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COMM 1140 Mutiples Valuation With Solution

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51 views

COMM 1140 Mutiples Valuation With Solution

practice questions

Uploaded by

jemimahtang205
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Multiples Valuation (Sample Exam Question)

If time permits give students a head start and let them work in groups where possible.
The table below shows the stock prices and multiples for a number of firms in the newspaper
publishing industry.
Market Enterprise
Price/ Enterprise Enterprise
Name Capitalization Value ($ P/E
Book Value/ Sales Value/ EBITDA
($ million) million)
Gannet 6350 10,163 7.36 0.73 1.4 5.04
New York
2423 3472 18.09 2.64 1.1 7.21
Times
McClatchy 675 3061 9.76 1.68 1.4 5.64

Media General 326 1192 14.89 0.39 1.31 7.65


Lee
267 1724 6.55 0.82 1.57 6.65
Enterprises

a. Compute the averages across peer firm for all ratios in the table.
b. Compute the maximum and minimum percentage deviations from the average.

Another newspaper publishing firm (not shown) had sales of $600 million, EBITDA of $84 million,
excess cash of $68 million, $18 million of debt, and 180 million shares outstanding.

c. Use the P/E ratio to estimate the target firm’s share price when the target firm’s
forward earnings are $0.41 per share.
d. If the average enterprise value to sales for comparable businesses is used, what
is your best estimate of the firm's fair share price? What would be a reasonable range
for the target firm’s share price?
e. Which of the ratios in the table would most likely be the most reliable in
determining the stock price of a comparable firm?
Solution:
Market
Enterprise Value Price/ Enterprise Enterprise Value/
Name Capitalization ($ P/E
($ million) Book Value/ Sales EBITDA
million)

Gannet 6350 10,163 7.36 0.73 1.4 5.04

New York Times 2423 3472 18.09 2.64 1.1 7.21

McClatchy 675 3061 9.76 1.68 1.4 5.64

Media General 326 1192 14.89 0.39 1.31 7.65

Lee Enterprises 267 1724 6.55 0.82 1.57 6.65

Average 11.33 1.252 1.356 6.438


Maximum dev. 60% 111% 16% 19%
Minimum dev. -42% -69% -19% -22%

For Part B, Maximum deviation = (highest ratio value - the average ratio value) / the average ratio value
Minimum deviation = (loweset ratio value - the average ratio value) / the average ratio value

For example, for P/E ratio, the maximum deviation = (18.09 - 11.33)/11.33 = 60%
the minimum deviation = (6.55 -11.33) / 11.33 = - 42%

We do the exact same calculation for all other ratios to get the result (see the above table)

c. Target firm’s estimated share price = 11.33 x $0.41 = $4.65

d. Enterprise Value (EV) = 1.356 x $600m = $813.6m;

Share Price = (EV – Debt + Cash)/ No.of shares outstanding = (813.6m– 18m + 68m)/180m = $4.80;

Since our calculation is based on the Enterprise value to sales ratio,

To get the highest share price, we need to use the highest Enterprise value to sales ratio (1.57), Enterprise Value

(EV) = 1.57 x $600m = $942 m

Share Price = (EV – Debt + Cash)/ No.of shares outstanding = (942 m– 18m + 68m)/180m = $5.51

To get the lowest share price, we need to use the lowest Enterprise value to sales ratio (1.1), Enterprise Value (EV)

= 1.1 x $600m = $660 m

Share Price = (EV – Debt + Cash)/ No.of shares outstanding = (660 m– 18m + 68m)/180m = $3.94

e. EV/Sales ratio has the smallest min/max percentage range.

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