Question 18.A.2: Using Multiples Analysis PROBLEM: In addition to performing...
Using Multiples Analysis
PROBLEM: In addition to performing the liquidation analysis in Learning by Doing Application 18.1, you have decided to estimate the enterprise value of the company that manufactures specialized components for recreational vehicles. You have collected the following information for a comparable company and for the company you are valuing:
\begin{matrix} Comparable \ company: &&&&& Company \ you \ are \ valuing: \\ Stock price = \$10.62 &&&&& Value of debt = \$1.25 million \\ Number of shares outstanding = 9.55 million &&&&& EBITDA last year = \$2.37 million \\ Value of outstanding debt = \$11.67 million &&&&& Net income last year = \$0.45 million \\ EBITDA last year = \$10.85 million \\ Net income last year = \$2.67 million \end{matrix}Estimate the enterprise value of the company you are valuing using the P/E and enterprise value/EBITDA multiples.
APPROACH: First, calculate the P/E and enterprise value/EBITDA multiples for the comparable company. Next, use these multiples to estimate the value of the company you are valuing. Multiply the P/E multiple for the comparable company by the net income of the company you are valuing to estimate the equity value. Add this equity value to the value of the outstanding debt to obtain an estimate of the enterprise value. Multiply the enterprise value/EBITDA multiple for the comparable company by the EBITDA for the company you are valuing to obtain a direct estimate of the enterprise value.
The P/E and enterprise value/EBITDA multiples for the comparable company are:
\begin{matrix} \left(\frac{P}{E}\right)_{Comparable} &=& \left(\frac{Stock \ price}{Earnings \ per \ share}\right)_{Comparable} \\\\ &=& \frac{\$10.62 \ per \ share}{\$2.67 \ million/9.55 \ million \ shares} =38.0 \\\\ \left(\frac{Enterprise \ value}{EBITDA}\right)_{Comparable} &=& \left(\frac{V_D+V_E}{EBITDA}\right)_{Comparable} \\\\ &=& \frac{\$11.67 \ million+(\$10.62 \ per \ share \times 9.55 \ million \ shares)}{\$10.85 \ million} \\\\ &=& 10.42 \end{matrix}Using the P/E multiple, we calculate the value of the equity as:
\begin{matrix} V_E &=& \left(\frac{P}{E}\right)_{Comparable} \times Net \ income_{Company \ being \ valued} \\ &=& 38.0 \times \$0.45 \ million \\ &=& \$17.1 \ million \end{matrix}which suggests an enterprise value of:
V_F=V_D+V_E=\$1.25 \ million + \$17.1 \ million=\$18.35 \ millionUsing the enterprise/EBITDA multiple, we estimate the enterprise value to be:
\begin{matrix} V_F &=& \left(\frac{Enterprise \ value}{EBITDA}\right)_{Comparable}\times EBITDA_{Company \ being \ valued} \\ &=& 10.42 \times \$2.37 \ million \\ &=& \$24.70 \ million \end{matrix}