Corporate Valuation. Massari Mario

analytically the effects (on the market share, sales volumes, and prices) deriving from the competitive strategies that management wants to pursue over the business plan period:

      ● The major portion of the operating costs is represented by the industrial costs, whose quantification is driven in particular by the hypotheses on:

      ● Production volumes per product category (formulated to quantify the expected revenues)

      ● Unitary cost per production factor

      ● Usually, another important component of the operating costs is represented by the commercial costs, which can be variable (transportation costs, agency costs, etc.) or fixed (inventory management costs, sales force costs, etc.).

      ● The relevance of the R&D costs is a function of the very products manufactured by the enterprise.

      ● The significance of the promotional activity costs is a function of the final client nature:

      ● Generally speaking, if the product is marketed to the final consumer, it is necessary to heavily invest in promotional activities aimed at promoting the company product and direct final clients' purchasing choices to it.

      ● Conversely, if the product is marketed to another industrial company (this is the case of semi-finished products, or of manufacturing machinery), then the promotional activity financial burden will be minor.

      ● In general, industrial companies manufacturing standardized products do have relevant working capital stocks in their balance sheets. Usually:

      ● Trade credits have been quantified based on the average days sale outstanding.

      ● Trade debts have been quantified based on the average days payable outstanding.

      ● Inventory stock has been quantified based on the average days worth of inventory.

      ● Capital expenditures (capex) are to be ascribed mainly to the industrial apparatus:

      ● Maintenance capex, necessary to maintain the normal operations of the production apparatus, can be hampered by obsolescence.

      ● Growth capex is aimed at upgrading the current manufacturing/production capabilities of the company PPE.

      2.3.2 Commercial Companies Operating through a Network of Points of Sale

      Zeta is a company distributing consumer electronics and white-goods products through a point-of-sale (173) network spread around the national territory. Main suppliers of Zeta are Samsung, LG, Sony, Apple, and Asus. The company manages logistics activities in a centralized way. Suppliers deliver the goods to the logistics center of Zeta, which in turn passes the received goods to the points of sale, based on the latter demands.

      Promotional activity is managed partly by the central structure, which takes care, for instance, of the promotional campaigns with national diffusion, and partly of the single points of sale.

      The following paragraphs will analyze the main hypotheses formulated by Zeta management to develop the company business plan (which spans a time horizon of five years).

      Assumptions on Revenues

      Based on the activity performed by Zeta, the expected revenues over the business plan period have been quantified based on, in particular, the forecasts on:

      ● Commercial surface managed by the company, which is a function of the number and dimension of the points of sale. To this end, Zeta management has hypothesized:

● The closure of five points of sale (1 for each year of the business plan period) (Exhibit 2.12)

      ● The opening of 35 new points of sale (1 in t0, 4 in t1, 10 in t2, t3, t4, and t5) (Exhibit 2.12)

Exhibit 2.12 Evolution in the number of points of sale

● The total managed surface to evolve, during the business plan period, from 282,061 square meters to about 325,561 square meters (Exhibit 2.13)

Exhibit 2.13 Evolution of managed commercial surface

● Revenue per square meter for the managed surface. Zeta management has hypothesized that over the business plan horizon this KPI will evolve from €3,905 to €4,207 (Exhibit 2.14).

Exhibit 2.14 Evolution in revenue per square meter for the managed surface (€)

      This dynamic is underpinned by the following:

      ● The expected competition level in the reference market is likely.

      ● The number of points of sale will change. In this respect, it is worth noting that:

      ● Revenues per square meter of the points of sale for which closure is foreseen are far less than the average ones for Zeta points of sale.

      ● Start-up phase of a new point of sale lasts about 1 year.

      ● Based on Zeta management experience, after a refurbishing intervention, the revenue per square meter KPI generally rises. In this business plan, the management has assumed that it will carry out renovation of 20 points of sale per year over the business plan horizon.

      ● Zeta has decided to undertake new promotional/commercial activities over the horizon plan.

      Assumptions on the Contribution Margin

      As described, Zeta carries out a pure commercial activity by buying consumer electronics and white goods finished products from major international suppliers and reselling them through proprietary points-of-sale network for a profit. The contribution margin should be sufficient not only to outweigh the costs incurred in the business activity, but also to guarantee the desired rate of return on the capital invested in the business by the equity holders.

In this specific case, Zeta management expects over the business plan years a small contraction of the unitary average price per purchase from the suppliers. Accordingly, Zeta management has hypothesized the percentage contribution margin to expand over the business plan period (Exhibit 2.15).

Exhibit 2.15 Evolution of the percentage contribution margin

      As a direct consequence of the above, Zeta management expects the cost of goods sold to lie in the 71.5 to 71.7 percent (as a percentage of revenues) range.

      In the business plan, the contribution margins for each of the business plan years have been constructed as the product between revenues and percentage contribution margin.

      Assumptions on Sales Force Employees Costs

      The major part of Zeta employees are engaged in the points of sale managed by the company and carry out commercial activities. As specified above, at the end of t0 Zeta managed as much as 173 points of sale. The sales force employees cost at t0 was €108 million (about 9.8 percent of revenues); over the business plan years it has been calculated as the algebraic sum of:

      ● Cost of sale force employees at t0, increase each year by 2.0 percent compound annual growth rate (CAGR)

      ● Additional cost of sale force employees deriving from opening of new points of sale

      ● Cost saving of sale force employees deriving from the closure of some points of sale

      Assumptions on the Costs for the Location of the Points of Sale

      The number of points of sale managed by Zeta is expected to increase to 203 in t5. Points of sale are all rented, so that rental costs are a key item in Zeta's