Question 0. Describe the situation and the problems faced in a few bullet points.
After you’ve completed the case, write one or two main learning points here. (1 point)
The chairman of Tottenham Hotspur was contemplating about a bold move. This, because, he
would make it possible for Tottenham Hotspur to play in the upper echelons of the Premier
League. Significant investments in Physical assets would be required, mostly based on his
three-pillar model. The investment in a new stadium should lead to the effect that Tottenham
Hotspurs’ main competitors wouldn’t have competitive advantage from revenues generated
by bigger stadium anymore
Learning points:
1. Organizations can have negative Net Working Capitial. This, however, is not always
negative, like in the case of Tottenham
2. The Tottenham case shows that a combination of investments can have a totally different
NPV than the individual investments.
, 1a. What are the free cash flows Tottenham Hotspur expects from 2007 until
2020?
Explanation formula 2007 2008 2009 2010 2011 2012 2013 2014 2015
Revenues Given in Exhibit 5 £ 74,10 £ 80,77 £ 88,04 £ 95,96 £ 104,60 £ 114,01 £ 124,27 £ 135,46 £ 147,65
Operating costs Given in Exhibit 5 £ 69,10 £ 74,92 £ 81,28 £ 88,23 £ 95,82 £ 104,13 £ 113,22 £ 123,16 £ 134,04
EBITDA = revenues - operating costs £ 5,00 £ 5,85 £ 6,76 £ 7,73 £ 8,78 £ 9,88 £ 11,05 £ 12,30 £ 13,61
Depreciation Given in Exhibit 5 £ 2,20 £ 2,29 £ 2,38 £ 2,47 £ 2,57 £ 2,68 £ 2,78 £ 2,90 £ 3,01
= Revenues - operating
EBIT £ 2,80 £ 3,56 £ 4,38 £ 5,26 £ 6,21 £ 7,20 £ 8,27 £ 9,40 £ 10,60
costs - depreciation
Interest Given in Exhibit 5 £ 2,26 £ 2,46 £ 2,69 £ 2,93 £ 3,19 £ 3,48 £ 3,79 £ 4,13 £ 4,50
= (EBIT-interest) x Tc
Tax £ 0,19 £ 0,39 £ 0,59 £ 0,81 £ 1,06 £ 1,30 £ 1,57 £ 1,85 £ 2,13
(Tc=35%)
Net unlevered
= EBIT x (1-Tc) £ 1,82 £ 2,32 £ 2,85 £ 3,42 £ 4,03 £ 4,68 £ 5,37 £ 6,11 £ 6,89
income
Net income = EBIT - Interest - Taxx £ 0,35 £ 0,72 £ 1,10 £ 1,51 £ 1,96 £ 2,42 £ 2,91 £ 3,43 £ 3,96
Given in text, growth rate of
CapEx £ 3,30 £ 3,43 £ 3,57 £ 3,71 £ 3,86 £ 4,01 £ 4,18 £ 4,34 £ 4,52
4%
= Account Receivables -
NWC Current liabilities (equals to -£ 44,46 -£ 48,46 -£ 52,82 -£ 57,58 -£ 62,76 -£ 68,41 -£ 74,56 -£ 81,28 -£ 88,59
60% of revenues)
∆NWC Given in Exhibit 5 £ - -£ 4,00 -£ 4,36 -£ 4,75 -£ 5,18 -£ 5,65 -£ 6,16 -£ 6,71 -£ 7,31
= Net unlevered income
FCF + depreciation - Capex - £ 0,72 £ 5,17 £ 6,02 £ 6,93 £ 7,93 £ 8,99 £ 10,14 £ 11,38 £ 12,70
∆NWC
Discounting years 1 2 3 4 5 6 7 8
= FCF/1,1009^discounting £ £ £ £ £ £ £ £ £
Present value
years 0,72 4,70 4,97 5,19 5,40 5,56 5,69 5,81 5,89
= FCF2020*1,04/(0,1009-
Terminal value
0,04)
PV Terminal
value
, 1b. Explain in a few lines the concept of unlevered net income and give an example. (2
points)
The Unlevered Net Income is the net income that the firm would have if it would have no debt
(and therefore, no interest payments). To calculate the Unlevered Net Income we exclude the
interest payments and the interest tax shield.
1c. Why should excess cash be excluded from Net Working Capital when determining
Free Cash Flows? (2 points)
The excess cash is not an operating asset, Net Working Capital refers to the cash a company
needs for day-to-day operations and the excess cash is not intended for that.
1d. Net working capital is negative for Tottenham Hotspur. Explain why this is generally the
case for football clubs (limit your answer to 1-2 sentences). (1 point)
Tottenham receives, like most other football clubs, its earnings of attendance, merchandise,
television fees and sponsorships upfront. This is different compared with traditional
businesses, since there is no need to grant credit terms. Secondly, Tottenham has a strong
cash position. This might result in relaxed credit terms from its suppliers. This has also an
important influence on net working capital.
1e. What is Tottenham Hotspur’s expected return on equity? Assume the market risk
premium is 5%. (1 point)
E ( r i ) =r f + βi∗( E [ r ] −r f ) =4.57 % +1.29∗(5 %)=11.02 %
m
1f. What is Tottenham Hotspur’s weighted average cost of capital after tax? Assume the
debt is risk free. (2 points)
E D−cas h
After tax−WACC= ∗r e + ∗( 1−τ d )∗r d=¿
E+(D−cas h) E+( D−ca s h)
128.2 43.08−26.29
∗11,02 %+ ∗( 1−0.35 )∗4.57 %=10.09 %
128.2+(43.08−26.29) 128.2+ ( 43.08−26.29 )
1g. Based on your previous calculations, what is Tottenham Hotspur’s enterprise value?
(Hint: do not forget to include the terminal value of the stadium in your calculations
which depends on growth estimates after 2020). (3 points)
Enterprise value is the total market value of Tottenham’s equity and debt, less the value of its
cash and marketable securities
EV (Enterprise Value) = PV(FCF)+PV(TV) = £71.81 + £68,39 = £140,20
See table of question 1a for calculation
1h. Based on your previous calculations, what value would you expect for Tottenham
Hotspur’s share price? Is the share currently over-/ undervalued? (2 points)
Based on our previous calculations, a share of Tottenham is worth 12.26 compared to the
market value of 13.80 making it currently undervalued.
The sum of the value of equity (128.20 million) and net debt (debt 43.08 million – excess cash
26.29 million = 16,79 ) is 144.99 million, while the total value of the firm in our previous
calculations is estimated on 140.20 million pound.
Total number of shares: 9.29 million
Share price = Market cap / number of outstanding shares = 128..29 = 13.80
Estimated share price = estimated market camp / number of shares = EV – debt + cash /
number of shares = 113..29 = 12.26
After you’ve completed the case, write one or two main learning points here. (1 point)
The chairman of Tottenham Hotspur was contemplating about a bold move. This, because, he
would make it possible for Tottenham Hotspur to play in the upper echelons of the Premier
League. Significant investments in Physical assets would be required, mostly based on his
three-pillar model. The investment in a new stadium should lead to the effect that Tottenham
Hotspurs’ main competitors wouldn’t have competitive advantage from revenues generated
by bigger stadium anymore
Learning points:
1. Organizations can have negative Net Working Capitial. This, however, is not always
negative, like in the case of Tottenham
2. The Tottenham case shows that a combination of investments can have a totally different
NPV than the individual investments.
, 1a. What are the free cash flows Tottenham Hotspur expects from 2007 until
2020?
Explanation formula 2007 2008 2009 2010 2011 2012 2013 2014 2015
Revenues Given in Exhibit 5 £ 74,10 £ 80,77 £ 88,04 £ 95,96 £ 104,60 £ 114,01 £ 124,27 £ 135,46 £ 147,65
Operating costs Given in Exhibit 5 £ 69,10 £ 74,92 £ 81,28 £ 88,23 £ 95,82 £ 104,13 £ 113,22 £ 123,16 £ 134,04
EBITDA = revenues - operating costs £ 5,00 £ 5,85 £ 6,76 £ 7,73 £ 8,78 £ 9,88 £ 11,05 £ 12,30 £ 13,61
Depreciation Given in Exhibit 5 £ 2,20 £ 2,29 £ 2,38 £ 2,47 £ 2,57 £ 2,68 £ 2,78 £ 2,90 £ 3,01
= Revenues - operating
EBIT £ 2,80 £ 3,56 £ 4,38 £ 5,26 £ 6,21 £ 7,20 £ 8,27 £ 9,40 £ 10,60
costs - depreciation
Interest Given in Exhibit 5 £ 2,26 £ 2,46 £ 2,69 £ 2,93 £ 3,19 £ 3,48 £ 3,79 £ 4,13 £ 4,50
= (EBIT-interest) x Tc
Tax £ 0,19 £ 0,39 £ 0,59 £ 0,81 £ 1,06 £ 1,30 £ 1,57 £ 1,85 £ 2,13
(Tc=35%)
Net unlevered
= EBIT x (1-Tc) £ 1,82 £ 2,32 £ 2,85 £ 3,42 £ 4,03 £ 4,68 £ 5,37 £ 6,11 £ 6,89
income
Net income = EBIT - Interest - Taxx £ 0,35 £ 0,72 £ 1,10 £ 1,51 £ 1,96 £ 2,42 £ 2,91 £ 3,43 £ 3,96
Given in text, growth rate of
CapEx £ 3,30 £ 3,43 £ 3,57 £ 3,71 £ 3,86 £ 4,01 £ 4,18 £ 4,34 £ 4,52
4%
= Account Receivables -
NWC Current liabilities (equals to -£ 44,46 -£ 48,46 -£ 52,82 -£ 57,58 -£ 62,76 -£ 68,41 -£ 74,56 -£ 81,28 -£ 88,59
60% of revenues)
∆NWC Given in Exhibit 5 £ - -£ 4,00 -£ 4,36 -£ 4,75 -£ 5,18 -£ 5,65 -£ 6,16 -£ 6,71 -£ 7,31
= Net unlevered income
FCF + depreciation - Capex - £ 0,72 £ 5,17 £ 6,02 £ 6,93 £ 7,93 £ 8,99 £ 10,14 £ 11,38 £ 12,70
∆NWC
Discounting years 1 2 3 4 5 6 7 8
= FCF/1,1009^discounting £ £ £ £ £ £ £ £ £
Present value
years 0,72 4,70 4,97 5,19 5,40 5,56 5,69 5,81 5,89
= FCF2020*1,04/(0,1009-
Terminal value
0,04)
PV Terminal
value
, 1b. Explain in a few lines the concept of unlevered net income and give an example. (2
points)
The Unlevered Net Income is the net income that the firm would have if it would have no debt
(and therefore, no interest payments). To calculate the Unlevered Net Income we exclude the
interest payments and the interest tax shield.
1c. Why should excess cash be excluded from Net Working Capital when determining
Free Cash Flows? (2 points)
The excess cash is not an operating asset, Net Working Capital refers to the cash a company
needs for day-to-day operations and the excess cash is not intended for that.
1d. Net working capital is negative for Tottenham Hotspur. Explain why this is generally the
case for football clubs (limit your answer to 1-2 sentences). (1 point)
Tottenham receives, like most other football clubs, its earnings of attendance, merchandise,
television fees and sponsorships upfront. This is different compared with traditional
businesses, since there is no need to grant credit terms. Secondly, Tottenham has a strong
cash position. This might result in relaxed credit terms from its suppliers. This has also an
important influence on net working capital.
1e. What is Tottenham Hotspur’s expected return on equity? Assume the market risk
premium is 5%. (1 point)
E ( r i ) =r f + βi∗( E [ r ] −r f ) =4.57 % +1.29∗(5 %)=11.02 %
m
1f. What is Tottenham Hotspur’s weighted average cost of capital after tax? Assume the
debt is risk free. (2 points)
E D−cas h
After tax−WACC= ∗r e + ∗( 1−τ d )∗r d=¿
E+(D−cas h) E+( D−ca s h)
128.2 43.08−26.29
∗11,02 %+ ∗( 1−0.35 )∗4.57 %=10.09 %
128.2+(43.08−26.29) 128.2+ ( 43.08−26.29 )
1g. Based on your previous calculations, what is Tottenham Hotspur’s enterprise value?
(Hint: do not forget to include the terminal value of the stadium in your calculations
which depends on growth estimates after 2020). (3 points)
Enterprise value is the total market value of Tottenham’s equity and debt, less the value of its
cash and marketable securities
EV (Enterprise Value) = PV(FCF)+PV(TV) = £71.81 + £68,39 = £140,20
See table of question 1a for calculation
1h. Based on your previous calculations, what value would you expect for Tottenham
Hotspur’s share price? Is the share currently over-/ undervalued? (2 points)
Based on our previous calculations, a share of Tottenham is worth 12.26 compared to the
market value of 13.80 making it currently undervalued.
The sum of the value of equity (128.20 million) and net debt (debt 43.08 million – excess cash
26.29 million = 16,79 ) is 144.99 million, while the total value of the firm in our previous
calculations is estimated on 140.20 million pound.
Total number of shares: 9.29 million
Share price = Market cap / number of outstanding shares = 128..29 = 13.80
Estimated share price = estimated market camp / number of shares = EV – debt + cash /
number of shares = 113..29 = 12.26
