Blue Nile Report Questions
I.
Overview
1. When was the report issued?At the time, at what price was Blue Nile inc’s
stock traded? What’s the company’s market capitalization?
2. What was the company’s P/E ration in 2012? What was the company’s
estimated P/E ratio for 2013,2014 and 2015? How did the analyst obtain
this estimate?
3. In the analyst’s opinion, in which market would Blue Niles need to grow in
order to match the increased adjusted EBITDA multiple?
4. For 2011, If debt level were 20% less, levered beta remains the same,
what’s the ratio of unlevered beta/levered beta? How does the company
value change under this assumption, assuming that Blue Nile pays no
taxes and the perfect capital markets assumption holds?
II. Cash Flow Statements
1. Exhibit 4 shows the gross margin (as a % of Revenue) in 2012Q1 is 18.4%.
How is this number obtained?
2. Exhibit 7 shows the operating Cash Flow for 2012 is $34.4. How is this
number obtained?
III.DCF Valuation
1. What’s the value of WACC, EBITDA multiple and perpetual growth rate used
in the DCF valuation assumptions?
2. Using the perpetuity growth method, what is the terminal value of Blue Nile? What’s the NPV of TV at the time of the report?
3. Using EBITDA Multiple method, what is the terminal value of Blue Nile?
What’s the NPV of TV at the time of the report?
4. What is the present value of free cash flow? What is the Enterprise Value
using Terminal values from Q2 and Q3?
5. Suppose the risk-free return is 2.5% and you measure the market risk
premium to be 5%. If Blue Nile has a beta of 1.3. According to the CAPM,
what is its expected return? What if beta becomes 1?
IV. What Actually Happened
For this section, please look up “BLUE NILE INC” on EDGAR
(https://www.sec.gov/edgar/searchedgar/companysearch.html) for an annual
report (form type 10-k) for a later year between 2013-2015, and compare the
projected the cash flow as in the report and the realized on as on the 10-k form.
Answer the following questions
1. Was the share price higher or lower than projected?
2. Was the earning (net income) higher or lower than projected?
3. Was the EPS higher or lower than projected?
4. If the analyst had perfect foresight (i.e. they know the true future cash
flows) what would their DCF valuation look like? ( write a few
sentences to illustrate qualitatively)
