Question

Suppose Rocky Brands has earnings per share of ​$2.27 and EBITDA of ​$29.5 million. The firm also has 5.4 million shares outstanding and debt of ​$125 million​ (net of​ cash). You believe​ Jared's Outdoor Corporation is comparable to Rocky Brands in terms of its underlying​ business, but​ Jared's has no debt. If​ Jared's has a​ P/E of 13.6 and an enterprise value to EBITDA multiple of 7.8​, estimate the Enterprise Value of Rocky Brands by using both multiples. Which estimate is likely to be more​ accurate?

Answer 1

	Rocky Brands	Amount
	EPS	$       2.27	Per share
	EBITDA	$    29.50	Million
	No of share outstanding	5.4	Million
	Debt	125	Million
	Jared's outdoor corp
	P/E	13.6
	Enterprise value/EBITDA	7.8
A	Rocky brand's valuation using PE ratio:
	Value per share = P/E ratio of jared's Outdoor Corpx EPS of Rocky Brand's
	=2.27*13.6	$    30.87	Per share
B	Rocky brand's valuation using EV/EBITDA ratio:
	Rocky Brand's Enterprise value= EBITDA*EV/EBITDA of Jared's outdoor corp= $29.5*7.8	$ 230.10	Million
	Enterprise value= Market value of equity + net debt
	Market cap of equity= 230.1-125	$ 105.10	Million
	Value per share= 105.1/5.4	$    19.46	Per share
	EV/EBITDA is based on operating income for both debt and equity and hence, nullify the impact of varying capital structures among comparable companies and PE ratio is more direct measure for Equity valuation of the company. Value of share derived form EV/EBITDA is more suitable ie. $19.46 per share