )esults Base Case Assumpti!ns


23/25

re.uen, &"art


.000

.017

.034

.051

.068

0

17

34

51

68

-24.81 17.23 59.26 101.30 143.33


oreast/ *ro=et @*

re.uen, &"art


.000

.027

.053

.080

.106

0

26.5

53

79.5

106

0.00 62.50 125.00 187.50 250.00


oreast/ #ota+ iret nv< in 'aon

re.uen, &"art

.000

.008

.017

.025

.033

0

8.25

16.5

24.75

33

0.40+ 0.46+ 0.51+ 0.57+ 0.63+


oreast/ Averae Maret !"are

re.uen, &"art

%ertai#t is 76.60+ from 0.00 to D:#fi#i t

.000

.017

.034

.051

.068

0

17

34

51

68

-24.81 17.23 59.26 101.30 143.33


oreast/ *ro=et @*

Tara Inc.

r,sta+ a++ > inar, aria+e Assumptions

2>


24/25


25/25

)esults !$ the Binary ariable Assumpti!ns

O&viousl! the results un%er this scenario were ver! favora&le" *s can &e seen8 un%er these scenarios

there is a 6>/ chance of there &eing a positive D-" The net affect to the euit! hol%ers8 is that >B/of the time the! woul% have a higher present value investment rate into +a&on &! investing in Tara as

oppose% to %irectl! into +a&on" #n a%%ition8 the upsi%e potential is a huge %irect investment in +a&onthat reaches in e$cess of 1G0 million US,"

C!nclusi!n

There are man! lessons to &e gleame% from the Tara case &ut none that the writers want to rela! more

than the positive effects of Taras -rofitIDot:or:-rofit &usiness mo%el" #t is &etter than a ta$:an%:

spen% polic! &ecause it places the power of the investments into the han%s of the euit! hol%ers" #t

creates a sustaina&le8 long:term source of investment into an impoverishe% compan! an% inclu%es

man! intangi&le upsi%es"

*lso to &e gleame% from this case are the notions of how to %efine an% mitigate various riss8 how tocreate an appropriate cost of capital8 how to han%le various h!pothetical occurrences inclu%ing the

notion of 3eal Options8 an% how to put together a financial stor! of a start:up from scratch"

Overall8 this case was inten%e% to &e a lesson in finance in an Emerging Maret" Unuestiona&l! Tarais an i%ealistic mo%el with significant riss &ut euall! unuestiona&le is that if the results are positive8

the effect is more than just the creation of financial value"

Tara Solution

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