Question

1. NuDayWear Inc. is a nationwide retail chain specializing in women's apparel. The company's most popular lines are West and SeaWear. West offers executive wear for women in the middle to high-end markets, and SeaWear features sportswear and stylish clothes, also targeted at women in the middle to high-end markets. The company has 95 million shares outstanding with a current market price of $10.55 per share. The company is expected to show net income of $41 million in the next 12 months. Forecast sales and EBITDA are $635 million and $63 million, respectively. Debt outstanding is $120 million. (Show all your work for credit).

a. Do you think that the list below represents valid comparable companies? If not, which are comparable and why?

b. What is the current total equity value of NuDayWear? Total enterprise market value of NuDayWear?

c. Suppose you are asked to value NuSoftWear Inc. given the following information. Using your comparable companies from a. above what is your estimate of equity? Of enterprise value?

N.B.: This is all available information on the problem. The list of companies mentioned in a is the list below with given data.

		Price to Earnings           Price to Sales
Abercrombie & Fitch	44.4		.43
Ascena (AnnTaylor)	13.6		.78
Gap Inc.	14.1		0.82
Limited Brands Inc.	13.8		1.11
LuLulemon Athetica.	39.2		4.25

Answer 1

a) Assuming that the given companies are from the same industry, the comparables can be considered using P/S values. As the tax rate and interest rate are not provided in the question, we can not compare the given companies using P/E ratio because then we won't be able to find net earnings of the company after depreciation, interest and taxes. But based on the taking some assumptions, I have created following table:

Based on the above assumption, I have produced the following table to find the comparables:

Considering the P/S ratio as the basis of comparables, we can see that the company Lululemon Athetica looks like an outlier as compared to other companies on the list. So, we can remove this outlier and consider rest others as valid comparable companies of NuDay Wear Inc.

b) Total Equity value is the Market Capitalization of the company. Here based on the given information,

Total Share = 95 mn

Share Price = $ 10.55

Total Equity Value = Total shares * Share price

= 95 mn * 10.55 = $ 1002.25 mn

Total Enterprise Value = Total Equity Value + Total Debt Value

= $1002.25 mn + $ 120 mn = $ 1122.25 mn

c) If we consider the average of the valid comparable companies as shown in the table below:

Average P/S = 0.79, and Average P/E = 21.48. If we consider P/E of NuDay Wear Inc. = 21.48, then

EPS of NuDay Wear Inc. = Share price/Average P/E = $10.55/21.48 = $0.491 per share

And Average P/S = 0.79 = Total Market Cap/Total Sales forecast = 95mn shares * Share Price/$635mn = 0.79

Share Price = $5.28

New Total Equity Value estimate = 95mn Shares * $ 5.28 = $ 501.65 mn

New Enterprice Value = $ 501.65mn + $ 120mn

= $ 621.65 mn