Discussion Response

Daniel Burnett

1st Discussion to respond to

Estimating Enterprise Value: 

To estimate Ceder Fair’s enterprise value using the DCF model, the first step is to calculate unlevered free cash flow. Enterprise value is based on the cash flows available to both debt and equity holders, not just the shareholders (Pignataro, 2013). 

Looking at Cedar Fair’s 2019 financials, EBIT was $320.8 million with depreciation being $170.5 million (Tompkins, 2022). After applying the effective tax rate of nearly 18.9%, the after-tax EBIT comes out to about $260 million. When the depreciation is added back in and subtract the average annual capital expenditures of $211.68 million, the estimated free cash flow would be $219 million. This number fits perfectly considering how capital-intensive the amusement park industry is. Cedar Fair is often reinvesting back into rides, park improvements, and maintenance, just to stay competitive within the industry.

The next step is to determine the discount rate using the weighted average cost of capital (WACC). Following Parrino et al., (2011), WACC reflects both the cost of equity and the after-tax cost of debt, weighted by their market values. Using CAPM, Cedar Fair’s cost of equity is about 13.29%, based on a beta of 2.23, a 1.69% risk-free rate, and a 5.20% market risk premium. The high beta really stands out and reflects how sensitive Cedar Fair is to economic conditions and customer spending. After adjusting the 5.37% cost of debt for taxes, the after-tax cost of debt is about 4.36%. with roughly 59% equity and 41% debt in the capital structure. The overall WACC would be 9.63%.

Finally, future cash flows can be projected. The case assumes a 1% long-term growth rate. If we apply this to the $219 million free cash flow, the 1-year projection would be around $221 million. Using the Gordon Growth Model, the enterprise value comes out to roughly $2.56 billion under these conservative assumptions. 

Utilizing Additional Information:

The additional information in the case really helps put the DCF results into context. For example, the industry outlook states that global amusement parks are projected to grow at 5-7% annually (Tompkins, 2022). That’s a big contrast to the 1% growth assumption used in the DCF model. Since valuation is extremely sensitive to growth assumptions, even increasing that rate slightly would significantly raise the enterprise value (Pignataro, 2013). This suggests that the conservative assumption may be understanding Cedar Fair’s true potential. 

Cedar Fair’s financial structure also plays a major role. The company has more than $2.5 billion in liabilities and negative equity in 2019 (Tompkins, 2022). This shows that Cedar Fair is heavily leveraged. This would explain both the high beta of 2.23 and the B- bond ratings. Higher leverage will increase equity risk and raise the required return, which ultimately lowers valuation in a DCF model (Parrino et al., 2011). So, the capital structure of Cedar Fair would 100% directly impact the discount rate and final valuation result. 

Looking at the comparable companies also gives another perspective. Peer firms in the industry trade at P/E ratios between roughly 22 and 28. When looking at Cedar Fair, their 2019 earnings per share was $3.03 (Tompkins, 2022). Using a midpoint P/E of 24 suggests an implied share price of roughly $73. That is noticeably higher than the year-end market price of $55.67 by Cedar Fair. This comparison demonstrates that the market may see more long-term growth potential than the conservative DCF model captures. 

Institutional ownership can also be looked at. Cedar Fair ownership structure notes that 54% of the partnership units are held by institutions, the median investor is a financial institution (Tompkins, 2022). This suggests that professional investors are heavily involved in pricing the stock, which adds a lot of creditability to the market valuation. 

Determining a Fair Price:

If we rely strictly on the DVF model using the 1% growth rate, the implied enterprise value is about $2.56 billion. This translates into a lower equity valuation than the market price at the end of 2019. However, that assumption seems overly conservative given the much broader industry growth projections. When we consider the industry outlook and apply the comparable company multiplies, the valuation picture truly changes. The relative valuation approach suggests a potential share value closer to $70, which is well above Cedar Fair’s $55.67 market price. 

Taking both approaches into account, a reasonable fair value range appears to be between the market price of $55 and $70 per share. The actual market price of $55.67 falls on the lower end of that range, which suggests that the stock was likely fairly valued. This might even show the stock was slightly undervalue, depending on their future growth expectations. Overall, the case really highlights how sensitive valuation is to growth assumptions and capital structure. Pignataro (2013) and Parrino et al. (2011), both emphasize that it is important to not rely on just one valuation method. By combining the DCF model with comparable analysis gives a much clearer and much more balanced estimate for the fair value. 

Reflection:

From this unit, I really developed a stronger understanding of how companies are valuated and how much assumptions truly matter in the finance world. Learning how to calculate free cash flow, apply CAPM to find the cost of equity, and determining WACC, helped me see how enterprise value is built step by step. What stood out to me the most was how sensitive valuation is to the smallest changes, such as growth rate or discount rate. Even a slight adjustment can significantly change the final value, which shows how important risk assessment and the capital decisions made are. 

I can apply this knowledge in my everyday life by thinking more carefully about my financial decisions. Whether its evaluating an investment in my stock portfolio, considering starting my own business, or even making an extremely large purchase. I now understand that to think in terms of present value, risk, and what the expected return is. Instead of just looking at the price, I can consider long-term value and whether the return justifies the risk. For example, buying a new car or use the one I currently have.  

Formulas used: 

Unlevered Free Cash Flow (UFCF):

FCF = EBIT (1- tax rate) + depreciation – capital expenditures – change in net working capital. 

CAPM:

Re= Risk free rate + beta (market risk premium)

After-tax Cost of Debt:

R_d(After tax) = R_d(1-T)

WACC:

WACC = (E/V) R_e + (D/V) R_d (1-T)

Projected Free Cash Flow Growth:

FCF_t+1 = FCF_t(1+g)

Gordon Growth Model:

TV= FCF_t+1 / WACC – g

Enterprise Value to Equity Value:

Equity value = enterprise value – net debt

Implied shared price:

Fair Price = Equity Value / Shares Outstanding

References:

Daniel L. Tompkins., (2022). “A Fair Price for Cedar Fair.” In  Sage Business Cases. SAGE Publications, Ltd., https://sk-sagepub-com.ezproxy.umgc.edu/cases/a-fair-price-for-cedar-fair

Pignataro, Paul (2013)  Financial Modeling & Valuation: A Practical Guide to Investment Banking and Private Equity. Wiley

Robert Parrino, David S. Kidwell, Thomas W. Bates, 2011,  Fundamentals of Corporate Finance, Second Edition, Wiley

Kayin

2nd discussion to respond to

1. Estimating Enterprise Value : What steps are necessary to estimate Cedar Fair's total enterprise value using the discounted cash flow (DCF) model? Outline the process, including the calculation of free cash flows, the determination of the discount rate, and the projection of future cash flows.

To estimate Cedar Fair’s total enterprise value using a discounted cash flow approach, the first step is to calculate the company’s unlevered free cash flow. This begins with EBIT. From there, we add back noncash expenses such as depreciation and amortization, incorporate deferred taxes and other noncash adjustments, and account for changes in working capital. Finally, we subtract capital expenditures to receive our unlevered free cash flow. Next, we determine the appropriate discount rate by calculating the company’s Weighted Average Cost of Capital (WACC). This requires gathering inputs such as the riskfree rate, market risk premium, beta, cost of equity, and cost of debt. We also estimate the tax rate by dividing tax expense by earnings before taxes. These components allow us to compute WACC, which serves as the discount rate in the DCF model (10.86%). The discount rate is then applied to future free cash flows to convert them into present values. Summing the present value of projected cash flows and the present value of the terminal value yields an estimate of Cedar Fair’s enterprise value (Pignataro, 2013).

2. Utilizing Additional Information : How can the additional information provided in the case study be used to estimate the total enterprise value of Cedar Fair? Discuss how factors such as market conditions, company-specific risks, and growth projections influence the valuation.

It is important to consider the broader industry growth outlook when evaluating Cedar Fair’s valuation potential. Analysts project approximately 6.5% annual growth from 2020 to 2025, supported by several emerging trends: a growing middle class with higher discretionary income, increased urbanization that expands access to entertainment markets, and rising global tourism. Together, these factors reinforce expectations for sustained demand in the amusement and leisure sector. Additionally, Cedar Fair appears to benefit from federal tax exemption, as it distributes roughly 90% of its earnings to unitholders, consistent with its structure as a publicly traded partnership. This tax treatment can influence free cash flow and valuation outcomes, since more of the company’s operating income flows directly to investors rather than to (federal) taxes (Tompkins, 2022).

3. Determining a Fair Price : Based on your analysis, what is a fair price for Cedar Fair? Provide a rationale for your valuation, considering the financial statements and other relevant information from the case study.

Based on the analysis, I estimate Cedar Fair’s fair value at approximately $93 per share. This valuation is supported by the industry’s strong growth outlook, driven by rising tourism and expanding middleclass spending. Additionally, Cedar Fair’s taxadvantaged structure, which distributes roughly 90% of its earnings to unitholders, creates meaningful cost savings that enhance its intrinsic value. At a current stock price of $55.67 and am EPS of $3.03, the company has a P/E ratio of 18.3, which is much lower than the industry average of 25. Given these factors, the acquisition offer of roughly $70 per share appears undervalued relative to the company’s longterm cashflow potential and should be reconsidered (Reuters, 2019).

4. Reflection : Include a short reflection using finance terminology. Reflect on what you have learned from this unit and discuss how you might apply this knowledge in your workplace or everyday life.

This unit was very insightful, as it provided a strong foundation for evaluating a company and constructing a DCF model. It introduced several methods for assessing a firm’s value and estimating its stock price, helping to build a more comprehensive understanding of valuation techniques. Additionally, the material highlighted the connections between a company’s financial statements, its operational performance, and broader market conditions. This unit also touched on the significance of competitor comparisons, reinforcing how relative performance and industry positioning play a key role in valuation analysis.

References:

Pignataro, P. (2013).  Financial modeling and valuation : A practical guide to investment banking and private equity. John Wiley & Sons, Inc.

Reuters. (2019, October 4).  Cedar Fair rebuffs $4 billion offer from Six Flags, sources tell Reuters. CNBC; CNBC.  https://www.cnbc.com/2019/10/04/cedar-fair-rebuffs-4-billion-offer-from-six-flags-sources-tell-reuters.html

Tompkins, D. L., (2022). A fair price for cedar fair. In Sage Business Cases. SAGE Publications, Ltd.,  https://doi.org/10.4135/9781529780536