VALUING A TOBACCO BRAND: THE CASE OF MATRIX
Swiss German Tobacco plans to introduce a new tobacco brand in the Czech Republic. The company has been operating in the country until 2007, when a currency crisis has taken the country out of a euro peg, and into a dollarization of the economy. The new brand is to be labeled "Matrix", as a glamour product targeted to a sophisticated segment, and competing with already established Kent Nanotek, manufactured by British American Tobacco. The question of whether to introduce the brand or not boils down to a valuation exercise, where the major inputs are: the expected demand for the product, driven by population growth; the prospects for tobacco in the country; and technical requirements in production and distribution. Participants are confronted sequentially with these challenges. Learning objectives: This is acapital budgeting and investment selection case, a comprehensive exercise of a Tobacco firm that designs a new brand, which is to be introduced in the market. It is a good illustration of the Free Cash Flow technique, used here for investment appraisal throughout a series of seven challenges.