Question

ilovefinance LLC makes AI blankets. Interested in finding out the valuation for her company, the CEO zeros down on a couple of comparable firms. The Montauk Coverlet company and the Provincetown Bed Monsters. These companies are currently trading at PE multiples of 8.56 and 9.48 respectively. Using the average PE multiple of the comparable firms, calculate the price that the CEO can expect per share of ilovefinance LLC in the coming year. You have the following information:

a) The company will assume a debt of $500,000 for setting up a manufacturing unit in Mexico.

b) The CEO expects that she can sell 5,000 blankets at a price point of $150 in the coming year.

c) EBITDA is 30% of gross sales

d) Depreciation is $20,000 per year

d) Tax rate is 21 %

e) Interest on debt is 10% per year (Interest Amount = Debt * Interest Rate)

c) For unforeseen issues the CEO would like to keep $100,000 reserved in cash.

d) To begin with, the CEO will issue only 100,000 shares to be distributed among friends and family,

Answer 1

Step 1 : Average PE  Multiple of the comparable firms:

= (PE of Montauk Coverlet + PE of Provincetown Bed Monsters) / 2

= ( 8.56 + 9.48 ) / 2

Average PE Multiple = 9.02

Step 2 : Earnings Per Share of "ilovefinance LLC" :

~ Gross Sales = 5,000 blankets x $150 = $750,000

~ EBITDA = 30% of Gross Sales = 30% of $750,000 = $225,000

~ Interest Expense = Debt x Interest Rate = $500,000 x 10% = $50,000

~ EARNINGS (PROFIT AFTER TAX) =

EBITDA	$225,000
Less : Depreciation	$20,000
= EBIT	$205,000
Less: Interest	$50,000
= EBT	$155,000
Less: Tax (21% of EBT)	$32,550
PROFIT AFTER TAX	$122,450

~ Earnings Per Share (EPS) = Profit After Tax / No. of Shares

= $122,450 / 100,000

EPS = $1.2245

Step 3 : Expected Price Per Share of "ilovefinance LLC" :

Price Per Share = Average PE Multiple of Comparable Firms x EPS of "ilovefinance LLC"

= 9.02 x $1.2245

= $11.045

Therefore, the CEO can expect a price per share of $11.04 for ilovefinance LLC in the coming year.