Question

You have been asked to estimate the enterprise value of Dan Automotive as of today in an effort to determine what price the firm might sell for if it were offered for sale on the open market. You have identified a public company, Kal Motors, which has business operations that are identical to those at Dan Auto. The income statements for Dan Auto and Kal Motors for their fiscal years that ended this December 31, 2017 are as follows:

Financials ($ in Millions)                                    Dan Auto            Kal Motors

Revenue                                                                   $995                        $882

Cost of goods sold                                                    652                          584

Gross profit                                                            $343                       $298

Selling, general, & administrative expenses             135                        105

EBIT                                                                        $208                        $193

Interest expense                                                          48                           32

Pretax income                                                          $160                        $161

Taxes                                                                           64                           48

Net income                                                               $ 96                       $113

Dan Auto had depreciation and amortization expenses of $42M last year and $833M of debt outstanding as of the end of the year. Kal Motors had depreciation and amortization expenses of $35M last year and $600M of net debt outstanding as of the end of the year. Its stock is currently trading at $12.25 per share with 150M in shares outstanding.

Using the EV/EBITDA multiple of Kal Motors, what is the enterprise value of Dan Auto? What is the value of 100 percent of its equity?

What are the advantages of using an EV/EBITDA multiple instead of a P/E multiple in a multiples analysis such as this?

Answer 1

Answer 1:

Kal Motors:

Market value of Equity = Number of shares outstanding * Current price

= 150 * 12.25

= $1837.50 Million

Enterprise value of Kal Motors = Market value of Equity + Debt outstanding = 1837.50 + 600 = $2,437.50 million

EBITDA of Kal Motors = EBIT + depreciation and amortization expenses = $193 + 35 = $228 million

EV/EBITDA multiple of Kal Motors = 2437.50 / 228 = 10.6908 Times

Dan Auto:

EBITDA of Dan Auto = = EBIT + depreciation and amortization expenses = 208 + 42 = $250 million

Using the EV/EBITDA multiple of Kal Motors, Value of Dan Auto = 250 * 10.6908 = $2672.70 million

Value 100% equity of Dan Auto = Enterprise value - debt outstanding = 2672.70 - 833 = $1,839.70

Hence:

Using the EV/EBITDA multiple of Kal Motors, Value of Dan Auto = $2672.70 million

Value 100% equity of Dan Auto = Enterprise value - debt outstanding = $1,839.70

Answer 2:

Advantages of using an EV/EBITDA multiple instead of a P/E multiple:

P/E ratio = Share price / EPS

EPS varies based on number of outstanding shares, changes in net income due to tax, interest, depreciation etc. The leverage of the company, depreciation policies, tax rates impact net income and hence P/E ratio.

EBITDA is earnings before interest, tax, depreciation and amortization. EBITDA as a measure is not influenced by debt cost (leverage of company), tax rates and accounting measures like depreciation and as such is better measure than P/E ratio