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

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

Laker Company has provided the following information for its most recent year of operation: Cash collected...

Laker Company has provided the following information for its most recent year of operation: Cash collected from customers totaled $99,300 Cash borrowed from banks totaled $42,700 Cash paid to employees totaled $23,300 Cash paid for interest expense totaled $3,100 Cash received from selling an investment in Husky stock totaled $73,000 Cash payments to banks for repayment of money borrowed totaled $9,700. (principal only) Cash paid for operating expenses totaled 11,200 Land costing $75,000 was sold for & $75,000 cash Cash...

The Tracey Company had the following information for its most recent period: Total Unit % Sales...

The Tracey Company had the following information for its most recent period: Total Unit % Sales $1,000,000 $50 100% Variable expenses 600,000 30 60% Contribution margin 400,000 $20 40% Fixed expenses 320,000 Net operating income $80,000 Average operating assets $500,000 Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. Net operating income $80,000 Correct! Sales $1,000,000 Correct! Average operating assets $500,000 Correct! Margin 8.00% Correct! Turnover 2.0 Correct!...

The Blossom Company has disclosed the following financial information in its annual reports for the period...

The Blossom Company has disclosed the following financial information in its annual reports for the period ending March 31, 2017: sales of $1.4 million, cost of goods sold of $800,000, depreciation expenses of $175,000, and interest expenses of $89,575. Assume that the firm has an average tax rate of 35 percent. Compute the cash flows to investors from operating activity.

Gilligan's Boat Tours Ltd. most recent free cash flow was $100,000. The company expects free cash...

Gilligan's Boat Tours Ltd. most recent free cash flow was $100,000. The company expects free cash flows to grow at 30% per year for the next three years and then be stable in future years. The company’s cost of equity (rs) is 12% and its WACC is 11%. The company has $400,000 in long-term debt and has 50,000 common shares outstanding. a.Calculate Gilligan's Boat Tours Ltd. current common share price b. Below are two industry average multiples. Gilligan's Boat Tours...

Riverside Memorial Hospital has experienced the following cash flows for the 2019 financial period (in thousands):...

Riverside Memorial Hospital has experienced the following cash flows for the 2019 financial period (in thousands): o Cash flows from operating activities: $11,196 o Cash flows from investing activities: ($6,293) o Cash flows from financing activities: ($5,735) • The nursing department is requesting additional funding (estimated $10,000) for additional, hospital-based continuing education programs. • The Women’s Center expansion project is estimated to cost roughly $1,000,000, and will require 4 years for build-out. • Due to the Patient Protection and Affordable...

A company's most recent annual Free Cash Flow is $180,000,000. Free cash flow is expected to...

A company's most recent annual Free Cash Flow is $180,000,000. Free cash flow is expected to grow by 15% per year for the next 10 years and then grow by 3% per year thereafter. Investors required rate of return is 11%. What is the current value of the stock? a. $11,300,755,080 b. $2,250,000,000 c. $5,404,011,121 d. $1,636,363,636

ABC’s the most recent free cash flow (FCF0) is $200 million. The free cash flow is...

ABC’s the most recent free cash flow (FCF0) is $200 million. The free cash flow is expected to grow at a rate of 40 percent, and 20 percent in the second year. After two years, it is expected to grow forever at a constant rate of 5 percent. The cost of common stock (rs) is 12% and the weighted average cost of capital (WACC) is 9%. ABC balance sheet shows $20 million in short term investments that are unrelated to...

Etters Manufacturing Company has provided the following financial data for its most recent month. Unit Selling...

Etters Manufacturing Company has provided the following financial data for its most recent month. Unit Selling Price $18 Units in beginning inventory 0 Units produced 10,000 Units sold 9,500 Variable costs per unit: Direct materials $6 Direct labor $4 Manufacturing overhead $3 Selling and administrative costs $1 Fixed costs: Manufacturing overhead $12,000 Selling and administrative costs $8,000 Required: Prepare an income statement using an absorption costing format. LO2 Solution: Sales $171,000 Less cost of goods sold: Variable manufacturing $123,500 Fixed manufacturing 11,400 134,900 Gross...

ABC company specialized in food industry has selected the following information from its most recent annual...

ABC company specialized in food industry has selected the following information from its most recent annual report to be the subject of an immediate press release. Net income this year was $4.4 million. Last year's net income had been $4.0 million. The current ratio has changed to 2.5 from last year's 2. The debt/total assets ratio has changed to 4 from last year's 3. The receivable turnover has changed to 7 from last year’s 5 times. The Return on Assets...

Go.co Company has the following financial information for its first year in business: cash of $242,...

Go.co Company has the following financial information for its first year in business: cash of $242, accounts receivable of $850, inventory of $820, net fixed assets of $3,408, accounts payable of $700, short-term notes payable of $740, long-term liabilities of $1,100, common stock of $1,160, retained earnings of $1,620, net sales of $2,768, cost of goods sold of $1,210, depreciation of $360, interest expense of $160, taxes of $312, addition to retained earnings of $508, and dividends paid of $218....