BRINKER INTERNATIONAL
Financial Analysis
Draft 3
Josh Moore, Brad Bolte, James Hall, Tanner Swaringen, Tim Meyer
4/1/2014
Table of Contents
Liquidity Ratios ...................................................................................................................................................... 3
Introduction ....................................................................................................................................................... 3
Current Ratio ..................................................................................................................................................... 3
Quick Ratio ......................................................................................................................................................... 4
Inventory Turnover ........................................................................................................................................ 5
Inventory Days ................................................................................................................................................. 7
Accounts Receivable Turnover .................................................................................................................. 8
Accounts Receivable Days ........................................................................................................................... 9
Cash to Cash Cycle ...................................................................................................................................... 10
Working Capital Turnover......................................................................................................................... 11
Conclusion ........................................................................................................................................................ 12
Profitability Ratios ............................................................................................................................................. 12
Introduction .................................................................................................................................................... 12
Sales Growth................................................................................................................................................... 12
Gross Profit Margin ...................................................................................................................................... 13
Operating Profit Margin ............................................................................................................................. 14
Net Profit Margin........................................................................................................................................... 16
Asset Turnover............................................................................................................................................... 17
Return on Assets (“ROA”) ........................................................................................................................ 18
Return on Equity (“ROE”) ......................................................................................................................... 19
Conclusion ........................................................................................................................................................ 20
Capital Structure Ratios.................................................................................................................................. 20
Introduction .................................................................................................................................................... 20
Debt to Equity ................................................................................................................................................ 21
Times Interest Earned................................................................................................................................ 22
Altman’s Z-Score ........................................................................................................................................... 23
Conclusion .................................................................................................................................................... 25
Growth Rates....................................................................................................................................................... 25
Introduction .................................................................................................................................................... 25
Internal Growth Rate .................................................................................................................................. 25
Sustainable Growth Rate .......................................................................................................................... 26
Page | 1
Industry-Specific Ratios ................................................................................................................................. 27
Introduction .................................................................................................................................................... 27
Company-Owned Locations ..................................................................................................................... 28
Financial Analysis Conclusion ...................................................................................................................... 29
Financial Forecasting ....................................................................................................................................... 29
Income Statement ....................................................................................................................................... 30
.............................................................................................................................................................................. 32
.............................................................................................................................................................................. 33
Dividends Forecasting ................................................................................................................................ 34
Balance Sheet................................................................................................................................................. 34
Statement of Cash Flows .......................................................................................................................... 40
.............................................................................................................................................................................. 41
Restated Financial Statements ............................................................................................................... 42
Cost of Capital Estimation ............................................................................................................................. 42
Cost of Debt .................................................................................................................................................... 42
Cost of Equity ................................................................................................................................................. 44
Backdoor Cost of Equity ............................................................................................................................ 47
Weighted Average Cost of Capital (WACC) ...................................................................................... 48
Appendix................................................................................................................................................................ 53
Appendix (1) ........................................................................................................................................................ 53
Page | 2
Liquidity Ratios
Introduction
Liquidity is the ability or quality of an asset that makes it easily convertible to
cash. In general, liquidity represents more safety to companies and investors alike
because it is easier for the holder of the asset to collect the cash value associated with
the asset. On a company balance sheet, marketable securities and accounts payable are
two examples of relatively liquid assets. In this analysis of liquidity ratios, we will looks
at the current and quick ratios, inventory turnover, inventory days, accounts receivable
turnover, accounts receivable days, cash to cash cycle, and working capital turnover.
Current Ratio
The current ratio, also known as the liquidity or cash asset ratio, is defined and
calculated as the current assets divided by current liabilities. It is used to measure the
firm’s ability to pay current liabilities with current assets. A higher number is generally
better. As evidenced below, Brinker’s yearly current ratio was higher than the average
of its peers until 2011, but it has since slumped below the mean. We believe this is due
primarily to the firm selling its On The Border segment in 2010. The segment’s efficient
financials helped bolster the holding company’s current ratio as a whole.
Page | 3
Current Ratio
2009
0.90
1.26
1.31
0.51
1.48
1.09
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2010
1.11
1.18
1.32
0.54
1.70
1.17
2011
0.55
1.24
1.07
0.52
1.22
0.92
2012
0.48
0.55
1.10
0.43
0.89
0.69
2013
0.51
0.50
1.17
0.54
1.10
0.76
Average
0.71
0.95
1.19
0.51
1.28
0.93
Current Ratio
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 1.
Quick Ratio
The quick ratio, or quick asset ratio, is a measure of the firm’s short-term
liquidity. It is calculated as cash plus accounts receivable plus marketable securities, all
divided by current liabilities. In contrast to the current ratio, the quick ratio measures
the firm’s ability to cover short-term obligations without using certain, less-liquid current
assets, such as inventory. As you can below, Brinker has a very undesirable quick asset
ratio over the past five years. Anything over 1 is what a company or analyst might
consider as desirable. Since this ratio is far below 1 it is telling us that Brinker would be
unable to cover its short term obligations. With a quick ratio as low as this one, there is
increased risk involved in investing into this company.
Page | 4
Quick Ratio
2009
0.35
0.12
0.72
0.06
0.83
0.42
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2010
0.87
0.10
0.76
0.24
0.93
0.58
2011
0.31
0.11
0.68
0.11
0.64
0.37
2012
0.27
0.11
0.72
0.08
0.36
0.31
2013
0.25
0.10
0.88
0.12
0.52
0.37
Average
0.41
0.11
0.75
0.12
0.66
0.41
Quick Ratio
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 2.
Inventory Turnover
Inventory turnover represents the number of times each company’s inventory
currently on hand is sold during a specified period. In general, a higher number is
better, because the ratio is calculated as cost of goods sold divided by inventory. A
higher number is better because it implies a higher amount of sales, whereas a lower
number implies excess inventories. It should be noted that companies in this industry
have higher than average inventory turnover levels because their food is perishable,
and they move their inventory much faster than other companies in industries such as
retail or technology. Brinker has been slightly increasing its inventory turnover each
year for the past five years. When comparing Brinker to its peers it is maintaining a
relatively consistent pattern matching its peers. As stated previously, the inventory
Page | 5
turnover in this industry is much higher than other industries due to the perishable
inventory. In this industry it is common to see this ratio exceeding 100, which Brinker
and its peers have done so over the past five years. In the last two years, Dine Equity
has shrunk its inventory to zero, while its percent of franchised restaurants has risen to
one hundred. That is why there are no inventory turnover statistics for Dine Equity over
the past two years.
Inventory
Turnover
2009
2010
2011
2012
2013
98.63 106.90 108.87 111.23 115.56
106.98 106.92 108.87 111.23 115.56
115.56 123.98
89.37
29.22
32.22
24.99
19.79
23.96
147.89 147.49 124.30 133.06 133.45
99.65 103.50 91.28
93.83
97.13
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
Average
108.24
109.91
109.64
26.04
137.24
98.21
Inventory Turnover
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 3.
Page | 6
Inventory Days
Inventory days, or days sales of inventory, takes inventory turnover one step
further by taking the number of days in the period, usually 365 or 360, and dividing
that by the inventory turnover. This new ratio measures the amount of time it takes the
company to turn its inventory into sales. In general, a lower number is better because it
means they are taking less time to turn their inventory into sales. Brinker is averaging
an inventory day’s ratio of 3.38 over the past five years. This tells us that Brinker is
converting its inventory into sales every 3.38 days. This ratio shows a strong and short
turnover rate which is needed in this industry due to the perishable inventory. If this
ratio was to much higher for Brinker or its peers it would result in wasting inventory.
Inventory Days
2009
3.70
3.41
3.16
12.49
2.47
5.05
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2010
3.41
3.41
2.94
11.33
2.47
4.72
2011
3.35
3.35
4.08
14.60
2.94
5.67
2012
3.28
3.28
2013
3.16
3.16
18.44
2.74
6.94
15.23
2.74
6.07
Average
3.38
3.32
3.40
14.42
2.67
5.44
Inventory Days
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 4.
Page | 7
Accounts Receivable Turnover
Accounts Receivable Turnover, or A/R Turnover, measures the company’s
efficiency in collecting credit revenue. It is calculated as net credit sales or total sales
divided by average accounts receivable for a period. A higher number implies that the
company’s offered credit terms are leading to efficient accounts receivable collections.
Comparing Brinker to its peer group has revealed fairly average accounts receivable
turnover of 68.24. While Brinker shows a healthy ratio, Buffalo Wild Wings has
mastered their accounts receivable ratio resulting in very high efficiency.
AR Turnover
2009
73.13
74.56
13.51
2010
2011
63.33 64.54
63.33
64.54
13.50
9.30
133.70 114.68
254.45 564.69 64.49
103.91 167.71 63.51
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2012
65.01
65.01
6.61
112.03
51.50
60.03
2013
75.21
75.21
4.44
100.14
57.99
62.60
Average
68.24
68.53
9.47
115.14
198.62
92.00
Accounts Receivable Turnover
600.00
500.00
400.00
300.00
200.00
100.00
0.00
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 5.
Page | 8
Accounts Receivable Days
Accounts Receivable Days, A/R Days or Days Sales Outstanding represents the
average number of days between a sale and the associated collection of revenue. In all
cases, a lower number is better because it implies that the company is receiving cash
faster, which means its accounts receivable account is a more liquid current asset.
Brinker has obtained an accounts receivable days of 0.21 in 2013, and an average over
the past five years of 0.19. Compared to Brinker’s peer group they are sitting
comfortably in the middle of the pack. In this industry many of its sales are transacted
in cash making this ratio relatively low.
AR Days
2009
4.99
4.90
27.02
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
1.43
9.59
2010
5.76
5.76
27.03
2.73
0.65
8.39
2011
5.66
5.66
39.27
3.18
5.66
11.88
2012
5.61
5.61
55.23
3.26
7.09
15.36
2013
4.85
4.85
82.14
3.64
6.29
20.36
Average
5.38
5.36
46.14
3.20
4.22
12.86
Accounts Receivable Days
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 6.
Page | 9
Cash to Cash Cycle
The Cash to Cash Cycle, sometimes referred to as the Cash Conversion Cycle, is
the aggregate number of days in the Accounts Receivable Days and Inventory Days
ratios. It represents the number of days required for cash spent on inventory and other
inputs to become cash gained from sales revenue. For the last five years, Brinker has
maintained a relatively average number of days for its cash to cash cycle; however, the
number has begun to fall below the average and is exhibiting a favorable downward
trend.
Cash to Cash
Cycle
2009
8.69
8.31
30.18
12.49
3.90
12.72
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2010
9.18
9.18
29.98
14.06
3.12
13.10
2011
9.01
9.01
43.35
17.79
8.60
17.55
2012
8.90
8.90
55.23
21.70
9.83
20.91
2013
8.01
8.01
82.14
18.88
9.03
25.21
Average
8.76
8.68
48.18
16.98
6.90
17.90
Cash to Cash Cycle
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 7.
Page | 10
Working Capital Turnover
Working Capital Turnover represents the company’s ability to fund its sales using
its working capital. To clarify, working capital is current assets minus current liabilities.
Working capital turnover is calculated similar to accounts receivable turnover and
inventory turnover: it is sales divided by working capital. It is a relative ratio that should
be compared to prior year’s data. Based on Brinker’s working capital turnover over the
past five years it is steadily becoming worse. This unhealthy ratio of -12.03 in 2013
represents that Brinker is unable to fund its sales using working capital.
Working Capital
Turnover
Brinker
Dine Equity
Darden
Bloomin' Brands
Buffalo Wild Wings
2009
25.47
8.34
10.98
-10.41
12.66
Industry
-0.78
2010
15.94
10.27
9.36
-9.52
8.23
2011
12.40
7.78
29.50
-9.15
22.93
6.86
7.73
Table. 8
2012
11.17
-4.27
13.52
-6.06
-51.50
11.90
2013
12.03
-3.88
5.72
-10.22
59.38
Average
7.79
1.94
-9.03
3.65
13.81
-9.07
10.34
Working Capital Turnover
80.00
60.00
40.00
20.00
0.00
-20.00
-40.00
-60.00
2008
2009
2010
2011
2012
2013
Brinker
Dine Equity
Darden
Bloomin' Brands
Buffalo Wild Wings
Industry
2014
Page | 11
Figure 8.
Conclusion
After rigorous analysis of Brinker’s liquidity ratios many of their ratios are
undesirable, representing an increased amount of risk involved in investing in this
company. Given these low liquidity ratios, representing Brinker we can come to the
conclusion that the margin for safety if significantly lower than the industry average.
We will discuss Brinker’s likelihood of going bankrupt with the Altman’s Z-score later in
this ration analysis section.
Profitability Ratios
Introduction
Profitability ratios assess the extent to which a company’s revenues exceed
various measures of their cost. As a rule of thumb the higher this ratio is compared to
its competitors the better shape the company is in. Profitability ratios are the most
commonly analyzed ratios when an investor is doing a financial analysis. These ratios by
themselves may not make sense at certain times. It is important to have a good overall
understanding of the industry from where these ratios are being taken in order to
complete the entire story that this analysis will provide.
Sales Growth
Sales Growth is the percentage change of sales from one year to the next. A
higher number is considered to be the most desirable figure for this ratio. While it does
not factor in the associated cost of revenue, it can be a useful statistic in measuring the
firms’ growth or accumulation of the market share compared to its peer. Brinker’s sales
decreased from 2009 to 2011, but have since displayed an upward trend. The sales
numbers are very volatile within this peer group, but Brinker’s numbers are generally
lower than the average.
Page | 12
Sales Growth
2009
2010
2011
15.1% 12.8% 3.4%
-21.0% -12.4% 2.1%
19.0%
8.9% 21.0%
-5.0%
-9.1%
6.6%
28.1% 27.6% 32.6%
1.2%
0.4% 3.4%
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2012
2013
2.1% 0.9%
0.9% 2.2%
24.6% 6.7%
6.9% 3.8%
21.7% 32.6%
1.4% 9.2%
Average
-7.3%
-7.6%
-4.4%
-0.1%
27.5%
1.6%
Sales Growth
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 9.
Gross Profit Margin
Gross profit margin, also known as gross margin, is used to measure the
profitability of a company. It is calculated as revenue minus cost of goods sold all
divided by total revenue. Gross margins can vary greatly between industries. It is most
useful when comparing profitability relative to the firm itself in prior years, or to its
industry peers. The gross profit margin numbers are much more consistent than the
sales growth percentages. Brinker’s gross profit margin has remained consistent around
Page | 13
twenty percent higher than the industry average over the last five years. However,
because Brinker’s restated cost of goods sold is much lower than the original numbers
and total revenue is unchanged, the gross profit margin becomes much higher over the
past three years. Brinker’s restated numbers are thirty percent higher, on average than
their peers.
Gross Profit Margin
2009
2010
2011
2012
2013
72.1% 71.5% 17.3% 18.1% 19.0%
74.5% 71.5% 73.1% 72.7% 73.4%
38.5% 39.7% 47.0% 57.5% 57.7%
21.9% 22.9% 24.0% 22.9% 22.1%
25.2% 26.1% 27.0% 24.2% 23.7%
46.4% 46.3% 37.7% 39.1% 39.2%
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
Average
44.7%
72.9%
45.7%
22.9%
25.6%
42.4%
Gross Profit Margin
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 10.
Operating Profit Margin
Operating profit margin is the amount of earnings generated by each dollar of
sales. This measure is calculated by dividing operating income by total revenue. The
operating profit margin is especially informative when used in conjunction with the sales
Page | 14
growth. It is important to analyze and note the company’s changes in efficiency relative
to the changes in the sales growth. In 2009, many of these operating profit margins
clustered in the ten to twenty percent range; however, as Dine Equity began
restructuring its franchising model, the company generated much higher operating
profits. The other firms within this peer group have maintained steady operating profit
margins centers around thirteen percent.
Operating Profit
Margin
2009
2010
2011
2012
2013
7.8% 10.4% 12.3% 12.8% 13.7%
2.4%
5.0%
7.0%
8.0%
5.4%
20.4% 16.6% 26.8% 41.0% 38.4%
12.5% 13.2% 14.1% 13.7% 12.2%
14.3% 15.6% 15.6% 14.4% 14.7%
11.5% 12.1% 15.2% 18.0% 16.9%
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
Average
10.8%
5.6%
26.2%
13.4%
15.0%
14.2%
Operating Profit Margin
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 11.
Page | 15
Net Profit Margin
The net profit margin, in contrast to the operating profit margin, is the firm’s net
income divided by sales. It represents the percentage of a company’s bottom line, or
net income that comprises total revenue. Similar to operating and gross profit margin,
net profit margin best serves the financial analysis when compared to prior years or the
margins of its peers. Brinker’s net profit margin has remained about 1.2% below the
industry average for the last five years. The only company to report a loss in net
income during this time was Dine Equity in 2010, but they have since improved their
business and posted the highest numbers within the sample set for the last two years.
Net Profit Margin
2009
2.2%
2.4%
2.2%
5.2%
5.7%
3.5%
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2010
3.6%
5.2%
-0.2%
5.8%
6.3%
4.1%
2011 2012 2013
5.1% 5.4% 5.7%
5.5% 6.0% 3.1%
7.0% 15.0% 11.2%
6.4% 6.0% 4.8%
6.4% 5.5% 5.6%
6.1% 7.6% 6.1%
Average
4.1%
4.8%
6.0%
5.8%
6.0%
5.3%
Net Profit Margin
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 12.
Page | 16
Asset Turnover
Asset turnover represents the dollar amount of revenue accumulated for every
dollar of sales. In all cases a higher asset turnover ratio indicates that a firm is utilizing
its assets more efficiently. Asset turnover is calculated by dividing sales by total assets.
Generally, it is best when the asset turnover becomes larger because that means the
company is generating more sales per dollar of assets. In essence, its assets are
becoming more efficient. Within this group, Brinker, before the restatements, had the
highest asset turnover levels, with a value thirty percent higher than the industry
average in 2013. Most of these firms regressed slightly in 2010, but have since followed
a very gradual increase of the last three years. Only Dine Equity’s assets have become
less-efficient relative to its total revenue.
Asset Turnover
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2009
1.9
1.5
0.5
1.4
1.7
1.4
2010
1.5
1.3
0.5
1.4
1.6
1.2
2011
1.9
1.5
0.4
1.4
1.6
1.3
2012
2.0
1.6
0.4
1.3
1.8
1.4
2013
2.0
1.6
0.3
1.2
1.8
1.4
Average
1.8
1.5
0.4
1.4
1.7
1.3
Asset Turnover
2.5
2.0
1.5
1.0
0.5
0.0
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Figure 13.
Page | 17
Return on Assets (“ROA”)
Return on Assets (“ROA”) indicates the percentage profit gained generated by a
firm’s total assets. It is calculated as the proportion of net income to the total assets.
When firms increase their revenues, it is important to observe the relative changes to
ROA. If sales are increasing but the ROA is decreasing then it may behoove the
managers to slow down growth as they are becoming less profitable. In general, a
higher ROA is best. Brinker’s ROA was below the industry average before 2011, but it
has since risen above the average at an increasing rate. Within this group, Buffalo Wild
Wings emerged again as a clear front-runner with an average ROA over the five-year
time period of 10.0%.
Return on Assets
(ROA)
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2009
4.1%
3.6%
1.0%
7.4%
9.9%
5.2%
2010 2011
2012
2013
5.6% 9.5% 10.5% 11.2%
6.6%
8.1%
9.5%
4.9%
-0.1% 2.9%
5.3%
3.0%
7.8%
8.8%
8.0%
5.9%
10.1% 10.2% 9.7%
10.1%
6.0% 7.9% 8.6%
7.0%
Average
7.4%
7.0%
2.3%
8.0%
10.0%
6.9%
Return on Assets
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
2009
2010
2011
2012
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2013
Figure 14.
Page | 18
Return on Equity (“ROE”)
Return on equity, most commonly abbreviated as ROE, is the amount of profit
comprised from the shareholder’s equity. This ratio can be found by dividing net income
by owner’s equity. Return on equity best utilized when comparing the profitability of
firms within the same industry. Shareholders’ equity is on facet of the firms funding of
operations. If the net income is increasing while the stockholder’s equity is remaining
relatively constant, this will represent a firm best utilizing their equity invested. An
increasing ROE represents increased the effectiveness of the shareholders equity. As
evidenced below, all of the firm’s within this group have exhibited drastic volatility in
ROE. Brinker, for example mustered a 71.1% Return on Equity in 2012 due to a variety
of factors including a $4B stock repurchase plan which greatly reduced the shares
outstanding. The firm was showing a significant, nearly exponential growth in ROE until
2013, when the firm only a 0.9%. Dine Equity exhibited the most volatility from 2009 to
2011 as their ROE climbed from -83.5% in 2010, to 92.9% in 2011.
Return on Equity
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%
-60.0%
-80.0%
-100.0%
2009
2010
2011
2012
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2013
Figure 15.
Page | 19
Return on Equity
(without Dine Equity)
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2009
Brinker
2010
Darden
2011
Buffalo Wild Wings
2012
2013
Industry
Figure 16.
Conclusion
Brinker’s profitability ratios indicate that they are below the industry average for
ROA, ROE, sales growth, gross margin, operating margin, and net profit margin. The
only time Brinker exceeds the industry average is in asset turnover, which has increased
steadily over the last five years.
Capital Structure Ratios
Introduction
The capital structure of a firm describes the way in which its operations are
being financed. Properly analyzing the capital structure ratios allows the analyst to
understand where a firm is currently obtaining their funds. Firms will utilize different
methods of funding depending on their current needs, and the cost of said funding. The
most commonly analyzed capital structure ratio is the debt to equity, because this will
demonstrate the extent to which a company is leveraged. There are three main capital
structure ratios that will be analyzed in this section. These three ratios consist of debt
Page | 20
to equity, times interest earned, and the Altman’s Z-score, which will be discussed in
further detail below.
Debt to Equity
The Debt to Equity Ratio is a capital structure ratio that measures the firm’s
debt, or total liabilities, in proportion to total shareholders equity. In order to confirm
the most universal truth of accounting, assets must always equal liabilities plus
shareholders’ equity. The Debt to Equity Ratio describes the amount of leverage or debt
that comprises that latter part of the equation. Analyst opinions vary regarding an ideal
number for this ratio. For instance, a higher number indicates that the firm has been
aggressive in financing its assets with debt, which has trade-offs. If the growth rate of
the company is less than the cost of debt, then creditors benefit. Relative to its peer
group Brinker is doing very well about not financing a majority of its assets with debt.
Brinker has been able to obtain a debt to equity ratio of 0.34 while its peer group
average is 0.66. It is also important to point out that Buffalo Wild Wings has been able
to finance all of its assets without seeking debt.
Debt to Equity
2009
0.37
0.37
4.98
0.3
0.00
1.21
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2010
0.33
0.32
2.25
0.27
0.00
0.64
2011
0.36
0.34
2.27
0.31
0.00
0.66
2012
0.30
0.29
1.08
0.40
0.00
0.41
2013
0.36
0.34
0.76
0.36
0.00
0.36
Average
0.34
0.33
2.27
0.33
0.00
0.66
Debt to Equity
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2008
2009
2010
2011
2012
2013
Brinker
Brinker Restated
Dine Equity
Darden
Buffalo Wild Wings
Industry
2014
Page | 21
Figure 17.
Times Interest Earned
Times interest earned is useful when analyzing the proportion of interest that
comprises operating income. It is the number of times a company can pay its interest
expenses out of the earnings before interest and taxes account. Anything below one is
considered to be undesirable and risky to potential investors. This ratio is attained by
dividing earnings before interest and taxed by total interest payable. Over the past
three years, all of the firms in this group, except Darden, have exhibited a strong
upward trend in times interest earned. Their total revenues are beginning to cover a
larger amount of the interest owed on outstanding debt. Because Buffalo Wild Wings is
debt-free, it does not need to pay interest on any debt. Thus, the times interest earned
ratio is undefined.
Page | 22
Times Interest
Earned
2009
7.10
7.10
6.21
6.20
6.65
Brinker
Brinker Restated
Dine Equity
Darden
Industry
2010
7.70
7.70
4.98
7.40
6.95
2011
9.20
9.20
6.19
6.90
7.87
2012
9.00
9.00
7.42
5.00
7.61
2013
10.40
10.40
6.94
9.25
Average
8.68
8.68
6.35
6.38
7.52
Times Interest Earned
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2008
2009
Brinker
2010
2011
Brinker Restated
2012
Dine Equity
2013
2014
Darden
Figure 18.
Altman’s Z-Score
Altman’s Z-score is a measure how likely a firm is to going to declare bankruptcy;
it can also be thought of as the credit risk of the company itself. The standard rule to
follow is: if the score is below 1.8 the company is expectedly heading toward
bankruptcy, but if the score is above 3.0 the firm does not expect to go bankrupt at any
time in the near future. The formula to calculate Altman’s Z-score is below:
Page | 23
Source: supplychainshaman.com
According to our calculations in the data below, only Dine Equity can be marked
as nearing bankruptcy. Over the past five years, the Z-score has grown from 1.0 to 1.6,
demonstrating a significant upward trend. The other firms in the industry have
exhibited a similar trend, but they do not appear to be nearing bankruptcy.
Altman's Z-Score
Brinker
Brinker Restated
Dine Equity
Darden
Industry
2009
5.3
4.4
1.0
4.4
3.8
2010
5.4
4.6
1.1
4.7
3.9
2011
6.0
5.2
1.2
4.6
4.2
2012
6.6
5.7
1.6
4.0
4.5
2013
6.5
5.3
1.6
3.5
4.2
Average
6.0
5.0
1.3
4.2
4.1
Altman's Z-Score
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2008
2009
Brinker
2010
2011
Brinker Restated
2012
Dine Equity
2013
2014
Darden
Figure 19.
Page | 24
Conclusion
As evidenced by the debt to equity ratio, the percentage of invested capital
allocated to debt is generally lower in this industry, with the exception of Dine Equity,
whom has seven times the amount of debt as they do equity, which may be negative
affects their bankruptcy risk in the Altman’s Z-score. For the most part, Brinker’s capital
structure numbers are on par with many of the statistics of the casual dining sector as a
whole, despite the volatility within this small peer group.
Growth Rates
Introduction
In this section, there are two relevant growth rates to be analyzed: internal
growth rate and sustainable growth rate. The sustainable growth rate measures the
level of growth attainable while receiving no outside additional funding. The internal
growth rate is used to assess the ability to which a firm can grow by keeping its capital
structure constant.
Internal Growth Rate
Internal growth rate is the level of a firm’s growth rate without obtaining
financing from outside sources. This ratio is very important for smaller firms and startup
firms. If a firm is able to obtain a healthy internal growth rate is represents the ability of
a company to grow with only its available assets. After analyzing Brinker’s IGR over the
past five years, there has not been a noticeable trend associated with this information.
Brinker’s five year average is consistent with its peer group average, which shows it is
similar to the rest of its competitors.
Page | 25
Internal Growth
Rate
2009
Brinker
Dine Equity
Darden
Buffalo Wild Wings
8.6%
12.0%
16.3%
16.1%
13.2
%
Industry
2010
16.1
%
16.4%
16.5%
16.3
%
2011
25.2
%
92.9%
16.0%
17.5%
37.9
%
2012
47.5
%
58.4%
11.2%
16.3%
33.4
%
2013
Average
0.6%
4.6%
6.8%
32.6%
11.2
%
19.6%
42.0%
13.3%
19.8%
23.7%
Internal Growth Rate
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
2008
2009
2010
2011
Brinker
Dine Equity
Buffalo Wild Wings
Industry
2012
2013
2014
Darden
Figure 20.
Sustainable Growth Rate
Sustainable growth rate is the rate at which a company can grow while keeping
its capital structure constant. This is also the growth rate of a firm without increasing or
decreasing its current financing leverage. This rate will represent the ability of a firm to
grow without borrowing more money. You could also consider this to be a rate of how
efficient a company is operating. Brinker showed healthy growth rates from 2009 to
2012. In 2013 Brinker had a large decrease in their SGR which put them below the peer
group average for 2013. For the purpose of displaying a graph with legible information,
Page | 26
we have capped the y-axis at 100% because only Dine Equity has shown a SGR with a
rate higher than 100%, which was 304% in 2010.
Sustainable
Growth Rate
2009
2010
2011
2012
2013 Average
11.7% 21.5% 34.2% 61.9% 0.8%
26.0%
71.8%
0.0% 303.7% 121.6% 8.1%
101.1%
21.6% 20.9% 20.9% 15.6%
9.3%
17.7%
16.1% 16.5% 17.5% 16.3% 32.6%
19.8%
30.3% 14.7% 94.1% 53.9% 12.7% 41.1%
Brinker
Dine Equity
Darden
Buffalo Wild Wings
Industry
Sustainable Growth Rate
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2008
Brinker
2009
2010
Dine Equity
2011
Darden
2012
2013
Buffalo Wild Wings
2014
Industry
Figure 21.
Industry-Specific Ratios
Introduction
In many cases, there are certain characteristics about specific industries that
make traditional liquidity, profitability, and capital structure ratios helpful, but
incomplete. In this analysis, it is also important to analyze a firm’s Company Owned
Location ratio. This ratio helps to measure and diagnose certain differences between
the structure of industry peers’ financial statements.
Page | 27
Company-Owned Locations
The Company Owned Locations ratio is important in this industry because a
restaurant holding company’s franchising structure can have a significant impact on the
financial statements. For example, Dine Equity is structured in such a way that they
hold no inventory on their balance sheet, which means their current assets are,
proportionally, much more liquid that their peers. Brinker’s franchising structure is
essentially the average of this peer group; however, the range within this group is so
large considering Darden owns and operates 100% of their restaurants and Dine Equity
is entirely franchised. The average percentage of company owned locations for the
entire casual dining sector is 88.9% as of 2013 Q4. Compared to the entire casual
dining sector, Brinker’s company owned location percentage is relatively low.
Company-Owned
Locations
Brinker
Dine Equity
Darden
Buffalo Wild Wings
Industry
2009
60.6
%
12.3%
98.3%
35.2%
51.6
%
2010
56.2
%
11.9%
100.0
%
35.6%
50.9
%
2011
55.0
%
9.1%
100.0
%
35.4%
49.9
%
2012
54.7
%
5.4%
100.0
%
39.0%
49.8
%
2013
55.1
%
1.0%
100.0
%
42.8%
49.7
%
Averag
e
56.3%
7.9%
99.7%
37.6%
50.4%
Page | 28
Company Owned Locations
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
2008
Brinker
2009
2010
Dine Equity
2011
Darden
2012
2013
Buffalo Wild Wings
2014
Industry
Figure 22.
Financial Analysis Conclusion
Brinker’s current financial statements have shown us that, compared to its peers,
is generally less liquid, less profitable, able to sustain less growth moving forward
without adapting.
Financial Forecasting
Financial forecasting is essential to the valuation process. It is important to
make educated assumptions using historical trends, ratios, the current economic
environment, and industry related patterns. Using these methods will help us define
the intrinsic value of the firm. Of course, the longer the forecasted period, the more
unreliable the estimated numbers will become. Using the income statement, balance
sheet, and statement of cash flows of Brinker International, we will forecast out the
next 10 years of financial information.
Page | 29
Income Statement
The first financial statement to be forecasted is the income statement. The
income statement is important to forecast with logical assumptions because the
numbers used in the balance sheet and statement of cash flows are pulled directly from
it. The most important factor in forecasting the income statement is the sales growth
figure. Future revenues are used in multiple ratios, including liquidity and profitability.
As always, the current economic conditions must also me taken into consideration.
Since we are slowly coming out of the housing recession, the sales growth rate has
been adjusted to take this into account. Brinker International has been showing an
increasing trend in sales over the past 5 years. We have continued this trend, but on a
cautious basis, since the average consumer still seems hesitant about the economic
future. We started with a sales growth of 2.4% in 2014 and continued the upward
trend to a max of 17% in 2018 and finally settling down to 15% in 2019 and on.
After the sales growth is projected, a common sized income statement can be
created. A common size income statement reports line items as a percentage of
revenues. Using this method, trends and patterns are easier to see and easier to
forecast. We have continued Brinker International’s upward trend and have forecasted
their gross profit margin to rise steadily from 73% in 2014 to a maintenance amount of
75% in 2018 and on. This gives us a cost of goods sold of 27% in 2014 and a final
number of 25% in 2018 and thereafter. We have also noticed a trend of Brinker
lowering their restaurant expenses. We have continued this trend by forecasting these
expenses as 23.5% in 2014 and slowly decreasing to 21.5% in 2019 and thereafter.
Following the trend of lower expenses and increasing sales growth, we have naturally
forecasted the operating income, earnings before taxes, and the net income, to
continue this favorable trend. We started with an operating income of 10% in 2014
and gradually increased it to 13% in 2018 and thereafter. The earnings before taxes
number was forecasted at 9% in 2014 and reached a max of 13% in 2019 and
remaining at that rate. And finally we show net income increasing from 6% in 2014 to
7.3% in 2018 and maintaining at that rate. Again, with a long forecast period of 10
Page | 30
years, unexpected factors could affect our projections. Using these forecasted income
statement numbers, we can now forecast the balance sheet, statement of cash flows,
and look at dividends.
Page | 31
Revenues
Cost of Sales
Gross Profit
Operating Costs and Expenses:
Restaurant Labor
Restaurant Expenses
Depreciation and Amortization
General and Administrative
Other gains and charges
Total operating costs and expenses
Operating Income
Interest Expenses
Other, net
Earnings Before Taxes
Income Taxes Expense
Income from continuing operations
Income from discountinued operations, net of taxes
Net Income
Common Sized
Sales Growth
Period Ending
Common Shares Outstanding
Dividends per Share
Annual Dividends
Revenues
Cost of Sales
Gross Profit
Operating Costs and Expenses:
Restaurant Labor
Restaurant Expenses
Depreciation and Amortization
General and Administrative
Other gains and charges
Total operating costs and expenses
Operating Income or Loss
Interest Expenses
Other, net
Earnings Before Taxes
Income Taxes Expense
Income from continueing operations
Income from discountinued operations, net of taxes
Net Income
Income Summary
As-Stated Income Statement
(in thousands)
Period Ending
Page | 32
30-Jun-09
30-Jun-10
30-Jun-11
30-Jun-12
30-Jun-13
67,444
0.80
53,955
100%
25%
75%
32%
22.00%
4%
4.50%
62%
13.0%
1%
13.0%
8.3%
7.3%
100%
25%
75%
32%
22.0%
4%
4.50%
62%
13.0%
1%
13.0%
8.3%
7.3%
100%
25%
75%
32%
22.0%
4%
4.50%
62%
13.0%
1%
13.0%
8.3%
7.3%
100%
25%
75%
32%
22.0%
4%
4.50%
62%
13.0%
1%
13.0%
8.3%
7.3%
100%
25%
75%
32%
22.0%
4%
4.50%
62%
13.0%
1%
13.0%
8.3%
7.3%
100%
25%
75%
32%
22.0%
4%
4.50%
62%
13.0%
1%
12.3%
8.3%
7.3%
32%
23.0%
4%
4.50%
63%
12.0%
1%
11.5%
7.8%
6.9%
32%
23.0%
4%
4.50%
63%
11.3%
1%
10.8%
7.4%
6.6%
32%
23.5%
4%
4.50%
64%
10.5%
1%
10.0%
6.9%
6.3%
32%
23.5%
4%
4.50%
64%
10.0%
1%
9.0%
6.2%
6.0%
31.4%
23.0%
4.6%
4.7%
0.6%
64.3%
9.0%
1.0%
-0.1%
8.1%
2.4%
5.7%
0.0%
5.7%
31.6%
23.0%
4.4%
5.1%
0.3%
64.5%
8.2%
1.0%
-0.1%
7.4%
2.0%
5.4%
0.0%
5.4%
32.1%
23.7%
4.7%
4.8%
0.4%
65.7%
7.4%
1.0%
-0.2%
6.6%
1.5%
5.1%
0.0%
5.1%
32.4%
23.1%
4.8%
4.8%
1.0%
66.0%
5.4%
1.0%
-0.2%
4.6%
1.0%
3.6%
1.2%
4.8%
32.2%
23.9%
4.4%
4.5%
3.6%
68.7%
3.1%
1.0%
-0.3%
2.4%
0.2%
2.2%
0.2%
2.4%
32.1%
23.9%
3.8%
4.2%
5.1%
69.1%
2.3%
1.2%
-0.1%
1.2%
0.1%
1.2%
0.2%
1.3%
15.0%
100%
26%
74%
15.0%
35,000
1.30
45,500
100%
26%
74%
15.0%
35,000
1.25
43,750
100%
27%
73%
15.0%
35,000
1.25
43,750
100%
27%
73%
15.0%
35,000
1.25
43,750
100.0%
26.6%
73.4%
17.0%
35,000
1.25
43,750
100.0%
27.3%
72.7%
13.0%
35,000
1.25
43,750
100.0%
26.9%
73.1%
9.0%
35,000
1.17
40,950
100.0%
28.5%
71.5%
3.7%
44,000
1.09
47,960
8,760,090
2,190,023
6,570,068
2,803,229
1,927,220
350,404
394,204
5,431,256
1,138,812
87,601
1,138,812
727,087
639,487
7,617,470
1,904,367
5,713,102
2,437,590
1,675,843
304,699
342,786
4,722,831
990,271
76,175
990,271
632,250
556,075
6,623,887
1,655,972
4,967,915
2,119,644
1,457,255
264,955
298,075
4,106,810
861,105
66,239
861,105
549,783
483,544
5,759,901
1,439,975
4,319,926
1,843,168
1,267,178
230,396
259,196
3,571,139
748,787
57,599
748,787
478,072
420,473
5,008,610
1,252,152
3,756,457
1,602,755
1,101,894
200,344
225,387
3,105,338
651,119
50,086
651,119
415,715
365,629
4,355,313
1,088,828
3,266,485
1,393,700
958,169
174,213
195,989
2,700,294
566,191
43,553
535,703
361,491
317,938
3,722,490
967,847
2,754,642
1,191,197
856,173
148,900
167,512
2,345,169
446,699
37,225
428,086
290,354
256,852
3,294,239
856,502
2,437,737
1,054,156
757,675
131,770
148,241
2,075,370
372,249
32,942
355,778
243,774
217,420
3,022,237
816,004
2,206,233
967,116
710,226
120,889
136,001
1,934,232
317,335
30,222
302,224
208,534
190,401
51,750
0.99
51,233
2023
2022
2021
2020
2019
2018
2017
2016
2015
100.0%
28.2%
71.8%
2.4%
59,500
0.88
52,360
2,914,404
786,889
2,127,515
932,609
684,885
116,576
131,148
1,865,219
291,440
29,144
262,296
180,693
174,864
2014
100.0%
28.5%
71.5%
0.90%
2.15%
-3.40%
-12.75%
-15.14%
30-Jun-13
30-Jun-12
30-Jun-11
30-Jun-10
30-Jun-09
0.64
47,578
0.56
46,446
0.47
47,738
0.44
44,933
0.42
42,554
30-Jun-08
74,340
82,940
101,570
102,120
101,320
1,239,604.00 1,054,078.00 926,474.00 886,559.00 891,910.00 892,413.00
922,382.00 784,657.00 660,922.00 655,060.00 649,830.00 655,214.00
147,393.00 145,220.00 135,832.00 128,447.00 125,054.00 131,481.00
163,996.00 147,372.00 136,270.00 132,834.00 143,388.00 134,538.00
17,300.00
8,974.00
10,783.00
28,485.00
196,364.00 118,612.00
2,669,739.00 2,249,939.00 1,887,983.00 1,813,683.00 1,819,156.00 1,830,946.00
90,057.00 102,755.00 154,500.00 205,420.00 231,837.00 256,775.00
29,118.00
26,800.00
28,311.00
28,515.00
33,330.00
45,862.00
(2,658.00)
(3,772.00)
(6,220.00)
(6,001.00)
(9,430.00)
(4,046.00)
78,855.00 131,986.00 183,329.00 208,809.00 230,315.00
48,241.00
66,956.00
57,577.00
42,269.00
28,264.00
6,734.00
2,644.00
72,121.00 103,722.00 141,060.00 151,232.00 163,359.00
45,597.00
33,982.00
7,045.00
6,125.00
79,166.00 137,704.00 141,060.00 151,232.00 163,359.00
51,722.00
3,860,921.00 3,276,362.00 2,858,498.00 2,761,386.00 2,820,722.00 2,846,098.00
1,101,125.00 923,668.00 816,015.00 742,283.00 769,729.00 758,377.00
2,759,796.00 2,352,694.00 2,042,483.00 2,019,103.00 2,050,993.00 2,087,721.00
30-Jun-08
Revenues
Cost of Sales
Gross Profit
Operating Costs and Expenses:
Restaurant Labor
Restaurant Expenses
Goodwill Impairment Charge
Amortization of Capital Lease Rights
Depreciation and Amortization
General and Administrative
Other gains and charges
Total operating costs and expenses
Operating Income
Interest Expenses
Other, net
Earnings Before Taxes
Income Taxes Expense
Income from continueing operations
Income from discountinued operations, net of taxes
Net Income
8.3%
7.3%
8.3%
7.3%
8.3%
7.3%
8.3%
7.3%
8.3%
7.3%
8.3%
7.3%
6.9%
6.6%
6.3%
6.0%
13.0%
13.0%
13.0%
13.0%
13.0%
12.3%
11.5%
10.8%
10.0%
9.0%
7.8%
62%
13.0%
1%
62%
13.0%
1%
62%
13.0%
1%
62%
13.0%
1%
62%
13.0%
1%
62%
13.0%
1%
63%
12.0%
1%
63%
11.3%
1%
64%
10.5%
1%
64%
10.0%
1%
7.4%
1.0%
4%
4.50%
1.0%
4%
4.50%
1.0%
4%
4.50%
1.0%
4%
4.50%
1.0%
4%
4.50%
1.0%
4%
4.50%
1.0%
4%
4.50%
1.0%
4%
4.50%
1.3%
4%
4.50%
1.5%
4%
4.50%
6.9%
32%
22.00%
32%
22.0%
32%
22.0%
32%
22.0%
32%
22.0%
32%
22.0%
32%
23.0%
32%
23.0%
32%
23.5%
32%
23.5%
31.4%
23.0%
0.0%
1.7%
4.6%
4.7%
0.6%
66.0%
7.3%
2.0%
-0.1%
5.4%
2.4%
3.1%
0.0%
3.1%
31.6%
23.0%
0.0%
1.9%
4.4%
5.1%
-3.2%
62.8%
9.9%
2.0%
-0.1%
8.0%
2.0%
6.0%
0.0%
6.0%
32.1%
23.7%
0.0%
2.1%
4.7%
4.8%
-3.2%
64.2%
9.0%
2.2%
-0.2%
7.0%
1.5%
5.5%
0.0%
5.5%
32.4%
23.1%
0.0%
2.2%
4.8%
4.8%
-2.6%
64.6%
6.9%
2.1%
-0.2%
5.0%
1.0%
4.0%
1.2%
5.2%
32.2%
23.9%
0.0%
2.0%
4.4%
4.5%
0.4%
67.4%
4.4%
2.0%
-0.3%
2.7%
0.2%
2.5%
0.2%
2.7%
32.1%
23.9%
0.0%
0.0%
3.8%
4.2%
5.1%
69.1%
2.3%
1.2%
-0.1%
1.2%
0.1%
1.2%
0.2%
1.3%
6.2%
100%
25%
75%
100%
25%
75%
100%
25%
75%
100%
25%
75%
100%
25%
75%
100%
25%
75%
100%
26%
74%
100%
26%
74%
100%
27%
73%
100%
27%
73%
100.0%
26.6%
73.4%
11.0%
100.0%
27.3%
72.7%
11.0%
100.0%
26.9%
73.1%
11.0%
100.0%
28.5%
71.5%
11.0%
100.0%
28.2%
71.8%
11.0%
100.0%
28.5%
71.5%
11.0%
0.90%
30-Jun-13
2.15%
30-Jun-12
8.0%
6,456,105
1,614,026
4,842,079
2,065,954
1,420,343
64,561
258,244
290,525
4,002,785
839,294
64,561
839,294
535,857
471,296
5,816,311
1,454,078
4,362,233
1,861,219
1,279,588
58,163
232,652
261,734
3,606,113
756,120
58,163
756,120
482,754
424,591
5,239,919
1,309,980
3,929,940
1,676,774
1,152,782
52,399
209,597
235,796
3,248,750
681,190
52,399
681,190
434,913
382,514
4,720,648
1,180,162
3,540,486
1,510,607
1,038,543
47,206
188,826
212,429
2,926,802
613,684
47,206
613,684
391,814
344,607
4,252,836
1,063,209
3,189,627
1,360,908
935,624
42,528
170,113
191,378
2,636,758
552,869
42,528
552,869
352,985
310,457
3,831,384
957,846
2,873,538
1,226,043
842,904
38,314
153,255
172,412
2,375,458
498,080
38,314
471,260
318,005
279,691
3,451,697
897,441
2,554,256
1,104,543
793,890
34,517
138,068
155,326
2,174,569
414,204
34,517
396,945
269,232
238,167
-3.40%
30-Jun-11
5.8%
2023
2022
2021
2020
2019
2018
2017
-12.75%
30-Jun-10
3.7%
3,196,016
830,964
2,365,052
1,022,725
735,084
31,960
127,841
143,821
2,013,490
361,150
31,960
345,170
236,505
210,937
3,022,237
816,004
2,206,233
967,116
710,226
39,289
120,889
136,001
1,934,232
317,335
30,222
302,224
208,534
190,401
2,914,404
786,889
2,127,515
932,609
684,885
43,716
116,576
131,148
1,865,219
291,440
29,144
262,296
180,693
174,864
2.4%
2016
2015
2014
-15.14%
30-Jun-09
30-Jun-08
Common Sized
Sales Growth
Period Ending
30-Jun-13
3,276,362.00 2,858,498.00 2,761,386.00 2,820,722.00 2,846,098.00
758,377.00
769,729.00
742,283.00
816,015.00
923,668.00
2,352,694.00 2,042,483.00 2,019,103.00 2,050,993.00 2,087,721.00
892,413.00
891,910.00
886,559.00
926,474.00
1,054,078.00
655,214.00
649,830.00
655,060.00
660,922.00
784,657.00
48,343.35
52,880.10
57,947.77
61,999.30
65,530.27
131,481.00
125,054.00
128,447.00
135,832.00
145,220.00
134,538.00
143,388.00
132,834.00
136,270.00
147,372.00
17,300.00
(75,029.00) (89,369.00) (91,467.00)
12,302.00
2,209,159.27 1,846,468.30 1,771,478.77 1,771,595.10 1,879,289.35
208,431.65
279,397.90
247,624.23
196,014.70
143,534.73
56,888.46
56,812.06
60,851.87
59,025.72
64,617.54
(2,658.00)
(3,772.00)
(6,220.00)
(6,001.00)
(9,430.00)
154,201.19
226,357.84
192,992.36
142,989.98
88,347.19
66,956.00
57,577.00
42,269.00
28,264.00
6,734.00
87,245.19
168,780.84
150,723.36
114,725.98
81,613.19
33,982.00
7,045.00
87,245.19
168,780.84
150,723.36
148,707.98
88,658.19
30-Jun-12
3,860,921.00
1,101,125.00
2,759,796.00
1,239,604.00
922,382.00
147,393.00
163,996.00
196,364.00
2,669,739.00
90,057.00
45,862.00
(4,046.00)
48,241.00
2,644.00
45,597.00
6,125.00
51,722.00
30-Jun-11
Revenues
Cost of Sales
Gross Profit
Operating Costs and Expenses:
Restaurant Labor
Restaurant Expenses
Goodwill Impairment Charge
Amortization of Capital Lease Rights
Depreciation and Amortization
General and Administrative
Other gains and charges
Total operating costs and expenses
Operating Income
Interest Expenses
Other, net
Earnings Before Taxes
Income Taxes Expense
Income from continueing operations
Income from discountinued operations, net of taxes
Net Income
30-Jun-10
30-Jun-09
30-Jun-08
Restated Income Statement
(in thousands)
Period Ending
Page | 33
Dividends Forecasting
The valuation of a firm is heavily dependent on future expectations of dividend
growth and value. Brinker International announced plans to spend $4 billion on a share
repurchase plan in 2012. As a result, the dividends paid out have been steadily
increasing while share outstanding have been decreasing. We have forecasted this
trend to continue starting with a dividend of $0.88 per share in 2014 and reaching a
max of $1.25 per share in 2018.
Balance Sheet
After forecasting the income statement, the next step is to forecast the balance
sheet. There are many ratios and methods used to do this, but we find the asset
turnover ratio is the best at tying the income statement to the balance sheet. Just like
the favorable trend in sales, we have found an increasing trend in the asset turnover
ratio from 1.6 in 2008 to 2.0 in 2013. Using this trend, we have forecasted the asset
turnover ratio in 2014 to be 2.1. With this ratio, we then backed into the total assets
figure. The total assets figure is the basis for forecasting the balance sheet. With the
use of Liquidity ratios we also forecasted the current assets and current liabilities. Now
that we have the total assets figure, the next step was to create a common size balance
sheet to help indentify patterns and trends.
Using the common size balance sheet we found a trend of decreasing current
assets and an increase in long term assets. We forecasted the current assets in 2014 at
13.1% of total assets and slowly decreased it to 11% in 2018 where it remained
constant. The long term assets were forecasted at 86.9% in 2014 and slowly increased
to 89% in 2018 and stayed constant as well. This same trend was found in the current
and long term liabilities of Brinker. Again, we continued this trend in our forecasts. We
started with 27% in current liabilities in 2014 and decreased it to 20% in 2016 where it
stayed constant. The long term liabilities increased from 73% in 2014 to 80% in 2016.
Page | 34
The trends we are finding in Brinker match the trends of the casual dining industry, as
well as, the slowly improving economy.
Page | 35
Liabilities and Shareholders' Equity
Current Liabilities:
Current installments of long-term debt
Accounts Payable
Accrued Liabilities
Income Taxes Payable
Liabilities associated with assets held for sale
Total current liabilities
Long-term debt, less current installments
Deferred Income Taxes
Other liabilities
Total Long-Term Liabilities
Total Liabilities
Commitments and Contingencies
Shareholders' Equity
Common Stock
Additional Paid-in capital
Accumulated other comprehensive loss
Retained Earnings
As- Stated Balance Sheet
(in thousands)
Period Ending
Assets
Current Assets:
Cash and cash equivalents
Accounts Receivale
Inventories
Prepaid Expense and Other
Income Taxes Receivable
Deferred Income Tax
Assets held for sale
Total Current Assets
Non-Current Assets:
Property and Equipment
Land
Building and leasehold improvements
Furniture and equipment
Construction-in-Progress
Less accumulated depreciation and amort.
Net Property and Equipment
Other Assets:
Goodwill
Deferred income taxes
Other Assets:
Total other assets
Total Non-Current Assets
Total Assets
Less Treasury Stock
Total shareholders' equity
Total Liabilities and shareholders' equity
Page | 36
1,815.00
121,483.00
285,406.00
9,798.00
418,502.00
727,447.00
4,295.00
151,779.00
883,521.00
1,302,023.00
17,625.00
463,980.00
1,834,307.00
2,315,912.00
(1,668,988.00)
646,924.00
1,948,947.00
1,973.00
168,619.00
331,943.00
5,946.00
17,688.00
526,169.00
901,604.00
170,260.00
1,071,864.00
1,598,033.00
17,625.00
464,666.00
(168.00)
1,800,300.00
2,282,423.00
(1,687,334.00)
595,089.00
2,193,122.00
27,334.00
100,531.00
273,884.00
401,749.00
587,890.00
136,560.00
724,450.00
1,126,199.00
17,625.00
466,781.00
2,112,858.00
2,597,264.00
(2,287,391.00)
309,873.00
1,436,072.00
22,091.00
87,549.00
287,365.00
8,596.00
405,601.00
502,572.00
137,485.00
640,057.00
1,045,658.00
17,625.00
463,688.00
2,013,189.00
2,494,502.00
(2,055,592.00)
438,910.00
1,484,568.00
16,866.00
112,824.00
300,540.00
19,647.00
449,877.00
524,511.00
148,968.00
673,479.00
1,123,356.00
17,625.00
465,721.00
1,923,561.00
2,406,907.00
(1,678,159.00)
728,748.00
1,852,104.00
355,070
1,439,163
715,509
1,439,164
676,949
1,439,165
1,092,232
1,439,166
1,116,742
1,439,167
1,604,557
1,439,168
1,710,729
1,439,169
271,861
1,439,160
17,625.00
477,420.00
2,217,623.00
2,712,668.00
(2,563,311.00)
149,357.00
1,452,603.00
441,321
1,439,162
(217,248)
(271,560)
(132,311)
(165,389)
257,940
322,425
277,547
346,934
609,773
762,216
578,924
723,655
867,274
1,084,093
798,273
997,841
994,494
1,299,993
852,128
1,167,299
139,168
1,439,161
(271,560)
1,280,860
1,439,169
158,309
2023
(165,389)
1,280,860
1,439,168
158,308
2022
322,425
1,280,859
1,439,167
158,308
2021
346,934
1,280,858
1,439,166
158,308
2020
762,216
1,280,857
1,439,165
158,308
2019
723,655
1,280,856
1,439,164
158,308
2018
1,084,093
1,270,781
1,439,163
168,382
2017
997,841
1,265,023
1,439,162
174,139
2016
1,299,993
1,257,827
1,439,161
181,334
2015
1,167,299
1,250,630
1,439,160
188,530
2014
27,596.00
93,326.00
268,444.00
845.00
390,211.00
780,121
132,914.00
913,035.00
1,303,246.00
142,103.00
24,064.00
52,030.00
218,197.00
1,254,012.00
1,452,603.00
125,604.00
20,231.00
51,827.00
197,662.00
1,241,226.00
1,436,072.00
124,089.00
30,365.00
52,475.00
206,929.00
1,263,208.00
1,484,568.00
124,089.00
44,213.00
53,658.00
221,960.00
1,351,037.00
1,852,104.00
124,932.00
46,921.00
171,853.00
1,419,633.00
1,948,947.00
140,371.00
23,160.00
43,854.00
207,385.00
1,738,401.00
2,193,122.00
147,581.00
1,435,426.00
580,115.00
20,588.00
(1,147,895.00)
1,035,815.00
152,382.00
1,399,905.00
556,304.00
11,211.00
(1,076,238.00)
1,043,564.00
156,731.00
1,383,311.00
543,682.00
6,425.00
(1,033,870.00)
1,056,279.00
163,018.00
1,367,646.00
556,815.00
11,870.00
(970,272.00)
1,129,077.00
173,758.00
1,399,843.00
579,290.00
9,031.00
(914,142.00)
1,247,780.00
198,554.00
1,573,305.00
669,201.00
35,106.00
(945,150.00)
1,531,016.00
194,846.00
94,156.00
48,557.00
33,845.00
90,218.00
41,620.00
50,785.00
170,133.00
529,314.00
221,360.00
30-Jun-13
59,367.00
37,842.00
24,628.00
71,824.00
4,930.00
198,591.00
30-Jun-12
59,103.00
43,387.00
25,360.00
63,023.00
1,055.00
2,918.00
30-Jun-11
81,988.00
42,785.00
25,365.00
59,698.00
11,524.00
30-Jun-10
344,624.00
45,140.00
26,735.00
63,961.00
20,607.00
501,067.00
30-Jun-09
54,714.00
52,304.00
35,534.00
106,472.00
71,595.00
134,102.00
454,721.00
30-Jun-08
Commitments and Contingencies
Shareholders' Equity
Common Stock
Additional Paid-in capital
Accumulated other comprehensive loss
Retained Earnings
Less Treasury Stock
Total shareholders' equity
Equity to Total L&E
Total Liabilities and shareholders' equity
2.96%
78.08%
-0.03%
302.53%
383.54%
-283.54%
100.00%
27.13%
100.00%
2.72%
71.72%
0.00%
283.54%
357.99%
-257.99%
100.00%
33.19%
100.00%
2.42%
63.91%
0.00%
263.95%
330.28%
-230.28%
100.00%
39.35%
100.00%
4.02%
105.65%
0.00%
458.68%
568.34%
-468.34%
100.00%
29.56%
100.00%
2.11%
8.37%
27.48%
0.82%
0.00%
38.79%
48.06%
0.00%
13.15%
61.21%
100.00%
70.44%
5.69%
150.64%
0.00%
681.85%
838.17%
-738.17%
100.00%
21.58%
100.00%
2.43%
8.93%
24.32%
0.00%
0.00%
35.67%
52.20%
0.00%
12.13%
64.33%
100.00%
78.42%
11.80%
319.65%
0.00%
1484.78%
1816.23%
-1716.23%
100.00%
10.28%
100.00%
2.12%
7.16%
20.60%
0.06%
0.00%
29.94%
59.86%
0.00%
10.20%
70.06%
100.00%
89.72%
0.12%
10.55%
20.77%
0.37%
1.11%
32.93%
56.42%
0.00%
10.65%
67.07%
100.00%
72.87%
Liabilities and Shareholders' Equity
Current Liabilities:
Current installments of long-term debt
Accounts Payable
Accrued Liabilities
Income Taxes Payable
Liabilities associated with assets held for sale
Total current liabilities
Long-term debt, less current installments
Deferred Income Taxes
Other liabilities
Total Long-Term Liabilities
Total Liabilities
Liabilities to Total L&E
1.50%
10.04%
26.75%
1.75%
0.00%
40.05%
46.69%
0.00%
13.26%
59.95%
100.00%
60.65%
10.2%
98.8%
39.9%
1.4%
-79.0%
71.3%
0.0%
9.8%
1.7%
3.6%
15.0%
86.3%
100.0%
10.6%
97.5%
38.7%
0.8%
-74.9%
72.7%
0.0%
8.7%
1.4%
3.6%
13.8%
86.4%
100.0%
10.6%
93.2%
36.6%
0.4%
-69.6%
71.2%
0.0%
8.4%
2.0%
3.5%
13.9%
85.1%
100.0%
8.8%
73.8%
30.1%
0.6%
-52.4%
61.0%
0.0%
6.7%
2.4%
2.9%
12.0%
72.9%
100.0%
8.9%
71.8%
29.7%
0.5%
-46.9%
64.0%
0.0%
6.4%
0.0%
2.4%
8.8%
72.8%
100.0%
9.05%
71.74%
30.51%
1.60%
-43.10%
69.81%
0.00%
6.40%
1.06%
2.00%
9.46%
79.27%
100.00%
0.14%
9.33%
21.92%
0.00%
0.75%
32.14%
55.87%
0.33%
11.66%
67.86%
100.00%
66.81%
4.1%
2.6%
1.7%
4.9%
0.3%
0.0%
0.0%
13.7%
30-Jun-13
4.1%
3.0%
1.8%
4.4%
0.1%
0.2%
0.0%
13.6%
30-Jun-12
5.5%
2.9%
1.7%
4.0%
0.0%
0.8%
0.0%
14.9%
30-Jun-11
18.6%
2.4%
1.4%
3.5%
0.0%
1.1%
0.0%
27.1%
30-Jun-10
4.8%
2.5%
1.7%
4.6%
2.1%
2.6%
8.7%
27.2%
30-Jun-09
2.49%
2.38%
1.62%
4.85%
0.00%
3.26%
6.11%
20.73%
30-Jun-08
Common Sized
(in thousands)
Period Ending
Assets
Current Assets:
Cash and cash equivalents
Accounts Receivale
Inventories
Prepaid Expense and Other
Income Taxes Receivable
Deferred Income Tax
Assets held for sale
Total Current Assets
Non-Current Assets:
Property and Equipment
Land
Building and leasehold improvements
Furniture and equipment
Construction-in-Progress
Less accumulated depreciation and amort.
Net Property and Equipment
Other Assets:
Goodwill
Deferred income taxes
Other Assets:
Total other assets
Total Non-Current Assets
Total Assets
Page | 37
100%
12%
100%
100%
10.3%
100%
100%
10.3%
100%
100%
10.3%
100%
100%
10.3%
100%
100%
10.3%
100%
100%
10.3%
100%
100%
10.3%
100%
100%
10.3%
100%
80.0%
100%
89.7%
80.0%
100%
89.7%
80.0%
100%
89.7%
80.0%
100%
89.7%
80.0%
100%
89.7%
80.0%
100%
89.7%
80.0%
100%
89.7%
80.0%
100%
89.7%
76.5%
100%
88.0%
73.0%
100%
90.0%
100%
10%
100%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
89.0%
100%
89.0%
100%
89.0%
100%
89.0%
100%
89.0%
100%
89.0%
100%
88.3%
100%
87.9%
100%
87.4%
100%
86.9%
100%
23.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.0%
11.5%
10.9%
10.4%
27.0%
75.0%
11.0%
75.0%
11.0%
75.0%
11.0%
75.0%
11.0%
75.0%
11.0%
75.0%
11.0%
75.0%
11.7%
74.0%
12.1%
72.6%
12.6%
72.0%
13.1%
Liabilities and Shareholders' Equity
Current Liabilities:
Current installments of long-term debt
Accounts Payable
Accrued Liabilities
Income Taxes Payable
Liabilities associated with assets held for sale
Total current liabilities
Long-term debt, less current installments
Capitalized Op. Lease Liability
Accu,. Reduction in Principal on Cap. Op. Lease Liab.
Deferred Income Taxes
Other liabilities
Total Long-Term Liabilities
Total Liabilities
Commitments and Contingencies
Shareholders' Equity
Common Stock
Additional Paid-in capital
Accumulated other comprehensive loss
Retained Earnings
Restated Balance Sheet
(in thousands)
Period Ending
Assets
Current Assets:
Cash and cash equivalents
Accounts Receivale
Inventories
Prepaid Expense and Other
Income Taxes Receivable
Deferred Income Tax
Assets held for sale
Total Current Assets
Non-Current Assets:
Property and Equipment
Land
Building and leasehold improvements
Furniture and equipment
Construction-in-Progress
Less accumulated depreciation and amort.
Net Property and Equipment
Other Assets:
Goodwill
Capitalized Operating Lease Rights
Accumulated Impairment of Lease
Deferred income taxes
Other Assets:
Total other assets
Total Non-Current Assets
Total Assets
Less Treasury Stock
Total shareholders' equity
Total Liabilities and shareholders' equity
Page | 38
27,334.00
100,531.00
273,884.00
401,749.00
587,890.00
386,746.78
(70,428.94)
136,560.00
1,040,767.85
1,442,516.85
17,625.00
466,781.00
2,130,406.84
2,614,812.84
(2,287,391.00)
327,421.84
1,769,938.69
22,091.00
87,549.00
287,365.00
8,596.00
405,601.00
502,572.00
423,040.76
(67,611.13)
137,485.00
995,486.63
1,401,087.63
17,625.00
463,688.00
2,022,852.36
2,504,165.36
(2,055,592.00)
448,573.36
1,849,660.99
16,866.00
112,824.00
300,540.00
19,647.00
449,877.00
524,511.00
463,582.19
(73,003.28)
148,968.00
1,064,057.91
1,513,934.91
17,625.00
465,721.00
1,934,564.98
2,417,910.98
(1,678,159.00)
739,751.98
2,253,686.89
17,625.00
463,980.00
1,843,799.19
2,325,404.19
(1,668,988.00)
656,416.19
2,441,410.43
17,625.00
464,666.00
(168.00)
1,800,300.00
2,282,423.00
(1,687,334.00)
595,089.00
2,848,424.66
343,793
1,439,163
703,279
1,439,164
663,921
1,439,165
1,078,252
1,439,166
1,101,965
1,439,167
1,588,827
1,439,168
1,695,952
1,439,169
267,101
1,439,160
17,625.00
477,420.00
2,241,796.19
2,736,841.19
(2,563,311.00)
173,530.19
1,781,117.56
430,841
1,439,162
(205,426)
(256,783)
(119,727)
(149,659)
269,762
337,202
288,731
360,914
620,195
775,244
588,708
735,885
876,296
1,095,370
806,657
1,008,321
999,641
1,306,720
855,603
1,172,059
132,441
1,439,161
(256,783)
(149,659)
1,280,860
1,439,169
849,110
158,309
2023
337,202
1,280,860
1,439,168
849,109
158,308
2022
360,914
1,280,859
1,439,167
849,109
158,308
2021
775,244
1,280,858
1,439,166
849,108
158,308
2020
735,885
1,280,857
1,439,165
849,107
158,308
2019
1,095,370
1,280,856
1,439,164
849,107
158,308
2018
1,008,321
1,270,781
1,439,163
839,032
168,382
2017
1,306,720
1,265,023
1,439,162
833,275
174,139
2016
1,172,059
1,257,827
1,439,161
826,078
181,334
2015
27,596.00
93,326.00
268,444.00
845.00
390,211.00
780,121.00
376,857.91
(72,516.54)
132,914.00
1,217,376.37
1,607,587.37
1,250,630
1,439,160
142,103.00
376,857.91
(48,343.35)
24,064.00
52,030.00
546,711.56
1,582,526.56
1,781,117.56
125,604.00
386,746.78
(52,880.10)
20,231.00
51,827.00
531,528.69
1,575,092.69
1,769,938.69
124,089.00
423,040.76
(57,947.77)
30,365.00
52,475.00
572,021.99
1,628,300.99
1,849,660.99
124,089.00
463,582.19
(61,999.30)
44,213.00
53,658.00
623,542.89
1,752,619.89
2,253,686.89
124,932.00
557,993.69
(65,530.27)
46,921.00
664,316.43
1,912,096.43
2,441,410.43
140,371.00
655,302.66
23,160.00
43,854.00
862,687.66
2,393,703.66
2,848,424.66
1,815.00
121,483.00
285,406.00
9,798.00
418,502.00
727,447.00
557,993.69
(75,022.46)
4,295.00
151,779.00
1,366,492.23
1,784,994.23
818,882
147,581.00
1,435,426.00
580,115.00
20,588.00
(1,147,895.00)
1,035,815.00
152,382.00
1,399,905.00
556,304.00
11,211.00
(1,076,238.00)
1,043,564.00
156,731.00
1,383,311.00
543,682.00
6,425.00
(1,033,870.00)
1,056,279.00
163,018.00
1,367,646.00
556,815.00
11,870.00
(970,272.00)
1,129,077.00
173,758.00
1,399,843.00
579,290.00
9,031.00
(914,142.00)
1,247,780.00
198,554.00
1,573,305.00
669,201.00
35,106.00
(945,150.00)
1,531,016.00
1,973.00
168,619.00
331,943.00
5,946.00
17,688.00
526,169.00
901,604.00
655,302.66
170,260.00
1,727,166.66
2,253,335.66
188,530
2014
59,367.00
37,842.00
24,628.00
71,824.00
4,930.00
198,591.00
30-Jun-13
59,103.00
43,387.00
25,360.00
63,023.00
1,055.00
2,918.00
194,846.00
30-Jun-12
81,988.00
42,785.00
25,365.00
59,698.00
11,524.00
221,360.00
30-Jun-11
344,624.00
45,140.00
26,735.00
63,961.00
20,607.00
501,067.00
30-Jun-10
94,156.00
48,557.00
33,845.00
90,218.00
41,620.00
50,785.00
170,133.00
529,314.00
30-Jun-09
54,714.00
52,304.00
35,534.00
106,472.00
71,595.00
134,102.00
454,721.00
30-Jun-08
Less Treasury Stock
Total shareholders' equity
Equity to Total L&E
Total Liabilities and shareholders' equity
Commitments and Contingencies
Shareholders' Equity
Common Stock
Additional Paid-in capital
Accumulated other comprehensive loss
Retained Earnings
2.96%
78.08%
-0.03%
302.53%
383.54%
-283.54%
100.00%
20.89%
100.00%
2.69%
70.68%
0.00%
280.89%
354.26%
-254.26%
100.00%
26.89%
100.00%
2.38%
62.96%
0.00%
261.52%
326.85%
-226.85%
100.00%
32.82%
100.00%
3.93%
103.37%
0.00%
450.95%
558.25%
-458.25%
100.00%
24.25%
100.00%
5.38%
142.56%
0.00%
650.66%
798.61%
-698.61%
100.00%
18.50%
100.00%
1.89%
6.97%
18.99%
0.00%
0.00%
27.85%
40.75%
26.81%
-4.88%
0.00%
9.47%
72.15%
100.00%
81.50%
10.16%
275.12%
0.00%
1291.88%
1577.16%
-1477.16%
100.00%
9.74%
100.00%
1.72%
5.81%
16.70%
0.05%
0.00%
24.27%
48.53%
23.44%
-4.51%
0.00%
8.27%
75.73%
100.00%
90.26%
100%
9.7%
100%
100%
9.7%
100%
100%
9.7%
100%
100%
9.7%
100%
100%
9.7%
100%
100%
9.7%
100%
100%
9.7%
100%
100%
9.7%
100%
80.0%
100%
90.3%
80.0%
100%
90.3%
80.0%
100%
90.3%
80.0%
100%
90.3%
80.0%
100%
90.3%
80.0%
100%
90.3%
80.0%
100%
90.3%
80.0%
100%
90.3%
79.3%
100%
88.0%
78.0%
100%
90.0%
100%
12%
100%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.7%
22.0%
100%
10%
100%
20.0%
30%
89.0%
100%
59.0%
11.0%
20.0%
30%
89.0%
100%
59.0%
11.0%
20.0%
30%
89.0%
100%
59.0%
11.0%
20.0%
30%
89.0%
100%
59.0%
11.0%
20.0%
30%
89.0%
100%
59.0%
11.0%
20.0%
30%
89.0%
100%
59.0%
11.0%
20.0%
30%
88.3%
100%
58.3%
11.7%
20.0%
30%
87.9%
100%
57.9%
12.1%
23.5%
30%
87.4%
100%
57.4%
12.6%
27.0%
0.09%
7.48%
14.73%
0.26%
0.78%
23.35%
40.01%
29.08%
0.00%
0.00%
7.56%
76.65%
100.00%
79.11%
Liabilities and Shareholders' Equity
Current Liabilities:
Current installments of long-term debt
Accounts Payable
Accrued Liabilities
Income Taxes Payable
Liabilities associated with assets held for sale
Total current liabilities
Long-term debt, less current installments
Capitalized Op. Lease Liability
Accu,. Reduction in Principal on Cap. Op. Lease Liab.
Deferred Income Taxes
Other liabilities
Total Long-Term Liabilities
Total Liabilities
Liabilities to Total L&E
1.58%
6.25%
20.51%
0.61%
0.00%
28.95%
35.87%
30.19%
-4.83%
0.00%
9.81%
71.05%
100.00%
75.75%
30%
86.9%
100%
7.98%
21.16% 21.96%
-2.71%
1.35%
2.92%
30.69%
88.85%
100.00%
7.10%
21.85%
-2.99%
1.14%
2.93%
30.03%
88.99%
100.00%
6.71%
22.87%
-3.13%
1.64%
2.84%
30.93%
88.03%
100.00%
5.51%
20.57%
-2.75%
1.96%
2.38%
27.67%
77.77%
100.00%
5.12%
22.86%
-2.68%
0.00%
1.92%
27.21%
78.32%
100.00%
4.93%
23.01%
0.00%
0.81%
1.54%
30.29%
84.04%
100.00%
1.11%
7.45%
19.85%
1.30%
0.00%
29.72%
34.65%
30.62%
-4.82%
0.00%
9.84%
70.28%
100.00%
67.18%
56.9%
8.29%
80.59%
32.57%
1.16%
-64.45%
58.16%
8.61%
79.09%
31.43%
0.63%
-60.81%
58.96%
8.47%
74.79%
29.39%
0.35%
-55.90%
57.11%
7.23%
60.68%
24.71%
0.53%
-43.05%
50.10%
7.12%
57.34%
23.73%
0.37%
-37.44%
51.11%
6.97%
55.23%
23.49%
1.23%
-33.18%
53.75%
0.10%
6.81%
15.99%
0.00%
0.55%
23.45%
40.75%
31.26%
-4.20%
0.24%
8.50%
76.55%
100.00%
73.11%
13.1%
3.33%
2.12%
1.38%
4.03%
0.28%
0.00%
0.00%
11.15%
30-Jun-13
3.34%
2.45%
1.43%
3.56%
0.06%
0.16%
0.00%
11.01%
30-Jun-12
4.43%
2.31%
1.37%
3.23%
0.00%
0.62%
0.00%
11.97%
30-Jun-11
15.29%
2.00%
1.19%
2.84%
0.00%
0.91%
0.00%
22.23%
30-Jun-10
3.86%
1.99%
1.39%
3.70%
1.70%
2.08%
6.97%
21.68%
30-Jun-09
1.92%
1.84%
1.25%
3.74%
0.00%
2.51%
4.71%
15.96%
30-Jun-08
Common Sized
(in thousands)
Period Ending
Assets
Current Assets:
Cash and cash equivalents
Accounts Receivale
Inventories
Prepaid Expense and Other
Income Taxes Receivable
Deferred Income Tax
Assets held for sale
Total Current Assets
Non-Current Assets:
Property and Equipment
Land
Building and leasehold improvements
Furniture and equipment
Construction-in-Progress
Less accumulated depreciation and amort.
Net Property and Equipment
Other Assets:
Goodwill
Capitalized Operating Lease Rights
Accumulated Impairment of Lease
Deferred income taxes
Other Assets:
Total other assets
Total Non-Current Assets
Total Assets
Page | 39
Statement of Cash Flows
The final part of financial forecasting is calculating the statement of cash flows.
The statement of cash flows is made up of three sections: cash flows from operating
activities-CFFO, cash flows from investing activities-CFFI, and cash flows from financing
activities-CFFF. Forecasting the statement of cash flows is the hardest financial to
predict. This is due to the volatile nature of cash flows.
Cash flows from operations are usually forecast using three different ratios: the
CFFO/sales, the CFFO/operating income, and the CFFO/net income. We have chosen
the CFFO/net income method since it was the least volatile. This gives us a CFFO of
$117,741,000.00 in 2014 and maxing out at $430,585,000.00 in 2023.
Page | 40
Net Chang in Cash & Cash Equivalents
Cash & Cash Equivalents Beginning Balance
Cash & Cash Equivalents Ending Balance
-9.22%
25.96%
16.75%
-13.14%
1.62%
-73.70%
-99.04%
121.99%
-62.27%
Financing Activities Cash Flows
Dividends Paid
Sale of Stock
Purchase of Stock
Net Borrowings
Other Cashflows from Financing Activities
Total Cash Flows From Financing Activities
16.86%
23.38%
40.24%
-19.38%
1.99%
-1.60%
-68.70%
-8.20%
-95.89%
-37.67%
-1.97%
36.99%
-2.65%
84.22%
31.66%
115.88%
-11.58%
0.81%
-7.69%
0.00%
-65.41%
-83.87%
-20.47%
0.00%
18.95%
-1.52%
-101.02%
132.55%
31.54%
-20.46%
12.71%
-162.35%
0.00%
-6.09%
-176.19%
-27.06%
-1.11%
3.34%
-24.83%
-7.54%
27.02%
19.48%
-16.50%
14.31%
-94.68%
13.18%
16.82%
-66.87%
-42.30%
-1.04%
2.67%
-40.67%
0.09%
20.33%
20.42%
-19.38%
14.17%
-114.69%
-13.76%
81.17%
-52.49%
-53.72%
0.00%
6.30%
-47.42%
30-Jun-13
56.20%
43.80%
100.00%
-79.38%
-2.67%
28.57%
-53.48%
30-Jun-12
49.84%
50.16%
100.00%
Investing Activities Cashflows
Capital Expenditures
Investments
Other Cashflows from Investing Activities
Total Cash Flows from Investing Activities
30-Jun-11
54.26%
45.74%
100.00%
30-Jun-08
15.83%
84.17%
100.00%
Common Size Cashflow Statement
(in thousandths)
Period Ending
Net Income
Accrual Adjustments to compute CFFO
Total Cash Flow From Operating Activities
30-Jun-10
46.30%
53.70%
100.00%
264
59,103
59,367
-22,885
81,988
59,103
-262,636
344,624
81,988
250,468
94,156
344,624
39,442
54,714
94,156
-30,109
84823
54,714
Net Chang in Cash & Cash Equivalents
Cash & Cash Equivalents Beginning Balance
Cash & Cash Equivalents Ending Balance
30-Jun-09
33.83%
66.17%
100.00%
-56343
41190
-333384
-40000
235,957
-152,580
-50,081
43416
-287291
40000
51,037
-202,919
-53185
33057
-422099
0
-15,836
-458,063
-156153
0
18309
-137,844
-34448
2396
-22868
0
-194518
-249438
-128346
-3170
8112
-123,404
-45355
4650
-3739
-160757
-19184
-224385
-70361
-2896
8696
-64,561
-42914
5277
-240784
-323586
398555
-203452
-60879
0
56352
-4527
Financing Activities Cash Flows
Dividends Paid
Sale of Stock
Purchase of Stock
Net Borrowings
Other Cashflows from Financing Activities
Total Cash Flows From Financing Activities
-88152
-4612
86553
-6211
18.98
2.47
1.39
19.26
2.50
1.41
14.64
1.90
1.07
15.91
1.91
1.10
10.08
1.14
0.67
2014
30-Jun-13
163,359
127,329
110,194
290,688 Op Method
117,741
NI Method
Average
20.34
22.79
2.64
2.96
1.49
1.66
-259356
-8711
93345
-174722
30-Jun-12
151,232
152,206
303,438
30-Jun-11
141,060
118,928
259,988
30-Jun-10
137,704
159,698
297,402
30-Jun-09
79,166
154,841
234,007
30-Jun-08
51,722
274,987
326,709
Investing Activities Cashflows
Capital Expenditures
Investments
Other Cashflows from Investing Activities
Total Cash Flows from Investing Activities
Sales/CFFO
OP Inc/CFFO
Net Inc/CFFO
As-Stated Cashflow Statement
(in thousandths)
Period Ending
Net Income
Accrual Adjustments to compute CFFO
Total Cash Flow From Operating Activities
Page | 41
2023
430,585
430,585
2022
374,422
374,422
2021
325,584
325,584
2020
283,117
283,117
2019
246,189
246,189
2018
214,077
214,077
2017
168,897
172,946
2016
140,748
146,395
2015
119,984
128,203
Restated Financial Statements
After restating the financial statements of Brinker International, we have found
there to be no significant changes to the income statement or balance sheet. Both
goodwill and capitalization of operating leases were immaterial amounts.
Cost of Capital Estimation
In order to determine a relative value of a firm, the discount rate for debt and
equity holders must be calculated to discount the firm’s financials. The weighted
average cost of capital (WACC) is the discount rate that will be used. The WACC
illustrates two ways companies can obtain funding from debt and equity. To calculate
the WACC, both the cost of debt and the cost of equity need to be estimated. In the
following section(s) Brinker’s cost of debt and cost of equity will be estimated, and then
used to calculate the company’s WACC. If in the event that the cost of capital is
relatively high or low, the firm is relatively understated or overstated respectfully.
Cost of Debt
The cost of debt refers to the overall effective interest rate a company is paying
on their debt financing. Generally, the higher the cost of debt results in a higher risk
associated with the firm. Due to the fact that debt holders have a superior claim on
assets and a lower associated risk, the cost of debt is typically lower than the cost of
equity.
To calculate the weighted average cost of debt for Brinker, all current and noncurrent interest bearing liabilities are taken into account. Non-interest bearing debts
are considered to be non-financial liabilities, as a result we adjusted the balance sheet
to reflect the removal of non-interest bearing accounts from both the left- and righthand side of the balance sheet. Next, we had to find the associated interest rates for
the current and non-current liabilities.
Page | 42
Interest bearing Liabilities
Current installments of long-term debt
3.88% Notes
2.6% Notes
Term Loan
Capital Lease Obligations
Less Current Installments
Total Interest Bearing Liabilities
Amount Interest Rate
27,596.00
299,707.00
3.88%
249,829.00
2.60%
212,500.00
1.83%
45,681.00
6.99%
(27,596.00)
807,717.00
Weight
3.42%
37.11%
30.93%
26.31%
5.66%
-3.42%
100%
Source
Weight * Rate
Kd
0.00%
Brinker 10-K
1.44%
Brinker 10-K
0.80%
LIBOR + 1.63% (Brinker 10-K)
0.48%
Appendix (#)
0.40%
0.00%
3.12%
= Weighted Cost of Debt
Table (22)
Interest bearing Liabilities (Restated)
Current installments of long-term debt
3.88% Notes
2.6% Notes
Term Loan
Capital Lease Obligations
Capitalized Op. Lease Liability
Less Current Installments
Total Interest Bearing Liabilities
Amount
Interest Rate
27,596.00
299,707.00
3.88%
249,829.00
2.60%
212,500.00
1.83%
45,681.00
6.99%
304,341.37
6.99%
(27,596.00)
1,112,058.37
Weight
Source
Weight * Rate
Kd
2.48%
0.00%
26.95%
Brinker 10-K
1.05%
22.47%
Brinker 10-K
0.58%
19.11% LIBOR + 1.63% (Brinker 10-K)
0.35%
4.11%
Appendix (#)
0.29%
27.37%
Appendix (#)
1.91%
-2.48%
0.00%
100.00%
4.18%
= Weighted Cost of Debt
Table (23)
According to the Brinker 10-K, total long-term liabilities are equal to $807,717.
Within this line item, Brinker contained: $299,707 in 3.88% notes, $249,829 in 2.60%
notes, a term loan based on LIBOR plus 1.63%, and capital lease obligations that we
calculated to have an interest rate of 6.99%. The line item also took into account the
subtraction of current installments or current portion of long-term debt in the amount of
$27,596. In calculating the cost of debt (kd), we found that the interest rate for the
current portion of long-term debt was not disclosed in the 2013 Brinker 10-K. However,
because current installments are subtracted out of long-term debt, we can conclude
that they have a net zero effect in calculating the cost of debt. The resulting amount is
equal to $807,717. From here, we calculated the weights related to each interest
bearing liability to the sum of the total interest bearing liabilities. Finally, the cost of
debt is the weighted average of the interest bearing liabilities and resulted in a discount
rate of 3.12%.
Page | 43
When looking at the restated balance sheet for 2013, it is evident that the
capitalization of operating leases does not have a large impact of cost of debt. The
increase in capitalized operating leases increased cost of debt from 3.12% to 4.18% by
changing the relative weights of the other interest bearing debt. This means that
Brinker is expected to pay on average 4.18% in interest for every dollar of debt instead
of 3.12%.
Cost of Equity
The cost of equity (ke) can also be stated as the return on equity that
shareholders require. For a firm, the cost of equity represents the return that the
market warrants for the risk taken in an ownership stake of a company. The cost of
equity is computed using the Capital Asset Pricing Model (CAPM). The CAPM formula is:
(
)
This formula takes into account the risk free rate (Rf), systematic risk (beta), the
market risk premium (Rm-Rf), and a size adjusted beta (Bsize). To find the risk free rate,
we found the yields for 3-month, 1-year, 2-year, 7-year, and 10-year treasury bonds via
the St. Louis Federal Reserve website. However, because these yields are provided in
an annual basis, we had to convert this annual rate to a monthly rate. For this analysis,
the most recent 10-year treasury rate was used, and was found to be 2.71%.
The market return is the rate of return that has been realized in the overall
market. For this analysis, the market return was taken from the historical returns of the
S&P 500. The market risk premium is the additional benefit that an investor expects to
earn when taking on the added risk of the market. To calculate the market risk
premium, we subtracted the risk free rate from the historical S&P 500 returns.
However, because of recent governmental influence over interest rates, the market risk
premium is understated. For this reason, we use an 8% market risk premium as a
realistic estimate based on the historical long-run market risk premiums.
Beta, also known as the beta coefficient, is a measure of systematic (market)
risk. In order to estimate beta, we conducted multiple regressions utilizing the
Page | 44
historical company returns and the market risk premiums associated with the relative
treasury yields. Appendix (1) provides the regression table information for the year
2013. From the regression tables we are able to obtain a beta of 1.40 with a lower and
upper bound for 72 months of 0.89 and 1.92 for the 10-year regression with a 95%
confidence level. According to YahooFinance.com, Brinker has a beta of 0.69. This
beta is not within the realm of our 95% confidence level, but it shows that the analysts
believe that Brinker has a systematic risk at the very low end of the spectrum. The
regression tables also show the adjusted R2, which is the percentage of systematic risk
associated with a company. The following table shows the regression table results:
Page | 45
Table (24)
3-Month Regression
Months Beta
Beta LB Beta UB R^2
MRP
Rf
Ke
Size pr
2 fact Ke Ke LB
Ke UB
72
1.40
0.88
1.92
28.30%
8.00%
0.05%
11.25%
1.10%
12.35%
8.21%
16.50%
60
1.09
0.59
1.59
23.38%
8.00%
0.05%
8.77%
1.10%
9.87%
5.86%
13.87%
48
0.90
0.46
1.35
25.05%
8.00%
0.05%
7.26%
1.10%
8.36%
4.81%
11.91%
36
0.69
0.15
1.22
14.27%
8.00%
0.05%
5.56%
1.10%
6.66%
2.37%
10.95%
24
0.60
-0.23
1.43
5.04%
8.00%
0.05%
4.84%
1.10%
5.94%
-0.73%
12.61%
1-Year Regression
Months Beta
Beta LB Beta UB R^2
MRP
Rf
Ke
Size pr
2 fact Ke Ke LB
Ke UB
72
1.40
0.88
1.92
28.31%
8.00%
0.12%
11.31%
1.10%
12.41%
8.27%
16.56%
60
1.09
0.59
1.59
23.38%
8.00%
0.12%
8.84%
1.10%
9.94%
5.94%
13.95%
48
0.90
0.46
1.35
25.07%
8.00%
0.12%
7.33%
1.10%
8.43%
4.88%
11.99%
36
0.69
0.15
1.22
14.27%
8.00%
0.12%
5.63%
1.10%
6.73%
2.45%
11.02%
24
0.60
-0.23
1.43
5.04%
8.00%
0.12%
4.91%
1.10%
6.01%
-0.66%
12.68%
2-Year Regression
Months Beta
Beta LB Beta UB R^2
MRP
Rf
Ke
Size pr
2 fact Ke Ke LB
Ke UB
72
1.40
0.88
1.92
28.32%
8.00%
0.33%
11.53%
1.10%
12.63%
8.48%
16.77%
60
1.09
0.59
1.59
23.43%
8.00%
0.33%
9.06%
1.10%
10.16%
6.16%
14.17%
48
0.90
0.46
1.35
25.10%
8.00%
0.33%
7.55%
1.10%
8.65%
5.10%
12.20%
36
0.69
0.15
1.22
14.27%
8.00%
0.33%
5.84%
1.10%
6.94%
2.65%
11.23%
24
0.60
-0.23
1.43
5.03%
8.00%
0.33%
5.12%
1.10%
6.22%
-0.45%
12.88%
7-Year Regression
Months Beta
Beta LB Beta UB R^2
MRP
Rf
Ke
Size pr
2 fact Ke Ke LB
Ke UB
72
1.40
0.89
1.92
28.43%
8.00%
2.15%
13.38%
1.10%
14.48%
10.33%
18.62%
60
1.09
0.59
1.59
23.49%
8.00%
2.15%
10.90%
1.10%
12.00%
7.99%
16.00%
48
0.90
0.46
1.35
25.11%
8.00%
2.15%
9.37%
1.10%
10.47%
6.92%
14.02%
36
0.69
0.15
1.22
14.22%
8.00%
2.15%
7.65%
1.10%
8.75%
4.46%
13.03%
24
0.59
-0.24
1.43
4.89%
8.00%
2.15%
6.91%
1.10%
8.01%
1.33%
14.68%
10-Year Regression
Months Beta
Beta LB Beta UB R^2
MRP
Rf
Ke
Size pr
2 fact Ke Ke LB
Ke UB
72
1.40
0.89
1.92
28.43%
8.00%
2.71%
13.94%
1.10%
15.04%
10.89%
19.18%
60
1.09
0.59
1.59
23.48%
8.00%
2.71%
11.45%
1.10%
12.55%
8.55%
16.55%
48
0.90
0.46
1.35
25.10%
8.00%
2.71%
9.93%
1.10%
11.03%
7.48%
14.58%
36
0.69
0.15
1.22
14.22%
8.00%
2.71%
8.21%
1.10%
9.31%
5.02%
13.59%
24
0.59
-0.24
1.43
4.88%
8.00%
2.71%
7.47%
1.10%
8.57%
1.89%
15.24%
From the table above, we see that the 10-year regression has the largest
adjusted R2 at 72 months. The estimated adjusted R2 from the 10-year regression is
28.43%. This means that 28.43% of the risk associated with Brinker can be explained
by the risk of the market. We use this R2 as a proxy for cost of equity (ke) in calculating
cost of capital.
The CAPM gives us a cost of equity (ke) of 13.94%, which means that an
ownership stake in Brinker is expected to earn 13.94%. However, according to the
2006 Ibbotson and Associates, Stocks, Bonds, Bills, and Inflation, companies earn on
Page | 46
average a different return than their theoretical CAPM return based on the size of the
company.
Size Decile
1 - smallest
2
3
4
5
6
7
8
9
10 - largest
Market Value of
largest company in
decile in 2005 ($
millions)
265.0
586.4
872.1
1,281.0
1,728.9
2,519.3
3,961.4
7,187.2
16,016.5
367,495.1
Fraction of total
market value
represented by decile
in 2005 (%)
0.8
1.0
1.3
1.7
2.4
3.2
4.7
7.6
14.0
63.3
Average annual stock
return, 1926 - 2005
(%)
21.6
17.5
16.6
15.6
15.3
14.9
14.3
13.8
13.2
11.1
Beta, 1926 - 2005
1.41
1.34
1.28
1.23
1.18
1.16
1.13
1.10
1.04
0.91
Size premium (return
in excess of CAPM %)
6.4
2.7
2.3
1.7
1.7
1.5
1.1
0.9
0.7
-0.4
Table (25)
Table (25) shows that Brinker is in the seventh decile and has a size premium of
1.10%. This results in the company having a 15.04% two factor cost of equity with a
lower and upper bound cost of equity of 10.89% and 19.18%, respectfully. This means
that Brinker is expected to earn anywhere from 10.89% to 19.18% with a 95%
confidence level on their equity. The cost of debt and cost of equity estimates will be
used to estimate the weighted average cost of capital.
Backdoor Cost of Equity
The backdoor cost of equity is an alternative method for obtaining the cost of
equity. Rather than using historical information through CAPM for its approximations,
the backdoor method applies the price to book ratio, return on equity, and growth to
give a reasonably accurate estimation. The backdoor cost of equity formula is found
below:
Page | 47
In this formula, Price/Book is the current market price to book ratio, ROE is the
average forecasted return on equity over the next ten years, and g is the firm’s average
growth rate over the next ten years. Because this valuation is subject to a restatement
of the balance sheet and income statement, we will show the backdoor cost of equity
estimations on an as-stated and restated basis to reflect operating lease adjustments.
Brinker International Backdoor Cost of Equity
ROE
P/B
g
Stated
0.74
28.24
12%
Ke
14.26%
As seen from above, the backdoor cost of equity is 14.26%. When you compare
this to our estimated cost of equity this is very comparable with a 15.04% estimate.
The backdoor cost of equity is also within our upper and lower bound estimates with a
95% confidence interval.
Weighted Average Cost of Capital (WACC)
According to the Pool of Funds theory, the Weighted Average Cost of Capital
(WACC) represents a firm’s average cost of asset financing, in terms of debt or equity.
It is also the weighted average return that a company is expected to make in order to
satisfy all capital investors. The WACC takes the weights of the market value of
liabilities and the market value of equity to the total market value of the firm, and
multiplies the weights by the cost of debt and cost of equity, respectfully. These
figures are then added to estimate the weighted average cost of capital.
WACC
Amount
Market Value Liab.
807,717.00
Market Value Equity 3,436,276.84
Market Value of Firm 4,243,993.84
Weight
Rate Weight * Rate WACC BT/AT
19.03% 3.12%
0.59%
80.97% 15.04%
12.18%
12.77% = WACC before tax
Tax Rate = 35%
12.56% = WACC after tax
Table (26)
Page | 48
WACC Restated
Market Value Liab.
Market Value Equity
Market Value of Firm
Amount
Weight Rate Weight * Rate
WACC BT/AT
1,112,058.37 24.45% 4.18%
1.02%
3,436,276.84 75.55% 15.04%
11.36%
4,548,335.22
12.38% = WACC before tax
Tax Rate 35%
12.02% = WACC after tax
Table (27)
In order to calculate the weight of equity, the market value of equity must first
be calculated. This is equal to the number of shares outstanding multiplied by the
closing price on that respective day. According to the 2013 Brinker 10-K, the firm had
69,444,099 shares outstanding as of June 26, 2013 and on March 26, 2014 their stock
closed at $50.95. This implies Brinker’s market value of equity is approximately
$3,436,276.84. The market value of interest bearing debt stated on Brinker’s 2013
balance sheet was $807,717 (in thousands). Now, the market value of the firm can be
determined by adding the market value of liabilities and the market value of equity.
Brinker has a market value of approximately $4,548,335.22. On an as-stated basis, the
weight of total liabilities is 19.03% and the weight of total equity is 80.97%. The
inclusion of operating lease obligations changes the weights of total liabilities to 24.45%
and the weights of total equity to 75.55%. This indicates that the company’s value is
primarily held in the value of its equity. Once the relative weights are determined, the
weight for total liabilities is multiplied by the cost of debt and the weight for total equity
is multiplied by the cost of equity to find the weighted average cost of capital. As
stated in the cost of debt section, Brinker has an estimated cost of debt of 3.12%. The
cost of equity (ke) used for the WACC was taken from the 10-year 2-factor ke that was
estimated from the regression analysis to be 15.04%.
According to Table (26), Brinker has a weighted average cost of capital of
12.77% before taxes. However, because earnings are influenced by federal, state, and
local taxes, a weighted average cost of capital after taxes should be calculated. This
will reflect a more realistic expected return for capital investors. A corporate tax rate of
35% is used in the after tax calculations and results in the company to have an
estimated after tax weighted average cost of capital of 12.56%.
This means that on
average Brinker is able to finance the company’s obligations at approximately 13%. It
Page | 49
is also evident from the restated weighted average cost of capital that the relevance of
operating leases is minimal in calculating the weighted average cost of capital.
Calculating the weighted average cost of capital using only the two-factor cost of capital
is considered highly unrealistic due to unforeseen circumstances. For this reason, we
solve for the cost of capital using a confidence level of 95% and obtain an upper and
lower bound that the cost of capital is likely to encompass.
WACC (Upper Bound)
Amount
Market Value Liab.
807,717.00
Market Value Equity
3,436,276.84
Market Value of Firm
4,243,993.84
Weight Rate UB Weight * Rate UB
WACC BT/AT
19.03% 3.12%
0.59%
80.97% 19.18%
15.53%
16.12% = WACC before tax
Tax Rate = 35%
15.92% = WACC after tax
Table (28)
WACC (Lower Bound)
Amount
Market Value Liab.
807,717.00
Market Value Equity
3,436,276.84
Market Value of Firm
4,243,993.84
Weight Rate LB Weight * Rate LB
WACC BT/AT
19.03% 3.12%
0.59%
80.97% 10.89%
8.82%
9.41% = WACC before tax
Tax Rate = 35%
9.21% = WACC after tax
Table (29)
WACC Restated (Upper Bound) Amount
Weight Rate UB Weight * Rate UB WACC BT/AT
Market Value Liab.
1,112,058.37 24.45% 4.18%
1.02%
Market Value Equity
3,436,276.84 75.55% 19.18%
14.49%
Market Value of Firm
4,548,335.22
15.51% = WACC before tax
Tax Rate 35%
15.16% = WACC after tax
Table (30)
WACC Restated (Lower Bound)
Amount
Weight Rate LB Weight * Rate LB WACC BT/AT
Market Value Liab.
1,112,058.37 24.45%
4.18%
1.02%
Market Value Equity
3,436,276.84 75.55% 10.89%
8.23%
Market Value of Firm
4,548,335.22
9.25% = WACC before tax
Tax Rate 35%
8.89% = WACC after tax
Table (31)
Page | 50
By utilizing the 95% confidence level of the cost of equity, we are able to
estimate a range of the upper and lower bounds for the weighted average cost of
capital. We can then assume that the true weighted average cost of capital for Brinker
lies within this range. The above charts show a range of 9.21% to 15.92% for the
after-tax weight average cost of capital on an as stated basis. On a restated basis, this
range falls to 8.89% to 15.16%. From this information we can conclude that the
restatement has a marginal effect on the cost of capital. As a result of this analysis, the
most appropriate discount to be used lies within our upper and lower bound restated
after-tax cost of capital.
Page | 51
Page | 52
Appendix
Appendix (1)
3-Month Regressions
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.54
0.29
0.28
0.11
72
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
70
71
0.37
0.89
1.25
MS
0.37
0.01
F
Significance F
29.02
0.00
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
0.02
0.01 1.37
0.18
-0.01
0.04
-0.01
0.04
1.40
0.26 5.39
0.00
0.88
1.92
0.88
1.92
1-Year Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.54
0.29
0.28
0.11
72
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
70
71
0.37
0.89
1.25
MS
0.37
0.01
F
Significance F
29.03
0.00
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
0.02
0.01 1.39
0.17
-0.01
0.05
-0.01
0.05
1.40
0.26 5.39
0.00
0.88
1.92
0.88
1.92
Page | 53
2_Year Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.54
0.29
0.28
0.11
72
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
70
71
MS
0.37 0.37
0.89 0.01
1.25
F
Significance F
29.05
0.00
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
0.02
0.01 1.41
0.16
-0.01
0.05
-0.01
0.05
1.40
0.26 5.39
0.00
0.88
1.92
0.88
1.92
7-Year Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.54
0.29
0.28
0.11
72
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
70
71
MS
0.37 0.37
0.89 0.01
1.25
F
Significance F
29.20
0.00
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
0.02
0.01 1.55
0.13
-0.01
0.05
-0.01
0.05
1.40
0.26 5.40
0.00
0.89
1.92
0.89
1.92
Page | 54
10-Year Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.54
0.29
0.28
0.11
72
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
70
71
0.37
0.89
1.25
MS
0.37
0.01
F
Significance F
29.20
0.00
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
0.02
0.01 1.60
0.11
-0.01
0.05
-0.01
0.05
1.40
0.26 5.40
0.00
0.89
1.92
0.89
1.92
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.50
0.25
0.23
0.08
60
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
58
59
0.12
0.37
0.49
MS
0.12
0.01
F
Significance F
19.10
0.00
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
0.02
0.01 1.63
0.11
0.00
0.04
0.00
0.04
1.09
0.25 4.37
0.00
0.59
1.59
0.59
1.59
Page | 55
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.52
0.27
0.25
0.06
48
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
46
47
0.06
0.17
0.24
MS
0.06
0.00
F
Significance F
16.75
0.00
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
0.02
0.01 2.11
0.04
0.00
0.04
0.00
0.04
0.90
0.22 4.09
0.00
0.46
1.35
0.46
1.35
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.41
0.17
0.14
0.06
36
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
34
35
0.02
0.11
0.13
MS
0.02
0.00
F
Significance F
6.80
0.01
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
0.02
0.01 2.27
0.03
0.00
0.04
0.00
0.04
0.69
0.26 2.61
0.01
0.15
1.22
0.15
1.22
Page | 56
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.30
0.09
0.05
0.06
24
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
22
23
MS
0.01 0.01
0.07 0.00
0.08
F
Significance F
2.18
0.15
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
0.03
0.01 2.08
0.05
0.00
0.05
0.00
0.05
0.59
0.40 1.48
0.15
-0.24
1.43
-0.24
1.43
Page | 57
Page | 58