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TB0459 Copyright © 2016 Thunderbird School of Global Management, a unit of the Arizona State University Knowledge Enterprise. This case was written by Professor Michael H. Moffett with the research assistance of Jeeku Saha, MBA ’16, for the sole purpose of providing material for class discussion. It is not intended to illustrate either effective or ineffective handling of a managerial situation. Any reproduction, in any form, of the material in this case is prohibited unless permission is obtained from the copyright holder. Michael H. Moffett Ferrari: Valuing The Prancing Horse While we will continue to pursue a low volume production strategy and maintain our reputation for exclusivity, we intend to respond to growing demand, both in emerging markets as well as in response to demographic changes and the growth in the size and spending capacity of our target clients. We believe we can grow in a controlled manner while preserving the exclusivity of our brand by continuing to focus on distinct market segments and maintaining a strong pipeline of new car launches. – New Business Netherlands N.V., Form F-1, U.S. Securities and Exchange Commission, Ferrari Prospectus, p. 79. Project Owl — the code name for the initial public offering (IPO) of Ferrari—was over. Officially, in all of the documents filed with authorities like the U.S. Securities and Exchange Commission, the company had been called New Business Netherlands N.V. , now to be renamed Ferrari N.V. The prancing horse had opened at the top end of its target price range—$52 per share in the U.S.—raising nearly $1 billion for Ferrari’s owner, Fiat. Like most IPOs, the share price of RACE (the ticker symbol for Ferrari) settled in the weeks following the launch. But now many analysts and mutual fund managers were all asking the same thing: Was Ferrari a promising equity or simply another of the equity eye candy IPOs to hit the market in recent years? The Ferrari Legacy If you can dream it, you can do it. – Enzo Ferrari Ferrari was the namesake of Enzo Ferrari. An automotive engineer his entire life, Enzo worked with Alfa Romeo for many years, performing every possible function including lathe instructor, test driver, racing driver, and eventually, serving as the director of the Alfa Corse racing division. In 1929, Enzo founded Scuderia Ferrari in Modena, Italy. Scuderia was a racing stable , where owners could drive and compete with their own cars. Enzo left Alfa Romeo in 1939 to open his own firm, Avio Costruzioni on Viale Trento Tieste in Modena (the plant was eventually moved to Maranello). After the forced hiatus during the Second World War, Ferrari launched the 125 S in 1947, and on May 25, 1947, the Ferrari 125 S won its first race, the Rome Grand Prix. Ferrari has since won more than 5,000 races worldwide. The financial pressures of sustaining the growing high-powered Ferrari family of cars resulted in Enzo partnering with the Fiat Group in 1969; Fiat initially taking a 50% interest, then increasing it to 90% in 1988. Enzo’s remaining 10% ownership was passed to his son in that same year with his death. It was now the Fiat Group and its family interests that sustained Enzo Ferrari’s legacy. That legacy was now led by Fiat’s new CEO, Sergio Marchionne. Core Characteristics Ferrari believed it possessed a number of core pillars , characteristics that formed the foundations of its value and value-growth potential. 1 • An iconic brand with superior, enduring power, benefiting from a loyal customer base. • Global access to growing wealth creation. 1 New Business Netherlands N.V., Form F-1, U.S. Securities and Exchange Commission, Ferrari Prospectus, p. 24. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

2 A06-16-0010 • Exceptional pricing power and value resilience. • Racing heritage. • Leading-edge engineering capabilities. • Flexible and efficient development and production process. • Strong and resilient financial performance and profile. • Superior talent. And in the end, leadership at Ferrari intended to achieve profitable growth by pursuing, in its own words— controlled growth in developed and emerging markets . Powerful Brand Ferrari is the world’s most powerful brand. The legendary Italian carmaker scores highly on a wide variety of measures on Brand Finance’s Brand Strength Index, from desirability, loyalty, and consumer sentiment to visual identity, online presence and employee satisfaction. Ferrari is one of only eleven brands (including Google, Hermès, Coca-Cola, Disney, Rolex, and F1 racing rivals Red Bull) to be awarded an AAA+ brand rating and has the highest overall score. Though Ferrari is the world’s most powerful brand, being a niche, luxury brand with an officially capped production, it is perhaps unsurprising that it is some way off being the world’s most valuable. Its US$4 billion brand value puts it 350th in brand value terms. David Haigh continues, “Apple also has a powerful brand, rated AAA by Brand Finance. However, what sets it apart is its ability to monetize that brand.” 2 Ferrari’s brand— powerful, yet not one of the most valuable—was part of its enigma. Management at Ferrari saw this as a true market differentiator. Shares in Ferrari would not be valued in the marketplace like traditional automotive shares, but rather as shares in a powerful, sustainable, luxury good. But as Brand Finance noted, a powerful brand was not the same thing as a valuable brand. Markets would decide that. Limits to Growth We pursue a low-volume production strategy in order to maintain a reputation of exclusivity and scarcity among purchasers of our cars and deliberately monitor and maintain our production volumes and delivery wait-times to promote this reputation. – New Business Netherlands N.V., Form F-1, U.S. Securities and Exchange Commission, p. 22. Like other rare elements, Ferrari’s value was linked to its scarcity . As illustrated in Exhibit 1, Ferrari had methodically controlled volume sales, averaging just 4.24% per year over the 1997-2014 period. Sales growth had been even slower in recent years, even the post-2009 crisis period. Total sales volume in 2014 was 7,255 cars—an astonishingly small number by any automobile standard. Scarcity premiums. In terms of preserving Ferrari’s value, this relative scarcity was both good news and bad news. The good news was that leadership had clearly maintained the product’s relative scarcity in a global economy that had grown faster and wealthier at a much more rapid rate. According to a recent study, the number of high net-worth individuals (HNWIs) and their wealth, the target demographic segment for Ferrari sales (at least historically), had grown 8.6% per annum for nearly 30 years. 3 The countries driving Ferrari’s sales reflected that wealth creation. Sales volumes in 2014 were roughly 45% Europe/Middle East/Africa (EMEA), 35% the Americas, 11% Asia Pacific (APAC), and 9% Greater China. This global sales mix seemed to be shifting slightly away from EMEA, with China and APAC garnering the gains. (Global sales volumes are detailed in Appendix 4.) Diving deeper, four countries made up 60% of this global HNWI population: the United States, Japan, Germany, and China. 2 http://brandfinance.com/news/ferrari—the-worlds-most-powerful-brand/. 3 Capgemini/RBC World Wealth Report, 2015 . HNWIs are defined as an individual having investable assets of USD 1 million or more, excluding primary residence, collectibles, consumables, and consumer durables. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

A06-16-0010 3 In its prospectus, Ferrari was quite bullish on HNWIs in China. Although China made up only 9% of current sales, the growing wealth and taste for luxury goods in China was promising. China already made up a very large piece of the total sales (2014) for a number of luxury goods producers: Hermes—25%; LVMH—28%; and Prada—30%. 4 If that were the case for Ferrari, the company could see growing demand pressures. But there were skeptics, as a number of analysts worried that the Chinese economy was already beginning to slow. The bad news about this relative scarcity through slow growth was that 4% was not a promising growth rate for an equity if sales and earnings did indeed follow volume growth rates. Publicly traded shares generated income for investors two ways, through dividend yields and capital gains. But with no plans to offer dividends, Ferrari’s value proposition relied exclusively on hoped-for capital gains. Investors in equities typically demanded double-digit rates of return. Differing perspectives on growth had also caused serious debate within Ferrari. Ferrari’s longtime Chairman, Luca De Montezemolo, had left the firm suddenly in early 2015, reportedly over his opposition to the IPO. Montezemolo believed the IPO would force the firm to grow sales volumes at a much more rapid rate. (Montezemolo did receive a €15 million severance payment.) His resignation came only one month prior to Fiat’s announcement of Ferrari’s IPO. Ferrari’s CEO, Sergio Marchionne, had repeatedly stated publicly that Ferrari’s future was as a business, not art: There comes a point when exclusivity, if it becomes unreachable, is no longer exclusivity, it’s like you’re reading a fiction novel…let’s not fool ourselves, we are in the business of selling cars to people. Regulatory limits. There was an even more challenging limit to future growth: European Union (EU) and U.S. government emission and mileage limitations. Ferrari was classified by the EU as a small volume manufacturer (SVM), and therefore subject to much less stringent emission requirements. The EU has, however, been revising these restrictions for the 2017-2021 period, and continued risks and threats to Ferrari persist. Ferrari will be submitting its emissions plan for the 2017-2021 period in the coming year. Under current U.S. law, as long as an automobile manufacturer sold fewer than 10,000 units globally per year, it was not subject to U.S. gasoline mileage targets and restrictions. If Ferrari broke that 10,000 unit barrier, 4 “The Ferrari Bond: Initiate Overweight at $56 PT,” Morgan Stanley, December 7, 2015, p. 9. Morgan Stanley also noted that although China was important for many luxury goods makers, Ferrari had a relatively low level of exposure to the Chinese market at this time. Exhibit 1. Ferrari’s Sales Volumes Source: New Business Netherlands N.V., Form F-1, U.S. Securities and Exchange Commission, Ferrari Prospectus, p.31. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

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4 A06-16-0010 however, the car could not be sold in the U.S. market without the company altering its product mix to reach fleet mileage targets. That would mean launching models with smaller engines and better mileage. In its prospectus, Ferrari noted that it had petitioned the EPA for alternative standards for the 2017-2019 period, and would thereafter apply to the National Highway Traffic Safety Administration (NHTSA) for company- specific standards under the combined average fuel economy (CAFÉ) clause. In both cases, Ferrari noted that it expected “to benefit from a derogation from currently applicable standards.” 5 In addition, it was rumored that development of an electrically powered version was underway, which would aid in meeting fleet targets. Porsche, for example, had just announced a purely electrically powered model. Financial Performance Ferrari’s financial results, summarized for the 2012-2014 period in Exhibit 2, revealed several unique features. First, the company had a relatively small product portfolio, consisting of eight vehicles that accounted for 70% of total revenue. Its sales and rentals of engines was exclusively to Maserati (it had supplied engines to Maserati since 2003), and its other sponsorship income was tied to Formula 1 racing. Yet, Ferrari’s R&D expenses were exceedingly high compared to any other automobile manufacturer, as illustrated by Exhibit 3. 6 Where R&D expenses as a percentage of sales averaged less than 5% for most of the global industry, Ferrari’s were over 20%. Porsche, a distant second, was only 11%. 7 Ferrari’s premium pricing and minimalist cost structure resulted in a gross margin that was more like a Silicon Valley internet firm than an automobile manufacturer. As illustrated in Exhibit 4, Ferrari’s gross margin— net revenues less direct costs—was 45.5% in 2014, more than double that of any other major automobile company. That large gross margin in turn generated an extremely large operating margin (EBIT as a percentage of sales) of 14.1%, again the highest in the industry. The spread between the two margins, gross less operating, was—at 31%--delivering financial results far beyond an automaker. That same spread averaged only 12% amongst a peer group of luxury automobile 5 New Business Netherlands N.V., Form F-1, U.S. Securities and Exchange Commission, Ferrari Prospectus, p. 43. 6 Note that Exhibit 3 includes R&D expenses as occurring on the income statement as well as other R&D expenditures that are capitalized, and therefore run through the cash flow statement as opposed to income. 7 “Ferrari IPO: Why This Engine Runs Too Rich,” by Abheek Bhattacharya, The Wall Street Journal , October 20, 2015. Exhibit 2. Results of Operations (for the years ending December 31) Millions of euros 2012 Percentage of net revenues 2013 Percentage of net revenues 2014 Percentage of net revenues Cars and spare parts € 1,695 76.2% € 1,655 70.9% € 1,944 70.4% Engines 77 3.5% 188 8.1% 311 11.3% Sponsorship, commercial and brand 385 17.3% 412 17.6% 417 15.1% Other 68 3.1% 80 3.4% 90 3.3% Total net revenues € 2,225 100.0% € 2,335 100.0% € 2,762 100.0% Net revenues 2,225 100.0% 2,335 100.0% 2,762 100.0% Cost of sales (1,199) -53.9% (1,235) -52.9% (1,506) -54.5% Selling, general and administrative (243) -10.9% (260) -11.1% (300) -10.9% Research and development (431) -19.4% (479) -20.5% (541) -19.6% Other expenses, net (17) -0.8% 3 0.1% (26) -0.9% EBIT € 335 15.1% € 364 15.6% € 389 14.1% Net financial income (expenses) (1) 0.0% 2 0.1% 9 0.3% Profit before taxes 334 15.0% 366 15.7% 398 14.4% Income tax expenses (101) -4.5% (120) -5.1% (133) -4.8% Net profit € 233 10.5% € 246 10.5% € 265 9.6% Source: Form F-1 Registration Statement, New Business Netherlands N.V., p.52 This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

A06-16-0010 5 manufacturers, and was twice that of other major players. 8 This despite the fact Ferrari was dwarfed by the others in terms of size in vehicles sold, employees, revenues, or even total profits. The growing debate was whether Ferrari could maintain those margins over the next five to seven years as it continued to grow volume sales. Some analysts argued that as volume sales grew, R&D expenses as a percentage of revenues would not grow as fast, as the company enjoyed scale benefits of previous investment. That, if true, would translate into a growing operating margin for the company. Other analysts, however, argued that the company would struggle to maintain its current investment and expense structure as it worked hard to maintain its performance edge and brand value. The IPO Ferrari’s IPO on Tuesday, October 20, 2015, was by all standards a huge success. Of the 189 million shares authorized in Ferrari’s incorporation, 17.2 million (9.1%) were sold to the public. At a launch price of $52 per share, Fiat raised $894.4 million. The over-subscription allowance raised another $28.6 million, bringing the total to $923 million. 8 “Ferrari Does Not Stand for ‘Fix It Again Tony’,” ADW Capital Management, LLC, August 2015, p. 8. Exhibit 3. R&D Expenditures as a Percentage of Revenue Source: The Wall Street Journal and company reports. Expenditures includes R&D expenses and capitalized expenditures. Exhibit 4. Comparison of Financial Margins of Selected Automotive Manufacturers, 2014 Millions of €, $, and ¥ Ferrari Volkswagen GM Toyota Ford Fiat Daimler BMW Audi Revenues € 2,762 € 202,458 $155,929 ¥25,691,911 $135,782 € 96,090 € 129,872 € 80,401 € 53,787 Gross profits € 1,256 € 36,524 $17,847 ¥5,703,666 $12,266 € 12,944 € 28,184 € 17,005 € 9,372 Gross margin 45.5% 18.0% 11.4% 22.2% 9.0% 13.5% 21.7% 21.2% 17.4% Operating profits € 389 € 12,697 $1,530 ¥2,292,112 $2,023 € 3,223 € 8,789 € 9,118 € 5,150 Operating margin 14.1% 6.3% 1.0% 8.9% 1.5% 3.4% 6.8% 11.3% 9.6% Profit after tax € 265 € 11,068 $4,018 ¥1,823,119 $3,187 € 632 € 7,290 € 5,817 € 4,428 Net margin 9.6% 5.5% 2.6% 7.1% 2.3% 0.7% 5.6% 7.2% 8.2% Gross Margin-Operating Margin 31.4% 11.8% 10.5% 13.3% 7.5% 10.1% 14.9% 9.8% 7.8% Vehicles 7,255 10,212,562 9,925,000 9,032,000 6,323,000 5,640,000 2,500,000 2,117,965 1,741,100 Employees 2,858 592,586 216,000 330,000 187,000 225,587 279,857 116,324 68,804 Vehicles/employee 2.5 17.2 45.9 27.4 33.8 25.0 8.9 18.2 25.3 Source: Calculations by author based on company annual reports. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

6 A06-16-0010 One of the drawbacks associated with the IPO was that the capital raised was not targeted for reinvestment into the business, as was common in many IPOs, but rather to compensate existing owners (Fiat) for reducing their interest. For a company that believed in investing in technology, this was a loss. Valuing Ferrari There are two basic valuation methodologies applicable to Ferrari: discounted cash flow (DCF) and valuation with comparables. DCF Valuation A baseline discounted cash flow (DCF) valuation of Ferrari is presented in Exhibit 5. Based on the income items provided by Ferrari and previously presented in Exhibit 2, the DCF valuation is driven by top-line growth. The analysis is based on a 10-year outlook, assuming 2015 as year 0. Volume growth . Ferrari’s leadership team assured investors of slow volume growth, explicitly committing to just under 9,000 units by 2019. That translated to an annual growth rate of 4.4% beginning with the 2015 volume of 7,500. Price growth . Ferrari has provided some insight into the potential of automobile price growth, repeatedly noting it was “committed to raising the average price point” of its products. Assuming that the scarcity discipline towards volume growth is maintained, and attention is focused on maintaining a four-month waiting period for orders, the baseline analysis assumes that price may grow 2% per year. It is possible, however, that more aggressive annual price increases of 3% to 4% may be achievable. Other revenues . Ferrari’s income from the sale of engines to Maserati, rental incomes, and sponsorship associated with the brand are all expected to grow a moderate 3% per year. Formula 1 income, a small component that leadership believes is critical to the brand, is only expected to grow 1% annually. Cost of sales changes and gross margin . Ferrari purchases from a small set of suppliers working under relatively long contracts. It employed 2,858 workers, and turnover was low. Labor costs and costs of sales were expected to grow at 2.1% per annum in the baseline analysis. SG&A and R&D expenses . This was in the eyes of many the second most critical valuation component behind that of volume sales. If SG&A and R&D expenses both only grew at 2.0% and 2.5%, respectively, per annum, reflecting what many analysts believed to be the company’s cost discipline and strategy moving forward, Ferrari’s operating margin would indeed grow considerably over the 10-year forecast period. Depreciation and capex . In its prospectus, Ferrari noted that there would likely be little additional investment in plant and equipment necessary for expanding volume production in the coming years. The company considered itself inherently agile, production increases were nominal in size, and sufficient capacity existed. At the same time, historical financial statements indicated continuing capital investments in both PP&E and intangible assets (intellectual property and related engineering knowledge). Ferrari included depreciation in its line item for research and development on its income statement (Appendix 1). Depreciation expenses had totaled €120 million in 2013, €126 million in 2014, and were expected to total €130 million in 2015. The DCF baseline analysis assumed no growth from 2015 levels in line with management’s direction. However, many analysts believed capital investment has to grow, at least in line with direct costs, if Ferrari is to maintain its technological edge. Capex and depreciation were assumed equal in size in the valuation analysis. Net working capital . Ferrari’s net working capital (NWC) was unusually long in duration due to its dealer network financing program. Ferrari provided extremely low-cost loans to its dealerships (independently owned businesses) to aid in their purchase of the automobiles for resale. The loans were typically secured by the titles to the cars or other collateral. Total receivables, trade receivables for the cars themselves, and receivables from financing activities, loans to the dealerships, had averaged 180 days of sales in 2014. Ferrari’s hand-crafted manufacturing This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

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A06-16-0010 7 Exhibit 5. Discounted Cash Flow Valuation of Ferrari (Baseline Analysis) Forecast periods 0 1 2 3 4 5 6 7 8 9 10 Millions of Euros Assume 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Automobile sales: Ferrari sales volume (units) 6,922 7,255 7,500 7,830 8,175 8,534 8,910 9,302 9,711 10,138 10,584 11,050 11,536 Sales volume growth 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% Ferrari average sales price (€) € 239,093 € 267,953 € 273,312 € 278,778 € 284,354 € 290,041 € 295,842 € 301,759 € 307,794 € 313,950 € 320,229 € 326,633 € 333,166 Sales price growth 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Car sales and spare parts € 1,655 € 1,944 € 2,050 € 2,183 € 2,324 € 2,475 € 2,636 € 2,807 € 2,989 € 3,183 € 3,389 € 3,609 € 3,843 Revenues (millions of euros): Cars and spare parts € 1,655 € 1,944 € 2,050 € 2,183 € 2,324 € 2,475 € 2,636 € 2,807 € 2,989 € 3,183 € 3,389 € 3,609 € 3,843 Engine sales to Maserati and rentals 3.0% 188 311 320 330 339 350 360 371 382 394 405 418 430 Sponsorship, commercial and brand 3.0% 412 417 430 443 456 470 484 498 513 529 545 561 578 Other Formula 1 and financial income 1.0% 80 90 91 92 93 94 95 96 97 98 99 100 101 Total net revenues € 2,335 € 2,762 € 2,891 € 3,047 € 3,213 € 3,389 € 3,575 € 3,772 € 3,981 € 4,203 € 4,438 € 4,687 € 4,952 Cost of sales (1,235) (1,506) (1,536) (1,568) (1,601) (1,635) (1,669) (1,704) (1,740) (1,777) (1,814) (1,852) (1,891) 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% Gross margin € 1,100 € 1,256 € 1,355 € 1,479 € 1,612 € 1,754 € 1,906 € 2,068 € 2,241 € 2,426 € 2,624 € 2,836 € 3,061 Gross margin (%) 47.1% 45.5% 46.9% 48.5% 50.2% 51.8% 53.3% 54.8% 56.3% 57.7% 59.1% 60.5% 61.8% Selling, general and administrative 2.0% (260) (300) (306) (312) (318) (325) (331) (338) (345) (351) (359) (366) (373) Research and development 2.5% (479) (541) (522) (535) (548) (562) (576) (591) (605) (620) (636) (652) (668) Other expenses, net 2.0% 2 (26) (27) (28) (28) (29) (29) (30) (30) (31) (32) (32) (33) EBIT € 363 € 389 € 500 € 604 € 717 € 838 € 969 € 1,110 € 1,261 € 1,423 € 1,598 € 1,786 € 1,987 EBIT margin (% ) 15.5% 14.1% 17.3% 19.8% 22.3% 24.7% 27.1% 29.4% 31.7% 33.9% 36.0% 38.1% 40.1% Discounted Cash Flow Analysis EBIT € 604 € 717 € 838 € 969 € 1,110 € 1,261 € 1,423 € 1,598 € 1,786 € 1,987 Income tax expenses 33.5% (202) (240) (281) (325) (372) (422) (477) (535) (598) (666) Net operating cash flow after-tax 402 477 557 644 738 838 947 1,063 1,187 1,321 Add back depreciation 2.0% 130 133 135 138 141 144 146 149 152 155 Capex 2.0% (130) (133) (135) (138) (141) (144) (146) (149) (152) (155) Changes in net working capital* 180/70/130 (72) (76) (81) (86) (92) (97) (103) (110) (117) (124) Terminal value (& growth rate) 0.0% - - - - - - - - - 13,784 Free cash flows for discounting € 330 € 400 € 476 € 558 € 646 € 741 € 843 € 953 € 1,071 € 14,982 Cost of capital (WACC) 8.6860% Present value of cash flows € 10,269 Less market value of debt (510) Use Terminal Value? (0 no, 1 yes) 1 Equity value (millions of €) € 9,759 Terminal Value as % of NPV 61% Shares outstanding (millions) 189 $ per € Value per share € 51.64 which at 1.100 equals $56.80 Note: Changes in net working capital (NWC) estimated assuming 180 days for A/R, 70 days Inventory, and 130 days for A/P for the 2015 through 2025 period. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

8 A06-16-0010 had averaged inventory levels of 72 days of cost of sales, and trade payables at 130 days of cost. The baseline DCF analysis therefore assumed 180/70/130 days in A/R, inventory, and A/P going forward. Terminal Value . Most valuations assume a business like Ferrari will continue to operate for many years. Instead of building 50 or 100 years (columns) of cash flow calculations in a spreadsheet, most valuations use a terminal value (TV) to approximate that continuing cash flow far into the future. For calculation purposes, the TV in Exhibit 5 uses the typical perpetuity calculation form. In an attempt to be conservative with the TV, net free cash flow (NFCF)—the sum of net operating cash flow after-tax plus depreciation, capex, and changes in working capital—is assumed to grow at 0% for all years past 2025. The TV for the baseline case, using the corporate cost of capital (discussed below) as the discount rate and assuming a 0% perpetuity growth rate is €13,784 billion: Note that despite using conservative assumptions, TV still makes up 61% of the total NPV. Cost of Capital The final component of the valuation was the calculation of a weighted average cost of capital (WACC) for Ferrari. This was, of course, challenging given that the company was just now moving from being privately held to being publicly traded. Debt. Estimates were needed for two costs of debt, both euro-denominated. 9 The first was the baseline cost of debt in the European Union and euro-denominated markets, the 10-year German government bond rate. This was considered the risk-free rate of interest in the euro markets (k RF ), and was currently at 4.000%. The second cost of debt needed was for Ferrari itself (k D ). Although the firm had incurred little debt of its own to date, European banks were quoting the company a rate of 6.000% (therefore, a 2.000% credit spread over the risk-free rate). With an effective tax rate of 33.5%, the after-tax cost of debt was 3.990%. Equity. To estimate the cost of equity (k e ) using the capital asset pricing model (CAPM), assumptions need to be made about the risk-free rate of interest (k RF ), the market risk premium (MRP m ), and Ferrari’s beta ( β ). The cost of equity was then calculated as the risk-free rate plus a beta-adjusted market risk premium: Cost of equity = k e = k RF + β x MRP m The risk-free rate was 4.000%, and the market risk premium (MRPm), the average spread of expected returns on equities in Europe over and above the risk-free rate, was currently assumed to be about 5.500%. Estimating Ferrari’s beta ( β ) was in many ways guesswork with no real trading history. A company’s beta was measured over time, statistically, as the covariance of the company’s return with that of the market, divided by the variance of the market return. By definition, the beta of the market was 1.0. A firm with returns that were relatively less volatile than the market might have a beta less than 1, typically between 0.6 and 1.0. A firm demonstrating more volatile returns than the market may have a beta as high as 1.8 or more. With no history, and no clear conclusion over whether Ferrari was an automaker or a luxury good in the eyes of the market (at least yet), a conservative assumption was a beta of 0.9. The resulting cost of equity was 8.950%. Cost of equity = k e = 4.000% + (0.90 x 5.500%) = 8.950% As illustrated in Exhibit 6, current estimates of the market cost of debt and equity were used to calculate a weighed average cost of capital (WACC). Ferrari’s capital structure was largely equity, with interest-bearing debt outstanding of €510 million, representing only 5.3% of its capital structure. Note that this analysis calculates Ferrari’s equity value on its market value, meaning equity value is the company’s market capitalization, the share 9 Interest rates are currency-specific. Given that the valuation of Ferrari was to be made in euros, interest rates for Ferrari’s debt would have to be euro-denominated as well. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

A06-16-0010 9 price of €48 per share (market close on December 31, 2015) for the 189 million shares outstanding. The WACC was calculated as 8.686%. Using the calculated WACC for Ferrari and its projected cash flows, the baseline DCF analysis in Exhibit 5 estimated a present value of net operating cash flows of €10.269 billion. The present value of all projected operating cash flow accruing to equity was €9.759 billion after netting the €510 million in company debt. Given 189 million shares, this was a per share value of €51.64 ($56.80 at $1.10 per euro). Further sensitivity and scenario analysis was obviously needed to provide more of a range and context for the DCF valuation. Valuation with Comparables What is the most expensive stock in the world? If you asked a trader, his answer until Tuesday would have been, without hesitation: Hermes. The luxury house trades at 34 times 2015 forecast earnings. But yesterday, when luxury sports car maker Ferrari debuted as a rocket on Wall Street, the answer would have been different. At $60 per share, a level hit at the opening, Ferrari is the new queen of luxury: 35 times 2015 forecast earnings. – “Mission Accomplished: Ferrari Debuts at Hermes Multiples,” Italy24, October 22, 2015. A second valuation methodology widely used by investors and analysts was comparable multiples . A comparable was any business or firm that would be considered a close competitor. A comparable valuation multiple is any form of comparison across companies using a ratio or multiple of other financial values. When valuing companies, this typically involves combining a market-based value measure, like share price, with a financial statement value, like earnings or cash flow. One of the challenges in using multiples is always what to conclude from the numbers. A firm having a higher value than the average of the market or its industry could be reflecting the market’s conclusion that the firm is in some way superior to the average, reflecting a price premium that may persist. Alternatively, it might be that the higher value reflects a short-term mispricing of the firm’s shares in the market, and if the market is rational and logical in its movements over time, the firm’s share price should then return to near the average of the market in the near future, the so-called reversion to the mean . One of the most widely used multiples was the price-to-earnings ratio (PE), the ratio of an equity’s current market price per share to the firm’s earnings per share. If the calculation used the company’s most recently reported earnings, it was termed PE or trailing PE . Alternatively, if the PE was calculated using some estimate of the firm’s future earnings, usually 12 months into the future, it was termed Forward PE . Exhibit 7 provides a collection of price-based multiples for Ferrari in January 2016. These multiples would seem to support Ferrari’s management argument that the company was, in the eyes of the marketplace, valued more like a luxury good brand rather than a traditional automobile manufacturer. Although final financial results for 2015 were not yet available, earnings were thought to be €1.58 per share. Consensus estimates of 2016 earnings for Ferrari (future earnings) were approximately €1.69 per share. A second multiple widely used in industry was the Enterprise Value (EV) to EBITDA multiple. Enterprise value is the sum of the current market value of the company’s debt and equity less cash. Many practitioners prefer the EV/EBITDA multiple over PE ratios because of the belief that PE ratios are affected by company capital structures (and all capital structures are different), whereas EV/EBITDA is not. The consensus forecast for Ferrari’s 2016 EBITDA was €800 million. Exhibit 6. Ferrari’s Hypothetical Cost of Capital (in millions or percent) Debt Value Equity Value Capital Structure Value Weight Cost Cost Cost of debt 6.000% Risk-free rate 4.000% Debt value € 510 5.3% 3.990% 0.212% Tax rate 33.500% Beta 0.90 Equity value * € 9,072 94.7% 8.950% 8.474% Market risk premium 5.500% Enterprise value € 9,582 100.0% Cost of debt after-tax 3.990% Cost of equity 8.950% Weighted average cost of capital (WACC) 8.686% * Uses share price of € 48 per share (closing price December 31, 2015) and 189 million shares outstanding. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

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10 A06-16-0010 If Ferrari was indeed more of a luxury good than an automaker, then its financial performance needs to be evaluated in that comparable context. Exhibit 8 offers one such comparison. Here, Ferrari’s EV/EBITDA multiple is compared to a multitude of European luxury goods sellers. Horse Trading The expression horse trading has long meant that negotiating the price of anything—including a horse—was complicated, as the determination of true value was very difficult. Ferrari had now been publicly traded for more than 12 weeks, giving the market time to digest the IPO and form an opinion on the company. But, as illustrated by Exhibit 9, Ferrari’s share price had largely slid since the IPO. Down nearly 30%, many analysts were coming to the conclusion that Ferrari had indeed been a one-trick pony —and the market had seen the trick. Exhibit 8. Ferrari’s EV/EBITDA vs. European Luxury Peers Source: Ferrari NV: The Ferrari ‘Bond’, Initiate Overweight With $56 PT, Morgan Stanley Research, December 7, 2015, p.47. Exhibit 7. Ferrari’s Market Value in Multiples Auto Industry Luxury Industry 21 January 2016 Ferrari Daimler BMW Auto Hermes LVMH Luxury Multiple (RACE) (DDAIF) (BAMXY) Industry (HESAY) (LVUMY) Industry S&P500 Price to Earnings 31.7 9.1 9.3 11.7 33.0 12.6 20.2 19.0 Price to Earnings Forward 18.8 7.4 8.4 --- 24.9 15.5 --- 17.2 Price to Book Value 3.1 1.4 1.3 1.4 9.4 3.1 3.1 2.7 Price to Sales 2.9 0.5 0.6 0.5 6.8 2.2 1.7 1.8 Price to Cash Flow 12.5 0.0 35.3 0.1 29.1 20.9 12.7 11.5 Dividend Yield 0.0% 3.7% 3.8% 2.3% 1.0% 2.3% 2.4% 3.0% Price per share (USD) $41.94 $71.49 $28.80 --- $32.98 $31.09 --- --- USD to = 1 EUR 1.0814 Price per share (EUR) € 38.78 € 66.11 € 26.63 --- € 30.50 € 28.75 --- --- Source: Data collected from Yahoo, Morningstar, JPMorgan, S&P, The Wall Street Journal . This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

A06-16-0010 11 Exhibit 9. Ferrari’s Share Price Since IPO (NYSE: RACE) Source: Constructed by author from closing shares prices for RACE as quoted by Yahoo.com This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

12 A06-16-0010 Appendix 1. New Business Netherlands N.V. Consolidated Income Statement For the years ended December 31, (€ thousand) 2014 2013 2012 Net revenues 2,762,360 2,335,270 2,225,207 Cost of sales 1,505,889 1,234,643 1,198,901 Selling, general and administrative costs 300,090 259,880 242,819 Research and development costs 540,833 479,294 431,456 Other expenses/(income), net 26,080 -2,096 16,534 EBIT 389,468 363,549 335,497 Net financial income/(expenses) 8,765 2,851 -898 Profit before taxes 398,233 366,400 334,599 Income tax expense 133,218 120,301 101,109 Net profit 265,015 246,099 233,490 Net profit attributable to: Owners of the parent 261,371 240,774 225,403 Noncontrolling interests 3,644 5,325 8,087 Source: Form F-1 Registration Statement, New Business Netherlands N.V., p.373. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

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A06-16-0010 13 Appendix 2. New Business Netherlands N.V. Consolidated Statement of Financial Position At December 31, (€ thousand) 2014 2013 Assets Goodwill 787,178 787,178 Intangible assets 265,262 242,167 Property, plant and equipment 585,185 567,814 Investments and other financial assets 47,431 37,911 Deferred tax assets 111,716 41,543 Total nooncurent assets 1,796,772 1,676,613 Inventories 296,005 237,496 Trade receivable 183,642 205,925 Receivables from financing activities 1,224,446 862,764 Current tax receivable 3,016 1,297 Other current assets 52,052 39,163 Current financial assets 8,747 74,759 Deposits in FCA Group cash management pools 942,469 683,672 Cash and cash equivalents 134,278 113,786 Total current assets 2,844,655 2,218,862 Total assets 4,641,427 3,895,475 Equity and liabilities Equity attributaable to owners of the parent 2,469,618 2,289,506 Noncontrolling interests 8,695 26,776 Total equity 2,478,313 2,316,282 Employee benefits 76,814 65,479 Provisions 134,774 103,785 Deferred tax liabilities 21,612 27,958 Debt 510,220 317,304 Other liabilities 670,378 470,325 Other financial liabilities 104,093 4,485 Trade payables 535,707 485,948 Current tax payables 109,516 103,909 Total equity and liabilities 4,641,427 3,895,475 Source: Form F-1 Registration Statement, New Business Netherlands N.V., p. 377. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

14 A06-16-0010 Appendix 3. New Business Netherlands N.V. Consolidated Statement of Cash Flows For the years ended December 31, (€ thousand) 2014 2013 2012 Cash and cash equivalents at beginning of year 113,786 100,063 94,025 Cash flows from operating activities: Profit before taxes 398,233 366,400 334,599 Amortization and depreciation 288,982 270,250 237,540 Provision accruals 66,274 24,095 41,932 Other non cash expense and income 53,348 31,818 37,007 Net gains on disposal of PP&E and intangible assets -742 -1259 -1166 Change in inventories -65,548 -19,549 -18,940 Change in trade receivables 824 -81386 8857 Change in trade payables 12,986 14,260 24,770 Change in receivables from financing activities -201,692 -56,531 -148,422 Change in other operating assets and liabilities 14,322 44,700 80,665 Income tax paid -140,920 -138,784 -134,322 Total 426,067 454,014 462,520 Cash flows used in investing activities: Investments in property, plant and equipment -169,363 -161,653 -161,380 Investments in intangible assets -160,635 -109,250 -96,972 Cash acquired in change in scope of consolidation 38,751 0 0 Proceeds from the sale of PP&E 1,828 1,939 2,664 Change in investments and other financial assets -358 1,622 -1,960 Total -289,777 -267,342 -257,648 Cash flows used in financing activities: Proceeds from bank borrowings 80,745 15,208 10,495 Repayment of bank borrowings -1,715 -10,010 -916 Net change in financial liabilities with the FCA Group 89,075 50,638 -292,588 Net change in other debt -27,638 8,189 22,877 Net change in deposits in FCA Group cash management pools -247,034 -227,495 72,887 Dividends paid to non-controlling interests -15,050 0 -7,148 Total -121,617 -163,470 -194,393 Translation exchange differences 5,819 -9,479 -4,441 Total change in cash and cash equivalents 20,492 13,723 6,038 Cash and cash equivalents at end of the year 134,278 113,786 100,063 Source: Form F-1 Registration Statement, New Business Netherlands N.V., p.379. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

A06-16-0010 15 Appendix 4. Unit Sales by Geographic Region Number of cars For the 3 months ending March 31 For the 12 months ending Dec 31 2015 % 2014 % 2014 % 2013 % 2012 % EMEA UK 210 12.84% 168 9.70% 705 9.72% 686 9.80% 686 9.26% Germany 92 5.63% 163 9.41% 616 8.49% 659 9.41% 755 10.20% Switzerland 72 4.40% 88 5.08% 332 4.58% 350 5.00% 366 4.94% France 58 3.55% 68 3.93% 253 3.49% 273 3.90% 330 4.46% Italy 51 3.12% 64 3.70% 243 3.35% 206 2.94% 318 4.29% Middle East (1) 138 8.44% 150 8.66% 521 7.18% 472 6.74% 423 5.71% Rest of EMEA (2) 144 8.81% 162 9.35% 604 8.33% 663 9.47% 825 11.14% Total EMEA 765 46.79% 863 49.83% 3,274 45.13% 3,309 47.27% 3,703 50.01% Americas(3) 515 31.50% 552 31.87% 2,462 33.94% 2,382 34.03% 2,208 29.82% Greater China (4) 134 8.20% 111 6.41% 675 9.30% 572 8.17% 789 10.65% Rest of APAC (5) 221 13.52% 206 11.89% 844 11.63% 737 10.53% 705 9.52% Total 1,635 100.00% 1,732 100.00% 7,255 100.00% 7,000 100.00% 7,405 100.00% (1) Middle East includes the United Arab Emirates, Saudi Arabia, Bahrain, Lebanon, Qatar, Oman, and Kuwait. (2) Rest of EMEA includes Africa and the other European markets not separately identified. (3) Americas includes the United States of America, Canada, Mexico, the Caribbean, and Central and South America. (4) Greater China includes China, Hong Kong, and Taiwan. (5) Rest of APAC includes Japan, Australia, Singapore, Indonesia, and South Korea. Source: Form F-1 Registration Statement, New Business Netherlands N.V., p.39. This document is authorized for use only in Warwick Schneller's ZZBU8705 Equity Valuation - H5 2023 at University of New South Wales from Aug 2023 to Feb 2024.

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