Question

In: Accounting

STU Company has the following financial information for its most recent period. Free Cash Flows (Cash...

STU Company has the following financial information for its most recent period.

Free Cash Flows (Cash flows to the firm) $325,000

Equity Cash Flows (Cash flows to equity) $230,000

Market value of debt $481,000

A search of comparable firms ("comps") indicated the following price multiples.

Guideline Company Analysis

	Price / Earnings
	(P/E)	Price / EBITDA
Comp #1	9.3	6.7
Comp #2	9.1	7.8
Comp #3	7.2	7.0
Comp #4	9.1	8.2
Comp #5	10.0	7.7
Comp #6	6.8	6.9
Comp #7	6.0	6.1
Comp #8	7.3	7.3

Using the appropriate average (mean) price multiple and rounding the result to the nearest thousand dollars, the equity value for STU Company is:

$2,344,000

$2,633,000

$1,886,000

$1,863,000

Solutions

Expert Solution

Correct asnwer is ''d'' $ 1,863,000 is the equity value of STU Company

We will use the Multiple given Price/EBITDA to calculate the equity value

We will multiple the price multiple with the Free cash flow to the firm and this will give us the Value of the firm and to calculate value of equity we will deduct market value of debt from value of firm

Average price multiple (Price/EBITDA)=(Comp#1+Comp#2+Comp#3+Comp#4+Comp#5+Comp#6+Comp#7+Comp#8)/(Total number of companies )

=(6.7+7.8+7+8.2+7.7+6.9+6.1+7.3)/8

=57.7/8= 7.2125

Average price multiple= 7.2125

Value of firm= Free cash flow to firm*Average price multiple

=$325,000*7.2125

=$2,344,063

Market value of debt= $ 481,000

Market value of equity=$2,344,063-$481,000

Market value of equity==$,1863,000 (Rounded)

Note- If we have used Average Price/Earnings multiples and multiply it by the cash flow to equity, we would have received value of equity, which would be the same

Average Price/earning multiple= (9.3+9.1+7.2+9.1+10+6.8+6+7.3)/8

=8.1

Market Value of equity=8.1*230,000= $1,863,000

Hope it helps!!

Kindly do give a feedback!!

ekkarill92 answered 1 year ago

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