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Case Objectives and Use - page 12 / 13





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Armand Gilinsky, Jr., Sonoma State University

Raymond H. Lopez, Pace University

Case Objective and Use

This case presents students with the challenge of evaluating the costs and characteristics of expensive equity financing for a rapidly growing but highly leveraged firm.  As a private firm, valuation becomes more complicated, especially since there are no publicly owned wineries or vineyards on Long Island.  Cost of capital estimates can be made to evaluate the expansion plans of owner Laurie Johnson.

Financial forecast underlying the valuation measurements are also complicated by pricing trends for the firm’s products.  While premium wine prices rose in the 1990s, the recent “grape glut” in California will have a significant effect on grape prices, net revenues of all wine makers and prices at the consumer level.  

The teaching note was written for both advanced courses in finance at the undergraduate level as well as graduate students in an MBA program.  It may also be used successfully in a graduate course in Merges and Acquisitions to highlight the use of private equity capital and/or venture capital as sources of funds.  The implications of private equity investments, their expected rates of return, different valuation methods in negotiation for funds and implications of voting control are also covered in this case.

Case Synopsis

The Whistling Bird Winery has experienced greater than industry average growth in net revenues over the last five years.  Although heavily leveraged the firm owned and operated by Laurie Johnson has developed premium wines that are being accepted by the consuming public.  

The firm currently has expansion plans that include purchasing grape growing land, expanding the winery and increasing its fledgling retail operations.  Laurie has quickly realized that private equity funding or venture capital are her only options and is evaluating her position at the winery from both an owner and manager perspective.  With the cost of either form of equity capital quite expensive, is this expansion proposal worthwhile?

This case was prepared by Armand Gilinsky, Jr., Sonoma State University, and Raymond H. Lopez, Pace University, and is intended to be used for class discussion rather than to illustrate either effective or ineffective handling of the situation.

Presented to and accepted by the North American Case Research Association (NACRA) for its annual meeting, November 2003, Tampa, Florida.  All rights reserved to the authors and NACRA.  © 2003 by Armand Gilinsky and Raymond H. Lopez.

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