Question

Company A and Company B are competitors. Using the data provided below, explain which stock is more attractively valued. Show your calculations to earn full credit.

Data	Company A	Company B
Stock price ($)	323.22	89.07
Share outstanding	567,885,369	776,367,881
Earnings per share ($, last year)	12.04	3.71
Earnings per share ($, forward estimate)	18.12	5.58
EBITDA ($billion, last year)	12.4	6.55
EBITDA ($billion, forward estimate)	15.8	8.79
Total debt ($billion)	11.88	11.14
Minority interest ($billion)	0.08	0.00
Cash & equivalent ($billion)	9.99	20.23

Answer 1

Solution:-

In order to comment on the required valuation attractiveness, we must calculate the EV/EBITDA ratios of the two stocks. The stock with lower EV/EBITDA multiples are more attractive than the other. EV/EBITDA is just like P/E ratio and suggests how expensive or cheap the valuations of a stock is. Higher the ratio, more expensive the valuations and vice-versa.

Enterprise value in $ billionss (Stock A)= Market cap of equity + Debt + Minority interest - Cash & equivalent = (323.22*0.567885369) + 11.88 + 0.08 - 9.99 = $185.52 bn

Enterprise value in $ billionss (Stock B)= Market cap of equity + Debt + Minority interest - Cash & equivalent = (89.07*0.776367881) + 11.14 + 0.00 - 20.23 = $60.06bn

Based on values calculated above, we calculate the ratios as follows:

EV/EBITDA (Stock A)= $185.52bn/12.4= 14.96 times

EV/EBITDA (Stock B)= $60.06bn/6.55= 9.17 times

EV/EBITDA forward estimate (Stock A)= $185.52bn/15.8= 11.74 times

EV/EBITDA forward estimate (Stock B)= $60.06bn/8.79= 6.83 times

We have calculated EV/EBITDA ratios based on both historical EBITDA as well as forward estimate EBITDA. We see that the ratios of stock A are higher than the ratios of stock B. This means that stock A is more expensive than stock B. Thius means, stock B is more attractive than stock A.