The University of Auckland Business School

FINANCE 351: ADVANCED FINANCIAL MANAGEMENT

Selected tutorial, test and exam questions and suggested solutions
Topic 2 Valuation foundation, capital budgeting, DCF and multiples
1. Valuation Foundation (Ratios, Free Cash Flow, Enterprise Value and per share Value). You
are about to finish your summer internship with an independent equity research company. You
have picked up some basic financial analysis and modeling skills during this summer. On Feb 24,
2014, just after you browsed the Bloomberg terminal to catch up with market news, your boss gave
you some work to complete in a few hours. He would like to initiate the firms coverage of Trade
ME and issue the report on Monday. He needs your help to conduct some initial analysis of Trade
ME to be included in this report.

Income Statements
12 months ended 30 Jun 2013 (in thousands)
General items
Classifieds
Other
Total revenue

2012
62,408
53,904
26,146
142,458

2013
65,496
69,708
28,910
164,114

Employee benefit expense

Web infrastructure expense
Promotion expense
Other expenses
Total expenses

-17,228
-2,895
-2,602
-13,097
-35,822

-21,203
-3,016
-2,750
-13,683
-40,652

EBITDA

106,636

123,462

Depreciation and amortisation

EBIT

-5,165
101,471

-8,735
114,727

1,329
-4,042
98,758

1,926
-7,185
109,468

-26,937
71,821

-30,872
78,596

Finance income
Finance costs
Profit/(loss) before income tax
Income tax expense
Profit/(loss) for the year

Balance Sheets
As at 30 Jun 2013 (in thousands)
2012

2013

39,135
5,310
44,445

48,857
9,004
57,861

Trade and other receivables

Derivative financial instruments
Property, plant and equipment
Other intangible assets
Goodwill
Deferred tax asset
Total non-current assets
Total assets

0
0
4,342
43,675
729,724
824
778,565
823,010

814
78
5,449
45,672
730,703
875
783,591
841,452

Liabilities
Trade and other payables
Derivative financial instruments
Income tax payable
Total current liabilities

9,649
0
8,944
18,593

11,522
24
6,953
18,499

165,758
80
165,838
184,431

165,858
29
165,887
184,386

Assets
Cash and cash equivalents
Trade and other receivables
Total current assets

Interest bearing loans and borrowings

Other non-current liabilities
Total non-current liabilities
Total liabilities

Equity
Contributed equity
1,069,051 1,069,196
Share based payment reserve
200
557
Other reserves
-485,737 -485,737
Retained earnings/(losses)
55,065
73,050
Total equity attributable to owners of the Company
638,579
657,066
Total equity and liabilities
823,010
841,452

a. Please fill in the table below using the financial statement of Trade ME provided above.
(in thousands)
EBIT
EBITDA
EBIT margin
EBITDA margin

2012

2013

OWC
Non-financial CA
Non-financial CL
OWC
Investment in OWC (an outflow)
PP&E BASE
Opening carrying amount
Additions (Capex)
Depreciation
Closing carrying amount
Intangible Assets BASE (Computer Software & Development)
Opening carrying amount
Additions (Capex)
Amortisation
Closing carrying amount

4,081

4,342

-2,453
4,342

-2,787
5,449

3,374

11,074

-2,712
11,074

-5,948
13,066

b. Calculate the Free Cash Flow to the Firm and other financial ratios for Trade ME for 2013.
Assume that the share price for Trade Me on Feb 24, 2014 is $4.03 and number of shares
outstanding is 396,554,000. Please fill in the table below.
(in thousands)
Free Cash Flow to Firm
EBIT
EBIAT (Tax rate = 28%)
D&A
CFO
CAPEX (Purchase of PP&E and Software)
Change in OWC
Free Cash Flow to Firm

2013

Other Financial Ratios

Total debt
Cash and cash equivalents
Net debt
Equity
Market capitalization as at 24 Feb 2014
Enterprise value
Market/Book equity value ratio
Enterprise value/EBITDA ratio
EPS (cents)
Price/Earning ratio
Answer:
a.
3

(in thousands)
EBIT
EBITDA
EBIT margin
EBITDA margin

2012
101,471
106,636
71.2%
74.9%

2013
114,727
123,462
69.4%
74.7%

OWC
Non-financial CA
Non-financial CL
OWC
Investment in OWC (an outflow)

5,310
18,593
-13,283

9,004
18,475
-9,471
3,812

PP&E BASE
Opening carrying amount
Additions (Capex)
Depreciation
Closing carrying amount

4,081
2,714
-2,453
4,342

4,342
3,894
-2,787
5,449

Intangible Assets BASE (Computer Software & Development)

Opening carrying amount
Additions (Capex)
Amortisation
Closing carrying amount

3,374
10,412
-2,712
11,074

11,074
7,940
-5,948
13,066

b.
(in thousands)
Free Cash Flow to Firm
EBIT
EBIAT (Tax rate = 28%)
D&A
CFO
CAPEX (Purchase of PP&E and Software)
Change in OWC
Free Cash Flow to Firm
Other Financial Ratios
Total debt
Cash and cash equivalents
Net debt
Equity
Market capitalization as at 24 Feb 2014
Enterprise value (Total of Mkt Cap and Net Debt)
Market/Book equity value ratio
Enterprise value/EBITDA ratio
EPS (cents)
Price/Earning ratio

2013
114,727
82,603
8,735
91,338
11,834
3,812
75,692

165,858
48,857
117,001
657,066
1,598,113
1,715,114
2.43
13.89
19.82
20.33
4

2. Valuation Foundation (from Share Price to Enterprise Value and back)

a. Please fill in all empty cells and derive the enterprise value using the information given below.
Share Price Enterprise Value
Share price
Number of shares outstanding
Average number of shares outstanding
Short-term debt
Long-term debt
Cash
Enterprise Value
Net Debt
Equity Value

$20
100
90
$50
$500
$50

b. Please fill in all empty cells and derive the company share price using the information given
below.
Enterprise Value Share Price
Enterprise value
Market value of short-term investments
Cash
Debt
Market value of min. interests
Market value of prefer. shares
Number of shares outstanding
Weighted avg. shares outstanding
Share price
Net Debt
Equity Value

$1000
$50
$10
$300
$100
$50
300
250

Answer:
a.
Share Price Enterprise Value
Share price
Number of shares outstanding
Average number of shares outstanding
Short-term debt
Long-term debt
Cash
Enterprise Value
Net Debt
Equity Value

$20
100
90
$50
$500
$50
$2500
$500
$2000

b.
Enterprise Value Share Price
Enterprise value
Market value of short-term investments
Cash
Debt
Market value of min. interests
Market value of prefer. shares
Number of shares outstanding
Weighted avg. shares outstanding
Share price
Net Debt
Equity Value

$1000
$50
$10
$300
$100
$50
300
250
$2.03
$240
$610

3. Valuation Foundation (from Enterprise Value to per share Value). Totoro Inc. is a private
company. You have used the WACC approach to estimate its enterprise value as of 6th May 2016.
You have the following information for Totoro Inc.:
Enterprise value
Cash & cash equivalent
Debt
Number of shares outstanding
Weighted avg. shares outstanding

$1,000
$200
$100
200
225

Totoro Inc.s per share value based on your DCF valuation result is:
A.
B.
C.
D.

$5.50
$4.89
$4.50
$4.00

Answer: A
Equity = Enterprise value (debt cash) = 1100
Per share value = 1100/200 = 5.5
4. Valuation Foundation (OWC). You are considering adding a microbrewery on to one of your
firm's existing restaurants. This will entail an increase in inventory of $8,000, an increase in
accounts payable of $2,500, and an increase in property, plant, and equipment of $40,000. All
other accounts will remain unchanged. The change in net working capital resulting from the
addition of the microbrewery is:
A.
B.
C.
D.

A cash outflow of $45,500

A cash inflow of $10,500
A cash inflow of $6,500
A cash outflow of $5,500

Answer: D
6

Explanation: D) NWC = CA - CL = $8000 - $2500 = $5500

5. Capital Budgeting (Free Cash Flow). Epiphany Industries is considering a new capital budgeting
project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate
this project. Based on extensive research, it has prepared the following incremental cash flow
projects:
Year
Sales (Revenues)
- Cost of Goods Sold (50% of Sales)
- Depreciation
= EBIT
- Taxes (35%)
= EBIAT
Depreciation
Increase in working capital
Capital expenditures

Year 0

Year 1
100,000
50,000
30,000
20,000
7000
13,000
30,000
5,000

Year 2
100,000
50,000
30,000
20,000
7000
13,000
30,000
5,000

Year 3
100,000
50,000
30,000
20,000
7000
13,000
30,000
-10,000

90,000

The free cash flow to firm for the first year (year 1) of Epiphany's project is closest to:
A. $43,000
B. $25,000
C. $38,000
D. $45,000
Answer: C
6. Capital Budgeting (Incremental Cash Flow). Which of the following cash flows are relevant
incremental cash flows (before financing) for a project that you are currently considering investing
in?
A. Interest payments on debt used to finance the project
B. Research and Development expenditures you have made
C. The projects share of expenses incurred at the head-quarter (assuming that the head-quarter
expenses will not be affected by this project)
D. The cost of a marketing survey you conducted to determine demand for the proposed project
E. None of the above is correct
Answer: E
7. Capital Budgeting (Incremental Cash Flow). Pisa Pizza, a seller of frozen pizza, is considering
introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats.
The firm expects that sales of the new pizza will be $20 million per year. While many of these
sales will be to new customers, Pisa Pizza estimates that 40% of the sales will come from
customers who switch to the new, healthier pizza instead of buying the original version.
a. Assume customers will spend the same amount on either version. What level of incremental
sales is associated with introducing the new pizza?
b. Suppose that 50% of the customers who will switch from Pisa Pizzas original pizza to its
healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza.
What level of incremental sales is associated with introducing the new pizza in this case?
7

Answer:
a. Sales of new pizza lost sales of original = 20 0.40(20) = $12 million
b. Sales of new pizza lost sales of original pizza from customers who would not have switched
brands = 20 0.50(0.40)(20) = $16 million
8. Capital Budgeting (Terminal Value). Transcontinental is considering adding a trucking division
to expand the coverage of its existing rail lines. The trucking division will cost $1,000,000 now
(year 0) and is expected to generate free cash flows of $100,000 for each of the next three years
(year 1, 2 and 3). Taggart Transcontinental forecasts that future free cash flows after year 3 will
grow at 2% per year, forever. Taggart Transcontinental's cost of capital is 10%. The terminal value
for the trucking division in year three is closest to:
A.
B.
C.
D.

1,000,000
1,250,000
1,275,000
1,375,000

Answer: C
Explanation: C) Terminal value (year 5) = C(1 + g)/(r - g) = 100,000(1.02)/(.10 - .02) = 1,275,000
9. Capital Budgeting (Value of a Project of Indefinite Life). (continued from the previous
question) The NPV for the trucking division is closest:
A.
B.
C.
D.

751,310
206,610
212,550
523,690

Answer: B
TV
CF
Discount factor
PV
NPV

-1,000,000
1.00
-1,000,000
206,612

100,000
0.91
90,909

100,000
0.83
82,645

3
1,275,000
100,000
0.75
1,033,058

10. Capital Budgeting (Salvage Value). Two years ago the Krusty Krab Restaurant purchased a grill
for $50,000. The owner, Eugene Krabs, has learned that a new grill is available that will cook
Krabby Patties twice as fast as the existing grill. This new grill can be purchased for $80,000 and
would be depreciated straight line over 8 years, after which it would have no salvage value.
Eugene Krab expects that the new grill will produce EBITDA of $50,000 per year for the next
eight years (Year 1 to 8) while the existing grill produces EBITDA of only $35,000 per year. The
current grill is being depreciated straight line over its useful life of 10 years after which it will have
no salvage value. All other operating expenses are identical for both grills. The existing grill can
be sold to another restaurant now for $30,000. The Krusty Krab's tax rate is 35%.

The incremental cash flow that the Krusty Krab will incur today (Year 0) if they elect to upgrade
to the new grill is closest to:
A.
B.
C.
D.

80,000
50,000
46,500
+30,000

Answer: C
Explanation: C) CF0 = -80,000 + 30,000 + .35(40,000 - 30,000) = -46,500

11. Capital Budgeting (Choosing among Alternatives). A bicycle manufacturer currently produces
300,000 units a year and expects output levels to remain steady in the future. It buys chains from
an outside supplier at a price of $2 a chain. The plant manager believes that it would be cheaper to
make these chains rather than buy them. Direct in-house production costs are estimated to be only
$1.50 per chain. The necessary machinery would cost $250,000 and would be obsolete after 10
years. This investment could be depreciated to zero for tax purposes using a 10-year straight-line
depreciation schedule. The plant manager estimates that the operation would require additional
working capital of $50,000 but argues that this sum can be ignored since it is recoverable at the
end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $20,000.
If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net
present value of the decision to produce the chains in-house instead of purchasing them from the
supplier?
Answer:
FCF = EBIT (1 t) + depreciation CAPEX

NWC

Outside purchase:
FCF = -$2 300,000 (1 .35) = $390k per year.

Use the PVA formula, NPV(outside) =

$390, 000
1

0.15
1.1510
1

= $1.9573M

In-house:
FCF in year 0: 250,000 (CAPEX) 50,000 ()= 300,000

FCF in years 1-9:

Production cost

$1.50 x 300, 000

Minus depreciation

$25, 000

EBIT

-$475,000

Minus tax@35%

-(-$166,250)

Unlevered Net Income

-$308,750

(
9

Add depreciation

+$25,000

CFO

-$283,750

CAPEX

NWC

FCF

-$283,750

FCF in year 10: $283,750 + (1 0.35) $20,000 + $50,000 = $220,750

Note that the book value of the machinery is zero; hence, its scrap proceeds ($20,000) are fully taxed.
The NWC ($50,000) is recovered at book value and hence not taxed.

NPV (in-house)= $300,000+ PVAof $283,750 for 9 years +

=$300,000+

$283,750

0.15

$220,750
1.1510

1
$220,750
+
1.159
1.1510

=$300,000$1,353,937 $54,566
=$1,708,503

Thus, in-house is cheaper because it has a less negative NPV. The manufacturer should produce the
chain in-house.
12. Capital Budgeting (Project Valuation). You are a manager at P Fiber, which considering
expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops
a consultants report on your desk, and complains, We owe these consultants $1m for this report,
and I am not sure their analysis makes sense. Before we spend the $10m on new equipment needed
for this project, look it over and give me your opinion.
All of the estimates in the report seem correct (table below). The consultants used straight-line
depreciation for the new equipment that will be purchased today (year 0). The report concludes
that because the project will increase earnings by $4.5m per year for 3 years, the project is worth
$13.5m.
i.
ii.

iii.
iv.
v.

The consultants have not factored in the fact that the project will require $10m in working
capital upfront (year 0), which will be fully recovered in year 3.
They have attributed $2m of selling, general and administrative expenses (SG&A) to the
project, but you know that $1m of this amount is overhead that will be incurred even if the
project is not accepted.
The equipment to be purchased for $10m can be sold for $2m at the end of year 3.
You know that accounting earnings are not the right thing to focus on!
Assuming all CFs occur at the end of each year.

10

Required:
What are the FCFs in years 0 through 3 that should be used to evaluate the proposed project? If the
cost of capital for this project is 14%, what is your estimate of the value of the new project?
Please fill in all empty cells in the table below to answer these two questions.
(thousand)
0

Project year
1

Project year
1
2
30,000
30,000
18,000
18,000

3
30,000
18,000

Sales
Cost of goods sold
Gross profit
SG&A
Depreciation
EBIT
Tax (@40%)
EBIAT (Unlevered net income)

Cash flow from operations (CFO)

CAPEX
Increase in OWC
Salvage value
Book value
Gain/Loss from asset sale
Cash flow from asset sale
FCF
Discount rate
Discount factor
PV of FCF in each year
NPV

Answer:
(thousand)
0
Sales
Cost of goods sold

11

Gross profit

12,000

12,000

12,000

SG&A
Depreciation
EBIT
Tax (@40%)
EBIAT (Unlevered net income)

1,000
2,500
8,500
3,400
5,100

1,000
2,500
8,500
3,400
5,100

1,000
2,500
8,500
3,400
5,100

Add D&A
Cash flow from operations (CFO)
CAPEX
Increase in OWC
Salvage value
Book value
Gain/Loss from asset sale
Cash flow from asset sale
FCF
Discount rate
Discount factor
PV of FCF in each year
NPV

2,500
7,600
0
0

2,500
7,600
0
0

7,600
15%
0.87
6,609

7,600
15%
0.76
5,747

2,500
7,600
0
-10,000
2,000
2,500
-500
2,175
19,775
15%
0.66
13,002

10,000
10,000

-20,000
15%
1.00
-20,000
5,358

13. Constant Dividend Growth Model. SunTendy announced that it will cut its next years annual
dividend from $3.00 to $2.00 per share and use the extra funds to expand its operations. SunTendy
's dividends were expected to grow at a 2% rate, and its share price was $37.50 before the
announcement. With the new expansion, SunTendy dividends are expected to grow at a 5% rate.
The next dividend will be $2.00 per share and paid in one year. Assume that SunTendy pays only
one dividend each year and the cost of equity remains unchanged. SunTendy 's share price
following this announcement should be:
A. $20.00
B. $30.00
C. $37.50
D. $40.00
Answer: D
14. Constant Dividend Growth Model. DFB, Inc., expects earnings this year of $5 per share, and it
plans to pay a $3 dividend to shareholders. DFB will retain $2 per share of its earnings to reinvest
in new projects with an expected return of 15% per year. Suppose DFB will maintain the same
dividend payout rate, retention rate, and return on new investments in the future and will not
change its number of outstanding shares.
a. What growth rate of earnings would you forecast for DFB?
b. If DFBs equity cost of capital is 12%, what price would you estimate for DFB stock?
c. Suppose DFB instead paid a dividend of $4 per share this year and retained only $1 per share in
earnings. That is, it chose to pay a higher dividend instead of reinvesting in as many new projects.
If DFB maintains this higher payout rate in the future, what stock price would you estimate now?
Should DFB follow this new policy?
12

Answer:
a. g = retention rate return on new invest = (2/5) 15% = 6%
b. P = 3 / (12% 6%) = $50
c. g = (1/5) 15% = 3%, P = 4 / (12% 3%) = $44.44. No, the projects have positive NPV (return
exceeds cost of capital) so dont raise the dividend.
15. DCF Valuation of a Business. Try-and-Sav Stores is a retail firm. In the last year (year 0), Tryand-Sav Stores reported $100 million in revenues, $20 million in earnings before interest, tax,
depreciation and amortisation (EBITDA). Operating working capital was $10 million during the
last year.
a. What are your projected free cash flows to the firm in Year 1 and Year 2? Please use the
following assumptions for Year 1 and Year 2:

Sales will grow at 10% p.a.

EBITDA margin remains the same as in year 0
The capital expenditure will be 5% of revenue
Beginning balance of net fixed assets was $50 million, and depreciation and amortisation is
10% of the beginning net fixed assets
Operating working capital as a percent of revenues remains unchanged
Companys marginal tax rate is 30%

You are required to fill in all boxes. At the end of each row, you must show an example of the
workings for one-years result.

Sales
EBIT
D&A
EBITDA
EBITDA%

Historical
Projected
Year 0
Year 1
100

Projected
Year 2

Workings

20

OWC % of sales
OWC
Free Cash Flow to Firm:
Cash flow from operations
CAPEX
Chg. in OWC
Free cash flow to firm
Net Fixed Assets
Beginning
Addition (CAPEX)
Subtraction (Depreciation)
Ending

50

13

b. Now, disregard your answers to the previous question. Use the following projected cash flows to
firm for year 1 to 3. Your manager would like you to find the per share value of Try-and-Sav
Stores. The valuation date is the last day of year 0. You have the following information (Note:
you do not have to use all of these assumptions). Please assume that all cash flows come in at the
end of each year. Please fill in your final answer and intermediate results in the table below. All
boxes need to be filled in. Show example workings for one-years result as required.

After-tax WACC
Cost of equity
Short-term borrowing (market value)
Long-term borrowing (market value)
Cash and cash equivalent
Number of shares outstanding
Free cash flow to firm (projection)
Year 1
Year 2
Year 3
Constant annual growth rate (of free cash flows)
from year 4 onwards

Year 0
Free cash flows
Terminal value
Discount period
Discount rate
Discount factor
Enterprise value
Net debt
Equity value
Per share value($)

Projected
Year 1

10%
12%
$20 million
$40 million
$10 million
8,000,000
$ 12 million
$ 14 million
$ 16 million
4%

Projected
Year 2

Projected
Year 3

Workings

$ million

Answer:
a.

Sales
EBIT
D&A
EBITDA
EBITDA%
OWC % of sales
OWC
Free Cash Flow to Firm:
Cash flow from operations
CAPEX
Chg. in OWC
Free cash flow to firm

Historical
Projected
Projected
Year 0
Year 1
Year 2
Workings
100
110
121
100*1.1
17
19.15
5
5.05
BASE
20
22
24.2
11*20%
20%
20%
20%
20/100
-0.1
-10

-0.1
-11

-0.1
-12.1

-10%
-0.1*110

16.9
5.5
-1
12.4

18.46
6.05
-1.1
13.5

17*0.7+5
A
-11-(-10)
16.9-5.5+1
14

Historical
Year 0
Net Fixed Assets
Beginning
Addition (CAPEX)
Subtraction
(Depreciation)
Ending

Projected
Year 1

50

Projected
Year 2

Workings

50
5.5
5

50.5
6.05
5.05

Last year E
100*5%
50*

50.5

51.5

B+A-S

b.
Projected
Projected
Projected
Year 1
Year 2
Year 3
Workings
$ million
12
14
16
277.33
16*1.04/(0.1-0.04)
1
2
3
10%
10%
10%
0.91
0.83
0.75
1/1.1
12*0.91+14*0.83
242.87
+16*0.75+277.33
50
20+40-10
192.87
242.8-50
24.11
192.87/8

Year 0
Free cash flows
Terminal value
Discount period
Discount rate
Discount factor
Enterprise value
Net debt
Equity value
Per share value($)

16. Comparable Valuation. You are advising a large food company who wants to acquire Carls Jr.
(CJ). After careful research you establish two close comparables; Burger King (BK) and
BurgerFuel (BF). You do not have a share price for Carls Jr. You plan to use multiples to derive
Carls Jr's implied valuation. Please follow the steps below and fill in all empty cells to derive the
implied share price of Carls Jr using the EBITDA multiples of BK and BF.
Step 1: You prepare a small comparable sheet:
CJ
23,000
250
30
1,000
20

BK
20,000
300
30
800
10

BF
18,000
200
30
500
30

1,020

810

530

100

200

200

Earnings before tax

920

610

330

Tax expense @ 20%

-184

-122

-66

Earnings after tax

Equity Value
Net
Enterprise value
Number of shares
EBITDA multiple

736
???
1,250
???
1,000
N/A

488
3,936
2,857
6,793
N/A
???

264
2,904
3,000
5,904
N/A
???

Sales
Depreciation
Amortization
Operating profit
Other income
EBIT (assume
normalized)
Interest expense

15

Step2: Calculate the EBITDA for the three companies and EBITDA multiples of the two comparables.

EBIT
Depreciation
Amortization
EBITDA
Enterprise value
EBITDA Multiple

CJ
1,020
250
30
1,300
???
N/A

BK

BF

Step3: Use BKs and BFs EBITDA multiple to calculate an implied enterprise value for CJ. And use
CJs implied enterprise value to calculate its implied share price.
Use BK's
multiple

Use BF's
multiple

Implied enterprise value (CJ)

Less net
= Implied equity value
Divide by number of shares
= Implied share price

Answer:
CJ
1,020
250
30
1,300
???
N/A

BK
810
300
30
1,140
6,793
5.96

Implied enterprise value (CJ)

Less net
= Implied equity value
Divide by number of shares
= Implied share price

Use BK's
multiple
7,748
1,250
6,498
1,000
$6.50

EBIT
Depreciation
Amortization
EBITDA
Enterprise value
EBITDA Multiple

BF
530
200
30
760
5,904
7.77
Use BF's
multiple
10,101
1,250
8,851
1,000
$8.89

17. Comparable Valuation. During the most recent fiscal year, KD Industries had revenues of $400
million and earnings of $30 million. KD has filed a registration statement with the stock exchange
for its IPO. Before it is offered, KD's investment bankers would like to estimate the value of the
company using comparable companies. The investment bankers have assembled the following
information based on data for other companies in the same industry that have recently gone public.
In each case the multiples are based upon the IPO price.
Comparable Company
Eenie
Meenie
Minie
Moe

Price/Earnings
12.4
14.6
16.2
20.4

Price/Revenues
1.6
1.4
1.2
0.8
16

Based upon the average PE multiple, what would be a reasonable value for KD?
A. $37.5 million
B. $477 million
C. $500 million
D. $6,360 million
Answer: B (15.9 * 30)
18. Comparable Valuation. Use the following information to calculate the 2015 forward-looking
EV/EBITDA multiple of company XYZ as of 29 Oct 2015. XYZ share information:
Share price (closing on 29 Oct 2015)
Shares outsatnding ($ million)
Net debt ($ million)

Sales
Cost of sales
Gross profit
Non-D&A operating expenses
D&A expense
EBIT
Gain on disposal of property
Earnings before interest and tax
Net interest expenses
Profit before tax
Income tax expense
Net profit
A.
B.
C.
D.

$20
200
200
2016
(Forecast)
($ million)
2,500.00
( 1,500.00)
1,000.00
( 500.00)
( 100.00)
400.00
77.00
477.00
( 12.00)
465.00
( 12.00)
453.00

7.60 x
8.40 x
12.67 x
14.00 x

Answer: B
19. Comparable (calendarisation). Smartech Corporation is considering acquiring Hybrid Systems, a
private company. You are an intern working in the finance team of Smartech. You have been
asked to conduct a preliminary valuation of the target using the valuation multiples of comparable
companies. Your team leader instructs that you should ignore synergies for now because the team
wants to have a feel for the approximate stand-alone value of the target company first. You have
determined that only one listed company, AtomicTech, is comparable to the target company.
Required:

17

a. You notice that AtomicTech and Hybrid have different fiscal year ends. Hence, you would like to
convert the comparable companys forecasts so that the two companies have the same fiscal yearend and you are comparing apples to apples. You can assume that each month is 1/12 of a year.
Calendarize AtomicTechs projected EBIT and write your answers in the table below. Record
your answer to one decimal place (X.X). Show your workings.
EBIT
($ million)
2014
2015F
2016F
2017F

Hybrid

AtomicTech

AtomicTech

(30 June)

(31 Mar)

(30 Jun)

50
80
90
100

65
70
80
85

NA

Show your workings

NA

b. You decide to use EV/EBITDA multiple to value Hybrid. Ignore the answers in part a. Use the
information in the table below to value Hybrid.
(12 months ending 30 June, 2015)
($ thousand)
Gross Profit
Depreciation and amortization
Operating expenses
Other income
EBIT (assume normalized)
Net interest expenses
Earnings before tax
Tax expense @ 20%
Earnings after tax
Debt (at 30 June, 2014)
Cash and Cash equivalent (at 30 June,
2014)
Number of shares outstanding
(thousand) (Current)
Weighted average number of shares
(thousand) (over 12 months ended 30
June, 2014)
Share Price (Current)

Forecast
Hybrid

AtomicTech

50,000
600
1,000
20
9,500
300
9,200
-1,840
7,360
16,000

80,000
500
900
30
7,900
200
7,700
-1,540
6,160
10,000

2,000

20,000

10,000

8,000

9,900

8,800

N/A

8.00

18

i.

Calculate EBITDA for the two companies and equity value, enterprise value and EV/EBITDA
multiple of the comparable company. Fill in the following table. Record your answer to two
decimal places (X.XX) in the table below. Show your workings.
($ thousand)

Hybrid

EBITDA (2015F)
Equity Value
Enterprise value
EBITDA Multiple (2015F)

ii.

Show your workings

AtomicTech

N/A
N/A
N/A

Use AtomicTechs EV/EBITDA multiple (2015F) to derive the enterprise value, equity value and
per share value for Hybrid. Record your answer in thousands ($X thousand) or to two decimal
places ($X.XX) as appropriate in the table below. Show your workings.
Valuation of
Hybrid

Show your
workings

Enterprise value ($ thousand)

Equity value ($ thousand)
Per share value ($)
Answer:
a.
EBIT
($ million)
2014
2015F
2016F
2017F

Hybrid

AtomicTech

AtomicTech

(30 June)

(31 Mar)

(30 Jun)

50
80
90
100

65
70
80
85

66.3
72.5
81.3
NA

Show your workings

NA

b.
i.
($ thousand)
EBITDA (2015F)
Equity Value
Enterprise value
EBITDA Multiple (2015F)

Hybrid

AtomicTech

10,100.00
N/A
N/A
N/A

8,400.00
64,000.00
54,000.00
6.43

Show your workings

ii.

Enterprise value ($ thousand)

Equity value ($ thousand)
Per share value ($)

Valuation of
Hybrid
64,943
50,943
5.09

Show your
workings

19

20. Valuation Methods. Which of the following is true about the DDM, Comparable Company
Multiples and DCF?
A. If applied correctly to one company, three approaches should always give us identical values.
B. DDM can be easily applied to companies that never paid any dividend or conducted share
repurchase.
C. Professionals in the finance industry do not use comparable company multiples to value
companies.
D. The result from a DCF valuation are very sensitive to valuation assumptions.
Answer: A

20