Executive Summary As a deep-discount brokerage company, Ame.docx

Executive Summary:
As a deep-discount brokerage company, Ameritrade Holding
Corporation (AHC) aims to spend
in ads and expertise and techniques to grow its customers and,
therefore, its earnings. This
study aims to determine the risk of the planned project by
evaluating the capital charge of the
venture measured using the CAPM. A variety of variables must
be assessed to determine each
potential that could affect the outcome. Areas of emphasis
consist of:
● Risk-free prices
● market catalog standard returns
● marketplace risk premiums
● the definition of acceptable comparable
● the measurement of investment betas
Challenges:
● The high cost of capital which requires a higher return to be
profitable. Other firms have
a cost of capital around 9-15%.
● Ricketts strategy to implement technology enhancements and
increased advertising may
need to be reevaluated. Since the cost of capital is higher,
needing a higher return, then
any large increase in spending should be reevaluated to ensure
the benefits are higher
than the cost.

● Projects need to be creating value and have a higher return
than the project's cost. This
will account for the project’s risk.
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AC I(NOWLE DGE ME NTS
The authors cmd ptblisher are grar,efuI to those who hqve
given permksion to reproduce the following extracts and
adaptations oJ copyight material: p.77 Extract from
Language Delelowent and Language Disorders by
Lois Bloom and Margaret Lahey (1978). Macmillan
Publishers; p.47 Figure Ílom'Some issues relating
to the Monitor Model'by Stephen Krashen, On
TESOI (1977). Reprinted by permission ofTESOL
International Association; p.49 Extract from
'Constructing an acquisition-based procedure
for second language assessment'by Manfred
Pienemann, Malcolm Johnston, and Geoff Brindley
irt Studies in Second Longuage Acqu$üofl , Volume 10/2,
pp.277-a3 1988). Reproduced by permission of
Cambridge University Press; p.53 Extract Ílom
'speeding up acquisition ofhisfter: Expücit L1/L2
contracts help' itSecond Language Acquisition and
the Younger Learner: Child's Play? by Joanna White
(2008) pp.193-228. With kind permission ofJohn
Benjamins Publishing Company, Amsterdam/
Philadelphia; p.54 Exhact ftom 'Second language
instruction does make a diffe¡ence'by Catherine
Doughty in Studies in Second Language Acquisiüon,
Volume 13/4, pp.431-69 (7991. Reproduced by
permission of Carnbridge University Press; p.1 36
Reprinted fr om In t ern ati on al J ournol of E duc aüonal
Research, Volume 37 by Merrill Swain and Sharon
tapkin'Talking it through: two French immersion
learners' response to reformulations' Pp.285-304
(2002)with permission from Elsevier; p.139 Exüact
from 'Corrective feedback and learner uptake'
by Roy Lyster and Leila Ranta in Studies in Second
Longuage Acquisition, Volume 7917 pp.37 -66 (7997).

Reproduced by permission of Cambridge
University Press.
Cartoonsw: Sophie Grillet @ Oxford University
Press 1993, 2005, and 2012.
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IX
SINflINOf
vlll Contents
Individual differences in second language learning
Preview
Research on learner characteristics
Intelligence
Language learning aptitude
Learning styles
Personality
Attitudes and motivation
Motivation in the classroom
Identiry and ethnic group affiliation
Learner beliefs
Individual differences and classroom instruction
Age and second language learning
The critical period: More than just pronunciation?
Intuitions of grammaticality
Rate of learning
Age and second language instruction
Summary
Suggestions for further reading
Explaining second language learning
Preview

The behaviourist perspective
Second language applications: Mimicry and memorization
The innatist perspective
Second language applications: Krashen's'Monitor Model'
The cognitive perspective
Information processing
Usage-based learning
The competition model
Language and the brain
Second language applications: Interacting, noticing,
processing, and practising
The sociocultural perspective
Second language applications: Learning by talking
Summary
Suggestions for further reading
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NOIIfNCIOUINI
Innoduction
In Chapter 2 we look at second language learners' developing
knowledge,
their abiliry to use that knowledge, and how this compares with

Ll learning.
In Chapter 3, we rurn our attention to how individual learner
characteristics
may affect success. In Chapter 4, several theories that have
been advanced
to explain second language learning are presented and
discussed. Chapter
5 begins with a comparison of naturd and instructional
environments for
second language learning.'We then examine some different ways
in which
researchers have observed and described teaching and learning
practices in
second language classrooms.
In Chapter 6, we examine six proposals that have been made for
second
language teaching. Examples of research related to each of the
proposals are
presented, leading to a discussion of the evidence available for
assessing their
effectiveness. The chapter ends with a discussion of what
research findings
suggest about the most effective ways to teach and learn a
second language
in the classroom.
In Chapter 7, we will provide a general summary of the book by
looking at
how research can inform our response to some'popular opinions'
about lan-
guage learning and teaching that are introduced below.
A Glossary provides a quick reference for a number of terms
that may be new
or have specific technical meanings in the context of language

acquisition
research. Glossary words are shown in bold letters where they
first appear in
the text. For readers who would like to find out more, an
annotated list of
suggestions for further reading is included at the end of each
chapter. The
Bibliography provides full reference information for the
suggested readings
and all the works that are referred to in the text.
'W'e
have tried to present the information in a way that does not
assume that
readers are akeady familiar with research methods or theoretical
issues in
second language learning. Examples and case studies are
included through-
out the book to illustrate the research ideas. Many of the
examples are taken
from second language classrooms. le have also included a
number ofactivi-
ties for readers to practise some of the techniques of
observation and analysis
used in the research that we review in this book. At the end of
each chapter
are 'Questions for refection to help readers consolidate and
expand their
understanding of the material.
Before we begin ...
It is probably true, as some have claimed, that most of us teach
as we were
taught or in awaythat matches our ideas and preferences about
howwe learn.
Take a moment to refect on your views about how languages are

learned and
what you think this means about how they should be taught. The
statements
in the activity below summarize some popular opinions about
language
'seuo xelduo) eJolaq
seJntrnJls a8en8ue¡ a¡durs qJeel Plnoqs sJeqf,eal | |
'Jaqloue ol uo 3uto3 aJoleq euo qf,ee
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lp euo selnJ lellleuue"r8 luasa.ld PlnoLls sJeq)€al Ol
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ilseq eql Pu€ sPJo^ 000'l
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'3utpea.t
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'3uru;ea¡ ur ssaf,f,ns
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'uolletlru! q8no-rqr l¡ureu PeuJEel a;e sa8en8uel ¡
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teq^ euos aa-r8esrp-6
leq^ euos aa-r8e-Y
ae.r8e ,!3uo;rs-y5
:uoruldo rnol qlrr* Peletf,osse xoq eql ul
¡ ue Suqreu lq tuaualets q)ea qr!^A aa.l3e nol q)lq/v 01 luelxe
aqt elerlPul
sluoruolels aseql uo uoluldo JnoÍ eAlD Arl^lrcv
'Sulurea¡ a8en8ue¡ Puoias ul ,Goaql Pue q3Jeasal luoJJnf, rnoge
Pear
nol sr punu ul rrJegl or suopf,EeJ rnol pue sluaruel?ls asaqr daal
'uorurdo

gr", qri^ aarSeslp ¡o aa¡8e nol raqtaqr'r rnoqe lun{I 'Surgrear
pue Sulurea¡
uo4Jnpo4uI
Introduction
Photocopiable @ Oxford University Press
l2 Learners'errors should be corrected as soon as
they are made in order to prevent the formation
of bad habits.
l3 Teachers should use materials that expose
students only to language structures they have
already been taught.
l4 When learners are allowed to interact freely (for
example, in group or pair activities), they copy
each other's mistakes.
l5 Students learn what they are taught.
ló Teachers should respond to students'errors by
correctly rephrasing what they have said rather
than by explicitly pointing out the error.
l7 Students can learn both language and academic
content (for example, science and history)
simultaneously in classes where the subject
matter is taught in their second language.
l8 Classrooms are good places to learn about
language but not for learning how to use language.

¿a8en8ur¡ auo ueqr a¡otu a¡rnb¡e uerPllql tenSut¡t9
oP ./roH ¿PIro1( eql Punor¿ l¡re¡u¡s do¡a,rap eSenSur¡ PInp
seoc ¿sasod
-¡nd lsour JoJ lryssaDns sI uolleflunluruof, a¡duls f¡rea -uaqr
g8noqr ua,ra
a8en8uq ¡erlteruutr8 xa¡duro:8urdo¡a,rap uo oB ol uerPlrql
seqsnd rer¡6
¿salueluas ¡ry3ulueau ul raqlaSor ureqr rnd ol lnq 'sProlv uJml
ol l¡uo rou
pI,{¡
"
salgeua r"qrh ¿srgr gsr¡druorre uarPllqr oP.u'oH
'suorle¡aua8:o3 srs¡8
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tta; Sulzeure
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u"runl{ Jo
spadse 8u¡reutoseS pue a,rtssardlul lsolu eqr Jo auo sr
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aqr sr r{f,rr{1vr ,(WS) uorlrslnb¡e a8enSue¡ puof,asJo
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l{f,nol or s¡ rardrqr
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JoJ suoneueldxa
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Language learning in early childhood
Tbef.rst three years: Milestones and
deu e lopmental sequences
One remarkable thing about first language acquisition is the
high degree of
similariry in the early language of children all over the world.
Researchers
have described developmental sequences for many aspects of
first language

acquisition. The earliest vocalizations are simply the
involuntary crying that
babies do when they are hungry or uncomfortable. Soon,
however, we hear
the cooing and gurgling sounds of contented babies, lying in
their beds
looking at fascinating shapes and movement around them. Even
though
they have little control over the sounds they make in these early
weeks of
life, infants are able to hear subtle differences between the
sounds of human
languages. Not only do they distinguish the voice of their
mothers from
those of other speakers, they also seem to recognize the
language that was
spoken around their mother before theywere born. Furthermore,
in cleverly
designed experiments, researchers have demonstrated that tiny
babies are
capable ofvery fine auditorydiscrimination. For example, they
can hear the
difference between sounds as similar as pa'and'ba'.
Janet'ü7erker, Patricia Kuhl, and others have used new
technologies that allow
us to see how sensitive infants are to speech sounds. tü7'hat
may seem even
more remarkable is that infants stop making distinctions
between sounds
that are not phonemic in the language that is spoken around
them. For
example, by the time they afe ayear old, babies who will
become speakers of
Arabic stop reacting to the difference between pa' and'ba'which
is not pho-

nemic in Arabic. Babies who regularly hear more than one
language in their
environment continue to respond to these differences for a
longer period
('Werke¡ 'Weikum, and Yoshida 2006) . One important finding
is that it is not
enough for babies to hear language sounds from electronic
devices. In order
to learn-or retain-the abiliry to distinguish between sounds, they
need
to interact with a human speaker (Conboy and Kuhl 20II). The
Internet
abounds with remarkable videos of infants reacting to language
sounds.
rMhether they are becoming monolingual or bilingual children,
however,
it will be many months before their own vocalizations begin to
refect the
characteristics ofthe language or languages they hear and longer
still before
they connect language sounds with specific meaning. However,
by the end of
their first year, most babies understand quite a few frequently
repeated words
in the language or languages spoken around them. Theywave
when someone
says 'bye-bye'; they clap when someone says pat-a-cake'; they
eagerly hurry
to the kitchen when 'juice and cookies' are mentioned.
At 12 months, most babies will have begun to produce a word or
two that
everyone recognizes. By the age of two, most children reliably
produce at
least 50 different words and some produce many more. About

this dme, they
begin to combine words into simple sentences such as 'Mommy
juice' and
I
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t
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(qooq ozvrr) s- prn¡d
(Suruunr furuo¡lq) &ur aqssat8o¡d luesa¡d
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pardepe) .vro¡aq tsIT eql
'aruanbas JEInuls t ur pa;lnbce eJalv sauragdroru ¡ecneruruer8
Vl ñqt PunoJ
laqr (qereg pue 'elg 'ur"py pa¡ec) ue¡P¡gr oerqrJo tuaurdola,rap
a8en8ue¡

aqr3o.,(pnrs purpn¡l8uol e uI 'sruaPnrs PuE san8ea¡or slq PuE
uôrg raSo¿
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saruagd.roru ¡rr
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es '<s096I el{r uI
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(,laa3, se grns)
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l¡qertar larp
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luasa¡d uaag a^¿q
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tf,egal ot rr¡eas sa¡uanbas ¡eruaudolartap agl 'saser Jar{ro uI
'arullJo Surpurrs
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l{f,ns sgJs PE
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arrrrluSol s,ueJPIIql
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euros QT.',sa8els,
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surauzd asaql
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Language learning in early childhood
regular past -el(she walked)
third person singular simple present -s (she runs)
auxiliary be (he is coming)
Brown and his colleagues found that a child who had mastered
the gram-
matical morphemes at the bottom of the list had also mastered
those at the
top, but the reverse was not true. Thus, there was evidence for a
'developmen-
tal sequence' or order of acquisition. However, the children did
not acquire
the morphemes at the same age or rate. Eve had mastered nearly
all the mor-
phemes before she was two-and-a-halfyears old, while Sarah
andAdam were
still working on them when they were three-and-a-half or four.
Brownt longitudinal work was confirmed in a cross-sectional
study of 21
children. Jill and Peter de Villiers (1973) found that children
who correctly
used the morphemes that Adam, Eve, and Sarah had acquired

late were also
able to use the ones thatAdam, Eve, and Sarah had acquired
earlier. The chil-
dren mastered the morphemes at different ages, just asAdam,
Eve, and Sarah
had done, but the order of their acquisition was very similar.
M-y hypotheses have been advanced to explain why these
grammatical
morphemes are acquired in the observed order. Researchers
have studied the
frequency with which the morphemes occur in parents' speech,
the cognitive
complexity of the meanings represented by each morpheme, and
the difficulty
ofperceiving or pronouncing them. In the end, there has been no
simple satis-
factory explanation for the sequence, and most researchers
agree that the order
is determined by an interaction among a number of different
factors.
To supplement the evidence we have from simply observing
children, some
carefully designed procedures have been developed …
UV0255
Rev. Apr. 26, 2016
This case was prepared by Robert F. Bruner. It was written as a
basis for class discussion rather than to illustrate effective or

ineffective handling of an
administrative situation. Information about the company has
been disguised. Some information on peer firms is fictional and
has been added for the
sake of deepening student analysis. Copyright 1995 by the
University of Virginia Darden School Foundation,
Charlottesville, VA. All rights reserved.
To order copies, send an e-mail to [email protected] No part of
this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet,
or transmitted in any form or by any means—electronic,
mechanical, photocopying, recording, or otherwise—without the
permission of the Darden School Foundation.
Calaveras Vineyards
In March 1994, Anne Clemens, a senior vice president at
Goldengate Capital, received a loan proposal
from Tom Howell, a managing director with NationsBank’s
investment-banking group. The brochure
described the prospective management acquisition of Calaveras
Vineyards and solicited Goldengate’s
participation in the $4.5 million senior financing facility. The
facility would consist of a $2 million term loan
and a revolving credit of up to $2.5 million. Clemens needed to
decide quickly whether the proposed terms
were attractive, where to position Goldengate in this credit, and
whether to offer a counterproposal on terms.
Goldengate Capital was a large West Coast financial institution
with main activities in commercial lending,
asset-based financing, leasing, mezzanine lending, and equity
investing. Clemens had worked with Howell on a

previous deal, and participated in two other business deals
structured by him. These proved to be very profitable
deals for Goldengate, so Clemens planned to give this new
proposal careful study. NationsBank N.A. was the
third largest financial institution in the United States.
Calaveras Vineyards
Calaveras Vineyards sat on 220 acres in Alameda Valley,
California. The vineyards occupied 175 acres. The
remaining acres consisted of various equipment sheds (to house
the farming equipment), the winery building
(containing storage tanks, aging barrels, and a small bottling
operation), and a small farmhouse with guestrooms,
offices, and the requisite tasting and sales room. Exhibit 1
summarizes the major assets of the vineyard.1
Esteban Calaveras founded Calaveras Vineyards in 1883 to
make wine for the Catholic Church. By the
1950s, the winery and vineyard had expanded into the
production of table wines for sale to retailers and
restaurants. Through the 1960s and 1970s, the Calaveras family,
who continued to own the vineyards, made
few changes despite dramatic growth in demand for California
wines and the entry of large corporations in the
production of California wines. Ownership of the vineyard
changed hands in 1986, 1990, and 1992, as the
vineyard passed from one large corporate wine producer to
another. With each change, the vineyard changed
marketing organizations (i.e., independent firms that managed
the sales and marketing of the vineyard’s
products). Thus, over the preceding nine years, there had been
three changes in both the ownership and the
marketing organization.
Most recently, Stout PLC, a British conglomerate with interests

in alcoholic beverages and branded
consumer products, acquired Calaveras Vineyards in a purchase
of a portfolio of vineyards from another
1 Clemens had heard that choice vineyard land might sell for
between $5,000 and $10,000 an acre, but that acreage was
usually sold in units sufficient
in size to constitute a winery business. She suspected that, in a
forced liquidation, receivables could be sold for 85% of face
value, and inventory (virtually
all of which was finished goods) could be sold for 75% of book
value, while plant and equipment would fetch 40% of book
value.
For the exclusive use of L. Yu, 2020.
This document is authorized for use only by Lanjing Yu in
FIN380 Spring Quarter 2020 Case Coursepack taught by
ROBERT GROSS, DePaul University from Mar 2020 to Jun
2020.
Page 2 UV0255
conglomerate. Stout decided to sell Calaveras as part of a drive
to focus on large, well-known wine and spirits
brands.
Products, marketing, and competition
Despite the many changes in ownership and marketing,
Calaveras managed to improve its brand image and

market position through a strategy of careful quality control,
market segmentation, and capital improvements
(such as converting from redwood to oak cooperage, upgrading
the winery with a bladder press, and installing
a sprinkler system). Because of these improvements, Calaveras
increased its average wholesale prices from
$29.52 in 1989 to $44.26 in 1993.
Calaveras’s products could be broken down into five main
categories:
1. Estate wines were made and bottled at the winery from a few
selected varieties. The Sauvignon Blanc
and Cabernet Sauvignon were highly praised by numerous
influential wine writers, while the Petite
Sirah was one of Calaveras’s oldest and best-known varieties.
All of Calaveras’s estate wines were sold
in the superpremium category.
2. Selected-vineyards wines were made from grapes purchased
from selected vineyards (under long-term
contracts), and aged and bottled separately to preserve their
special characteristics. The Chardonnay
was highly praised by numerous influential wine writers and
brought prestige to the Calaveras brand.
All selected-vineyards wines were sold in the superpremium
category.
3. California wines were made from medium-quality Calaveras
produce. This category was declining in
importance, as Calaveras was able to elevate its wines to a
higher status and pricing category under
either the estate or selected-vineyards programs.
4. Generic wines were made from lesser-quality produce of the
estates, selected-vineyards, and California

categories.
5. Special-accounts wines were made from surplus, lesser-
quality wine, and from non-varietal grapes. This
wine was sold under special programs to airlines, hotels, and
church parishes.
Exhibit 2 summarizes the breakdown of 1993 revenues among
these categories.
In recent years, Calaveras’ corporate owners had aimed to lift
the company out of the bulk-wine category
and into the premium-brand segment of the market. Dr. Lynna
Martinez joined Calaveras in 1987 in order to
develop and implement a strategy to reach this goal. Martinez’s
strategy called for developing estate wines that
would put the Calaveras brand in the premium category and
focusing the product line on a few premium
varieties of grapes. Accordingly, Calaveras introduced the
Sauvignon Blanc, Cabernet Sauvignon, and Petite
Sirah wines and reduced the number of varietal grapes grown at
the vineyard from 22 in 1987 to seven in 1994.
In 1990, Martinez introduced the Chardonnay to broaden
Calaveras’s position in the premium category. Having
attained the goal of moving Calaveras to the premium segment
of the wine market, management’s strategy now
called for cautious price increases and the development of the
special-accounts segment in order to use fully
Calaveras’s lesser-quality wines.
Calaveras management planned to adopt a new marketing
company upon consummation of the acquisition.
The new company, Winston-Fendall, was a well-established
wine marketer on the West Coast, where Calaveras
sales were strongest. Winston-Fendall had also just lost its
flagship account and promised to position Calaveras

in that capacity. The contract with the marketing company
called for Winston-Fendall to collect all receivables
on behalf of Calaveras and remit them to Calaveras. In addition,
Winston-Fendall would pay Calaveras any
2020.
Page 3 UV0255
receivables left unpaid after 90 days on a non-recourse basis.
Management believed these requirements would
relieve Calaveras of credit risk.
About two-thirds of Calaveras’s case sales were made through
its wholesale-distribution network, and the
remainder was sold directly to special commercial accounts,
including airlines and hotels. Its distributors sold
roughly 60% of Calaveras’s wholesale case sales to restaurants.
The remaining 40% was sold primarily to high-
end retail outlets. Calaveras management planned to make no
significant changes in its current wholesale
distribution network. All major distributorships expressed keen
interest in a continuing or increasing
relationship with Calaveras. Nine distributors handled 80% of
total volume, with two distributors in California
handling 50% of total volume.
Calaveras developed special commercial accounts with airline

and hotel companies, which represented sales
volume of approximately 15,000–25,000 cases a year. These
accounts permitted Calaveras to sell wine that
ordinarily would be sold in bulk. Because these were direct
sales, margins to Calaveras were higher than if the
cases had been sold through intermediaries. Gigantic Airlines, a
major national air-transportation company,
purchased 4,000 cases of this wine in 1987 and raised the
volume to 12,715 cases in 1993. At the same time,
free-on-board (FOB) prices increased from $21 per case in 1987
to $39.70 per case in 1993. Gigantic was
committed to a minimum of 16,500 cases in 1994 and told
management that future purchases should be no
less than 16,500 cases per year.
A common practice in the industry was to segment demand by
price, ranging from “Low Price” (under
$2.75 per 750-milliliter equivalent bottle at retail), “Economy”
($2.76–$4.25), “Popular” ($4.26–$5.75),
“Premium” ($5.76–$7.50), “Super Premium” ($7.51–$10.00),
and “Ultra Premium” ($10.01 and over).
Competition in the superpremium and premium wine segments
was fragmented. Nevertheless, management
identified several brands with characteristics similar to
Calaveras—namely, high visibility, a reputation based
on a well-respected brand and/or personality of the
owners/winemakers, and a competitive position in the
superpremium/premium segment. These competitors included
Clos du Val, Cakebread, Acacia, Sonoma-
Cutrer, and Jordan, all of which were privately owned and
typically secretive about their finances and operations.
Nationwide, demand for alcoholic beverages stagnated, and unit
sales of spirits declined. Dollar sales of
beer had grown only 2.2% in 1992—less than the rate of
inflation. Wine sales in supermarkets, however, had

grown 7.4%, in part because “…supermarket operators are
becoming increasingly sophisticated in their
selections of quality wines with higher price points, and
because they are doing a better job of merchandising.”2
Another source noted:
Domestic table wine, in particular, outshone the overall wine
market… In recent years, this category
was fueled by premium California varietals. American
consumers have increasingly been moving away
from the generic wines popular in the 1970s to the more
upscale, higher-quality varietal wines. Several
commercial wine manufacturers, most notably Gallo, Heublein,
and The Wine Group, have moved
into the premium varietal market to reap its profits. And that is
what they did in 1991. Both Gallo’s
Reserve Cellars and Heublein’s Blossom Hill posted double-
digit gains in 1991…3
Offering one unusual explanation for these sales improvements,
Standard & Poor’s noted:
Much of the gains can be traced to the continued effects of the
publicity surrounding the so-called
French Paradox—scientific studies indicating that while the
French consume 30% more fat per year
than do Americans, they have a 40% lower incidence of
coronary disease. The report gained widespread
2 Progressive Grocer (July 1993): 74.
3 Jobson’s Wine Marketing Handbook 1992 (New York: Jobson
Publishing Corporation, 1992), 6.

2020.
Page 4 UV0255
attention following a program on the subject that first aired on
CBS’s 60 Minutes in November 1991.
The show aired again in the summer of 1992. In the report, both
American and French doctors
suggested that the “paradox” could be related to the fact that the
French drink more wine than
Americans do. The researchers concluded that moderate
consumption of alcoholic beverages—
particularly red wine—could reduce the risk of heart disease by
as much as half. There has been a
significant upturn in wine sales, especially red wine, since the
60 Minutes report aired.4
Operations
The vineyard supplied about half the grape requirements of the
Calaveras winery. Exhibit 3 details the
acreage under production and the yield by variety of grape. To
fulfill its grape requirements, the new company
would assume two long-term supply contracts from Stout PLC.
Exhibit 4 outlines the purchase terms under
these contracts for 1993. Clemens learned that the price under
these long-term contracts was variable with the
market. She assumed that this year’s price per ton would be a
fair predictor of next year’s price, although the
uncertainty about the cost of goods meant that gross margins for

each of the product lines could vary by as
much as 4% up or down from target. She assumed that gross
margins had a standard deviation of 2%.
The production of wine from grapes entailed four main steps:
crushing, fermenting, aging, and bottling.
The winery was located on the vineyard property, with total
capacity of approximately 65,000 cases per year for
estate and selected-vineyards production. Although the winery
had adequate production capacity in most areas,
a moderate amount of fermentation, storage, and aging capacity
was leased from Seraphim Winery, a neighbor.
All finished bottled goods were also warehoused at Seraphim.
Management
Martinez, vice president and general manager of the property
for Stout PLC, headed management of the
new company. The operations manager, Peter Newsome,
remained in that capacity. Martinez purchased 85%
of the equity of the new company, and Newsome purchased the
remaining 15%. Exhibit 5 presents abbreviated
résumés for these individuals.
Historical financial performance
Stout PLC provided pro forma historical profit-and-loss
statements and balance sheets for Calaveras’s fiscal
years ended March 1990, 1991, 1992, and 1993. These
statements are presented in Exhibit 6. Management
believed that sales and operating profit were approximately as
follows:
1991 1992 1993
Sales $2,848 $2,836 $2,534
Operating cash flow $(54) $13 $260

(all values in thousands)
Sales increased from $2.4 million in 1990 to $2.8 million in
1991 and 1992, as Calaveras’s strategy of introducing
premium wines with increasing average prices began to show
tangible results. Sales dropped to $2.5 million in
1993, as Stout’s dismantling of its vineyard operations began to
have an impact on Calaveras’s volumes; in
particular, Calaveras had no effective sales organization
representing it. Operating cash flow improved
dramatically because of increased average prices for Calaveras
wines.
4 Standard & Poor’s Industry Surveys (August 26, 1993): F31.
2020.
Page 5 UV0255
Financial projections
Management developed a financial forecast with the assistance
of the prominent accounting firm Ernst and
Anderson. Forecast balance sheets, income statement, and
assumptions are given in Exhibits 7, 8, and 9,
respectively. Because many factors varied predictably with the

planned production level, the primary variable
was case revenues. Management developed what it believed was
a conservative projection of case sales, which
took into account three main factors: case-sales trends and
demand, inflation, and real price increases reflecting
Calaveras’s strengthening brand recognition.
Historical and projected case sales are given in Exhibits 10 and
11. Sales in Calaveras Vineyards’ first year
were expected to rebound to the levels of 1992, due to the
revitalization of the company’s marketing effort.
Case-sales forecasts for the second year and beyond predicted a
continuation of the increasing demand for
Calaveras’s estate Sauvignon Blanc, Cabernet Sauvignon, and
selected-vineyard’s Chardonnay, while
recognizing the constraints of vineyard and production capacity
for these and other varieties. Overall, this
displayed a shift in product mix toward white wines. Clemens
learned that the theoretical maximum capacity of
the winery was 110,000 cases per year. Without further
information, she assumed that, to sustain unit growth
shown in the forecasts, it would be necessary to invest $350,000
per year starting in 1996, rather than the
$250,000 per year shown in the loan-proposal forecast. The
forecast also showed an ambitious real growth rate
in unit prices of 2%. Clemens wondered how long real price
growth could continue, and generally believed that
it was an especially uncertain number.5 In defense of this
assumption, the proposal document pointed to the
strong past success of Martinez in elevating the winery’s brand
recognition and shifting the product mix into
the higher-price categories.
For the sake of comparison, Clemens’s assistant gathered
information on manufacturers of wine and
brandy (Exhibit 12). Unfortunately, few publicly listed “pure-

play” firms were comparable to Calaveras.
Clemens’s assistant identified three possible comparables, all
traded over-the-counter:
Canandaigua Wine Company was the second-largest producer
of wines in the United States, with sales
in 1993 of $471 million. Once derisively called “Chateau
Screwcap” and “a wino’s winemaker”6 for its
focus on low-price product segments, the firm was building a
record of solid growth and profit
improvement through the acquisition and consolidation of small
wineries. The firm was located in
upstate New York.
Finn & Sawyer Wine Company reached sales of $25 million,
and their headquarters operated out of
Mendocino, California. It operated four California vineyards
and produced only ultrapremium and
superpremium wines.
Frogg’s Jump Winery, Inc., had sales of $67 million and was
located in Livermore Valley, California.
This firm specialized in the production of private-label wines
for hotels, resorts, and airlines, and
serviced the higher-volume wine needs of wine-cooler
manufacturers and large religious organizations.
Valuation information about these firms included the following:
5 Indeed, Clemens believed that real price growth could vary
between +3% and 1% with equal probability.
6 Jay Palmer, “Sampling Chateau Screwcap,” Barron’s (July 20,
1992): 36.

2020.
Page 6 UV0255
Canandaigua
Finn & Sawyer
Frogg’s Jump
Beta (levered)7
0.59
1.35
0.95
Beta (unlevered)

0.54
1.312
0.867
Book value debt/equity ratio
0.86
0.12
0.35
Market value
debt/equity ratio
0.277
0.048
0.156
Market/book ratio

3.11
2.50
2.25
Price/earnings ratio
(on expected EPS)
14
13
15
Tax rate
38%
40%
39%

Expected EPS growth rate,
next 5 years
25%
11%
14%
Clemens was conscious of the fact that Calaveras was a
considerably smaller company than comparables, and
that, with the performance turnaround and change in
management, some conservative equity investors might
demand a venture-capital type of return from Calaveras. Target
venture-capital equity returns were at least 30%.
As for future financing, Clemens believed that Calaveras would
gravitate toward the industry-average capital
structure.
In the first quarter of 1994, long-term corporate interest rates
rose 150 basis points on fears of rising
inflation. Similarly, the stock-market indexes receded 4%.
Exhibit 13 gives a summary of historical rates of
inflation in recent years. Clemens learned that between 1926
and 1992 inflation averaged 3.1% per year and had
a standard deviation of 4.7%. Exhibit 14 presents information
on current capital-market conditions.
Conclusion
The specific terms of financing would need to be determined
through negotiations between the buyers and
their creditors. The NationsBank proposal, however,

contemplated the following structure at closing:
7 These betas taken from Value Line and author analysis. Such
betas are estimated by regressing the difference between return
on the company and
the risk-free rates of return against the equity-market premium
(calculated as the return on a large portfolio of stocks including
both large and small
capitalization companies less the risk-free rate of return).
2020.
Page 7 UV0255
Uses of Funds Sources of Funds
(in millions of dollars) (in millions of dollars)
Net working capital8 $2,116 Revolving loan $1,122
Land 1,124 Term loan 2,000
Plant and equipment 582 Equity investment 1,000
Organization expenses 300
Total uses $4,122 Total sources $4,122
NationsBank proposed that the revolving loan be secured by

accounts receivable and inventory. The
maximum commitment under the revolver would be $2.5
million, though the borrowing base (the amount
actually permitted to be outstanding under the loan) would be
equal to 85% of receivables and 75% of
inventories.9 The interest rate on the revolving loan would be
prime plus 2.0%. The term loan would amortize
equally over five years, and would be secured by land, plant,
and equipment. The interest rate on the term loan
would be prime plus 3.0%. The prime rate was currently
6.75%.10 As a rough initial assumption, Anne Clemens
decided to assume a total interest rate of 9.5% on both the
revolver and term loan. Clemens also assumed that,
over the long term, Martinez would lever Calaveras’s balance
sheet at levels typical for other wine-producing
companies, and Clemens proposed to use a discount rate
consistent with this assumption.
The proposal from Tom Howell noted that Calaveras was
currently carried on Stout’s books for
approximately $7 million, and the fair market value of the
assets of Calaveras was estimated to be $5 to
$7 million. Therefore, the purchase price for the assets of the
firm of $4.122 million represented a significant
discount.
Clemens needed to decide quickly whether to participate in this
deal, and how. Could the new company
service the debt? What was the value of the assets on both an
asset and a cash-flow basis? What were the “key
drivers” of these values, and how sensitive were the values to
variations in those assumptions? How attractive
was this deal from the standpoint of the equity investors?
Should she propose alternative terms, and if so, what
should they be?

As the sun set over the Pacific Ocean, Clemens decided to
tackle these questions with the help of her
assistant. After telephoning for supper from a nearby deli, she
booted up her computer and accessed the
spreadsheet model of the financial forecast that her assistant
had prepared.
8 Net working capital at closing was projected to be the sum of
cash ($50,000) and inventory ($2,196,000) less payables and
accruals ($130,000).
9 Privately, Clemens estimated that, in liquidation, a sale of the
plant and equipment would fetch a value equal to only 40% of
their gross book value.
10 Clemens believed that changes in the prime rate of interest
were normally distributed with a mean of zero and a standard
deviation of about 1.75%.
2020.
Page 8 UV0255
Exhibit 1
Calaveras Vineyards
Summary of Major Assets

Acreage: 220 gross acres
175 planted acres
Buildings: 8 structures (2 of wood frame and batten siding; 6 of
metal sides and roof, and concrete floor).
Grape-crushing equipment
Bottling equipment (@ 70 bottles per minute)
Cooperage: 40 stainless-steel tanks; 254,774 gallons capacity.
33 wooden tanks; 61,298 gallons capacity.
1,161 French oak barrels; 69,760 gallons capacity.
1,197 barrels used for generic wines; 63,667 gallons capacity.
Source: NationsBank offering document.
2020.
Page 9 UV0255
Exhibit 2
Calaveras Vineyards

Breakdown of 1993 Revenues by Product Category
Products Percentage of 1993 Revenues
Estates
Sauvignon Blanc (w) 13.8
Cabernet Sauvignon (r) 8.6
Petite Sirah (r) 4.5
Selected vineyards
Chardonnay (w) 30.0
Sauvignon/Fume Blanc (w) 4.9
White Zinfandel (w) 2.5
California
Petite Sirah (r) 8.1
Chenin Blanc (w) 1.6
Other (r) 0.4
Generic
White table wine 6.9
Red table wine 2.1
Special accounts (r,w) 16.6
Total 100.0
Note: “r” indicates a red wine; “w” indicates a white wine.
Source: NationsBank proposal document.

2020.
Page 10 UV0255
Exhibit 3
Calaveras Vineyards
Summary of Acres under Production and Tons per Acre by
Variety of Grape
Variety and Acres
Growing in 1993
1991 Tons/Acre
1992 Tons/Acre
1993 Tons/Acre
Sauvignon Blanc
(71 acres)
3.4

3.1
2.9
Semillon
(20.1 acres)
4.4
4.7
3.4
Chenin Blanc
(5.7 acres)
7.5
11.9
7.3
White Riesling
(7.8 acres)

3.0
2.4
1.4
Muscat Blanc
(0 acres)
2.7
0.8
0
White total
(107.15 acres)
3.7
3.7
3.0

Cabernet Sauvignon
(40.5 acres)
2.8
2.9
2.8
Petite Sirah
(26.7 acres)
2.9
2.7
2.2
Red total
(67.2 acres)
2.8
2.8

2.5
Grand total
(174.35 acres)
3.4
3.4
2.8
Notes: 1. Tonnage figures rounded from the actual. In 1989, 50
acres of the 175 were replanted. This acreage had not yet
reached full production.
2. The grand total tons/acre is a weighted average (by acres) of
the yield for red and white wine grapes.
2020.
Page 11 UV0255

Exhibit 4
Calaveras Vineyards
Summary of Purchases in 1993 of Grapes under Long-Term
Contract
Acres
Price/Ton
Tons
Years
Remaining
Pricing
Changes
Contract with Helsingor
Vineyards
Chardonnay
Sauvignon Blanc
Pinot Blanc

96.0
35.0
27.0
$750.76
469.90
$583.58
320
140
100
9 years
Variable
at market
Contract with Cleaver
Winery
Zinfandel

15.0
$412.90
50
3 years
Variable
at market
2020.
Page 12 UV0255

Exhibit 5
Calaveras Vineyards
Résumés for Martinez and Newsome
Lynna Martinez
Position Vice president/general manager and winemaker,
Calaveras Vineyard, Alameda California (1987–
present).
Education University of Burgundy, Dijon, France. Degrees:
Diplôme des Hautes Honneurs, Microbiology.
University of California at Davis. Degrees: M.S. Food
Science/Ph.D. Microbiology.
Experience
1980–81 Technical director—Casa Blanca Winery, Trujillo,
Mexico
1981–84 Technical director/winemaker—Domaine Millar,
Fresno, California
1984–87 Winemaker—Bullion Vineyards, La Plata, California
Other Training in family-owned winery and distillery. Teaching
and …

Executive Summary As a deep-discount brokerage company, Ame.docx

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