Critical Financial Problems Identified in the Case

5 critical problems identified in the case –

1) Ferrari might struggle as an independent entity because of its small scale, as Ferrari’s
Chairman Sergio Marchionne would like to spin off Ferrari into a separately traded
company.
Because the market demand would change with time, and in order to survive in the market, the
company have to restructure to themselves to better deal with the current difficulties. FCA could
be increasing the sales volume while keeping the core pillars to retain the value, such as the
iconic brand “Ferrari” with superior, enduring power, benefiting from a loyal customer base;
exceptional pricing power and value resilience, leading-edge engineering capabilities and strong
and resilient financial performance and profile, the company could use these to reach and satisfy
more of its target customers to become to the better one than before. I agree with the partition.

2) Sergio Marchionne is also considering expanding production despite the company’s long-
standing tradition of a severely limited-production stratify to maintain an exclusive brand
image. Is it a sound business decision? Why or why not?
Because Ferrari is in the luxury car industry, the current strategy revolves around creating the
recognizable and exclusive brand image by limiting production and fostering exclusivity around
the product in the past. This strategy has allowed FCA to have lower marketing costs, however,
the exclusive nature of the business limits the target consumer market of Ferrari. However, this
strategy was the sound business decision that had led FCA to reap higher margins and
progression in demand. And, Sergio Marchionne also should be expanding production of FCA in
future to satisfy global demand and continue R&D efforts in order to innovate amongst
competitors.

3) Please describe the market multiple approaches in spreadsheet S1 & S2. At what price in
US dollars would you recommend that Ferrari shares be sold? What are the strengths and
weakness of using a market-multiple approach in valuation?
In using the market-multiples approach in valuation, we need comparing the FCA to its
competitors that would represent Ferrari’s production and brand value.
In Appendix Ex-2 and 3 that the EBITDA multiple ratio was from comparing the similar
manufacturers in combination with the similar luxury lifestyle companies with the brand value or
reputation. Using the average EBITDA of competitors would get the result of relative analysis, it
was price per share of $57.71.
Then the selection of comparable companies included lifestyle companies with similar brand
values; Cie Financeriere Richemont and Hermens. As for compensate for the volume-expansion

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strategy, I would choose to comparable the manufacturers included Ford Motor, Renault and
Toyota Motor as they were larger, profitable and have similar financial structures as FCA
(indicating consistencies in operations from top level managers). The suitable comparable to
FCA when the Aston Martin was acquired in 2012, however the performance and brand position
was differed from the scenario of FCA. It could be found the scenario which start from the FCA
itself.
So, the relative value of $57.71 in USD per share should be considered in FCA’s IPO but would
not be weighted heavily given FCA’s unique market position. The other weakness of the market-
multiple approach in valuation as for FCA that was not enough of the marketing information.

4) How do you perform the valuation using the DCF approach? In preparation for Ferrari’s
listing on New York Stock Exchange, at what price in US dollars would you recommend
that Ferrari shares be sold?

The DCF analysis was used to value FCA and resulted in the enterprise value of $12123 million
and per-share equity value of $57.71 in Ex-3. Also, in this exhibit, the key is impacting the
valuation were the LT growth rate assumed at 2%. Since FCA had the high operating margins
and ROIC exceeded its WACC, the valuation is very sensitive to changes in the LT growth rates
which of 2%. It was chosen to be a conservative and reasonable estimate, given that FCA is
being listed in US where GDP growth rates and inflation are consistently low. As for calculating
value of FCA shares is $57.71 in Ex-3, it is above the upper bound of the established price range,
so I would recommend to the share be sold as $57 per share.

5) What does Ferrari gain from the IPO?

First of all, FCA would have a large cost of risk that to beyond the initially set range as it will
likely turn away investors who are already interested in purchasing the IPO during the first
trading day. Even if the current interest reports suggest that the deal was expected to be as much
as 10 times oversubscribed.
And, allowing the market to determine the suitable stock price as trading commences will
prevent FCA from seeming to ambitious prior the IPO. Investors would be more receptive to a
price within the range and have confidence that FCA will be a profitable investment.

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