Baskin Robbins 2011 Annual Report Download - page 74

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The total equity value at each valuation date was then allocated to common stock and Class L based on the
probability weighted expected return method (the “PWERM methodology”), which involved a forward-looking
analysis of possible future exit valuations based on a range of EBITDA multiples at various future exit dates, the
estimation of future and present value under each outcome, and the application of a probability factor to each
outcome. Returns to each class of stock as of each possible future exit date and under each EBITDA multiple
scenario were calculated by (i) first allocating equity value to the Class L shares up to the amount of its
preferential distribution amount at the assumed exit date and (ii) allocating any residual equity value to the
common stock and Class L on a participating basis. The position of the common stock as the lowest security in
the capital structure and only participating in returns after the Class L preferential distribution amount is satisfied
results in greater volatility in the common stock fair value.
The significant assumptions underlying the common stock valuations at each grant date were as follows:
Discounted cash flow PWERM
Grant Date(s)
Fair value
per common
share
Market
approach
EBITDA
multiples
Perpetuity
growth rate
Discount
rate
(WACC)
Core
EBITDA
multiple
Weighted
average
years to exit
Common
stock
discount
rate
Class L
discount
rate
6/24/2008, 7/1/2008 . .... $5.44 10.0x-11.0x 3.5% 9.5% 10.5x 2.0 40.0% 12.0%
5/15/2009 ............. $1.92 10.0x 3.5% 10.4% 10.0x 2.5 45.0% 13.0%
2/23/2010 ............. $3.01 10.0x-10.5x 3.5% 9.8% 10.5x 2.3 42.5% 12.5%
7/26/2010, 8/6/2010 ..... $5.02 10.5x-11.0x 3.0% 10.2% 10.5x 2.0 42.5% 12.5%
3/9/2011 .............. $7.31 10.0x-11.0x 3.0% 10.6% 10.5x 1.6 32.5% 11.5%
A 0.5x change in the EBITDA multiples used under the market approach for the three most recent valuation dates
listed in the table above would have resulted in a 5% to 9% change in the common stock value per share, while a
1.0x change in the EBITDA multiples would have resulted in a 10% to 16% change in the common stock value
per share. A 50 basis point change in the perpetuity growth rate used in the discounted cash flow calculation
under the income approach for the three most recent valuation dates listed in the table above would have resulted
in a 3% to 7% change in the common stock value per share. A 100 basis point change in the discount rate used in
the discounted cash flow calculation under the income approach for the three most recent valuation dates listed in
the table above would have resulted in a 9% to 16% change in the common stock value per share.
From 2008 through the first fiscal quarter of 2011, the overall equity value of the Company trended consistent
with overall stock market indices and companies within the restaurant industry. The Company’s equity value
declined towards the end of 2008 and into early 2009 driven by broad economic trends that impacted both
internal financial results and projections, as well as overall market multiples and values. Since that time period,
the overall equity markets partially recovered, and the Company’s total equity value tracked along with that
recovery. The Company’s common stock realized greater volatility over this period than the Company’s overall
equity value due to its placement within the capital structure, where the Class L shares are entitled to receive a
9% preferred return.
Income taxes
Our major tax jurisdictions are the U.S. and Canada. The majority of our legal entities were converted to limited
liability companies (“LLCs”) on March 1, 2006 and a number of new LLCs were created on or about March 15,
2006. All of these LLCs are single member entities which are treated as disregarded entities and included as part
of us in the consolidated federal income tax return. Dunkin’ Brands Canada Ltd. (“DBCL”) files separate
Canadian and provincial tax returns, and Dunkin Brands (UK) Limited, Dunkin’ Brands Australia Pty. Ltd
(“DBA”), and Baskin-Robbins Australia Pty. Ltd (“BRA”) file separate tax returns in the United Kingdom and
Australia. The current income tax liabilities for DBCL, Dunkin Brands (UK) Limited, DBA, and BRA are
calculated on a stand-alone basis. The current federal tax liability for each entity included in our consolidated
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