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Question 18.ss.2: You have the following information for a company you are val...

You have the following information for a company you are valuing and for a comparable company:

Comparable companyCompany you are valuingStock price=$23.45Value of debt=$3.68 millionNumber of shares outstanding=6.23 millionEst.EBITDA next year=$4.4 millionValue of debt=$18.45 millionEst.income next year=$1.5 millionEst.EBITDA next year=$17.0 millionEst.income next year=$5.3 million\begin{matrix}\bold{Comparable \ company} && \bold{Company \ you \ are \ valuing} \\ \text{Stock price}=\$23.45 && \text{Value of debt}=\$3.68 \ \text{million} \\ \text{Number of shares outstanding}=6.23 \ \text{million} && \text{Est.EBITDA next year}=\$4.4 \ \text{million} \\ \text{Value of debt}=\$18.45 \ \text{million} && \text{Est.income next year}=\$1.5 \ \text{million} \\ \text{Est.EBITDA next year}=\$17.0 \ \text{million} \\ \text{Est.income next year}=\$5.3 \ \text{million} \end{matrix}

Estimate the enterprise value of the company you are evaluating using the P/E and enterprise value/EBITDA multiples.

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The P/E and enterprise value/EBITDA multiples for the comparable company are:

(PE)Comparable=(Stock priceEarnings per share)Comparable=$23.45per share$5.3 million/6.23 million shares=27.6\begin{matrix} \left(\frac{P}{E}\right) _{\text{Comparable}} & = & \left(\frac{\text{Stock price}}{\text{Earnings per share}}\right)_{\text{Comparable}} \\ \\ & = & \frac{\$23.45 \text{per share}}{\$5.3 \ \text{million}/6.23 \ \text{million shares}} \\ \\ & = & 27.6 \end {matrix}

 

(Enterprise valueEBITDA)Comparable=(VD+VEEBITDA)Comparable=$18.45 million+($23.45per share×6.23 million  shares)$17.0 million=9.68\begin{matrix} \left(\frac{\text{Enterprise value}}{EBITDA}\right)_{\text{Comparable}} & = & \left(\frac{V_D+V_E}{EBITDA}\right)_{\text{Comparable}} \\ \\ & = & \frac{\$18.45 \ \text{million}+(\$23.45 \text{per share}\times 6.23  \text{million  shares})}{\$17.0 \ \text{million}} \\ \\ & = &9.68 \end{matrix}

Using the P/E multiple, we can calculate the value of the equity as:

VE=(PE)Comparable×Net incomeCompany being valued=27.6×$1.5 million=$41.4 million\begin{matrix} V_E &=& \left(\frac{P}{E}\right)_{\text{Comparable}}\times \text{Net income}_{\text{Company being valued}} \\ \\ &=&27.6\times \$1.5  \text{million} \\ \\ &=&\$41.4 \text{ million} \end{matrix}

which suggests an enterprise value of:

VF=VE+VD=$41.4million+$3.68 million=$45.08 millionV_F=V_E+V_D=\$41.4 \text{million}+\$3.68 \text{ million}=\$45.08 \text{ million}

Using the enterprise/EBITDA multiple, we obtain:

VF=(Enterprise valueEBITDA)Comparable×EBITDACompany being valued=9.68×$4.4million=$42.59 million\begin{matrix} V_F &=& \left(\frac{\text{Enterprise value}}{EBITDA}\right)_{\text{Comparable}} \times EBITDA_{\text{Company being valued}} \\ \\ &=&9.68\times \$4.4 \text{million} \\ \\ &=&\$42.59 \text{ million} \end{matrix}

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