Professional Documents
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The Value of A Brand Name
The Value of A Brand Name
The Value of A Brand Name
The profits margins for firms can be stated in terms of net income (as they have in all the
examples so far) or in terms of operating income (EBIT). If pre-tax operating margins are
used, the appropriate value estimate is that of the firm. In particular, if one makes the
assumption that
Free Cash Flow to the Firm = EBIT (1 - tax rate): Net Capital exp. and working capital
needs are zero.
Then the Value of the Firm can be written as a function of the after-tax operating
margin= (EBIT (1-t)/Sales
where,
gn = Growth rate in after-tax operating income after n years forever (Stable growth rate)
• One of the critiques of valuation is that is fails to consider the value of brand
names and other intangibles.
• The approaches used by analysts to value brand names are often ad-hoc and may
significantly overstate or understate their value. Firms with well known brand
names often sell for higher multiples than lesser-known firms. The standard
practice of adding on a 'brand name premium', often set arbitrarily, to discounted
cashflow value, can lead to erroneous estimates.
• One of the benefits of having a well-known and respected brand name is that
firms can charge higher prices for the same products, leading to higher profit
margins and hence to higher price-sales ratios and firm value. The larger the price
premium that a firm can charge, the greater is the value of the brand name.
brand value is most commonly defined as the value added to the product by
the brand. I would define it more specifically, for measurement purposes, as
the relative ability of a brand to bias customer choice. In turn, a brand’s
value I would argue, depends on its ability to reliably indicate attributes of
value to a customer. In other words, a brand’s value - to customers – depends
on its ability to act as a reliable predictor of what to expect after purchase.
(V/S)b = Value of Firm/Sales ratio of the firm with the benefit of the brand name
(V/S)g = Value of Firm/Sales ratio of the firm with the generic product
The following is an analysis of brand name value at Kellogg Corporation. The estimates
for Kellogg were obtained from 1994 financial statements. The after-tax operating margin
for the generic substitute was obtained by looking at a private-brand cereal manufacturer.
The expected growth is assumed to be
Value of Kellogg Brand Name = ( 3.39 - 1.10) ($6562 million) = $15,026 million