Question

In: Finance

I am given the following problem and solution. Can someone just explain where the BOLD values...

I am given the following problem and solution. Can someone just explain where the BOLD values in part B are coming from? ($60,000,000, $80,000,000, $200,000,000)

  1. [Relative Value Concepts Using Multiples] The WestTek privately held venture is considering the sale of the venture to an outside buyer. WestTek has net sales = $21.2 million, EBITDA = $11.1 million, net income = $2.9 million, and interest-bearing debt = $12 million. Three publicly-traded comparable firms or competitors in the industry have the following net sales, EBITDA, net income, equity value or market capitalization (stock price times number of shares of common stock outstanding), and interest-bearing debt information:

       

EastTek SouthTek NorthTek

Net sales $25,000,000 $37,500,000 $80,000,000

EBITDA 12,500,000 20,000,000 37,500,000

Net Income 2,500,000 3,000,000 10,000,000

Equity Value 45,000,000 60,000,000 160,000,000

Interest-bearing 15,000,000 20,000,000 40,000,000

A. Calculate the enterprise value to net sales ratios for each of the three competitors (EastTek, SouthTek, and NorthTek), as well as the average ratio for the competitors.

     

      Enterprise value = equity value + interest-bearing debt

      Equity value = market capitalization (i.e., stock price times shares outstanding)

      EastTek: ($45,000,000 + $15,000,000)/$25,000,000 = 2.40

      SouthTek: ($60,000,000 + $20,000,000)/$37,500,000 = 2.13

      NorthTek: ($160,000,000 + $40,000,000)/$80,000,000 = 2.50

      Average: (2.40 + 2.13 + 2.50)/3 = 7.03/3 = 2.34

B) Calculate the enterprise value to EBITDA ratios for each of the three competitors, as well as the average ratio for the competitors.

      EastTek: $60,000,000/$12,500,000 = 4.80

      SouthTek: $80,000,000/$20,000,000 = 4.00

      NorthTek: $200,000,000/$37,500,000 = 5.33

      Average: (4.80 + 4.00 + 5.33)/3 = 14.13/3 = 4.71

  

Solutions

Expert Solution

Enterprise Value = Total Capital Employed
Enterprise Value = Equity Value + Debt (Interest bearing Capital)
Computation of Enterprice Value:
EastTek SouthTek NorthTek
a. Equity Value       45,000,000              60,000,000               160,000,000
b. Interest Bearing       15,000,000              20,000,000                 40,000,000
c. Enterprise Value(a+b)       60,000,000              80,000,000               200,000,000

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