The following company is expected to grow rapidly for the first four year. The E

Question

The following company is expected to grow rapidly for the first four year.

The EPS is expected to grow at 30, 18, 12, and 9 percent, respectively for the first four years.  After the fast growth for the first four years the growth slows down to 7 percent rate.  The company is expected to keep this growth for the long-term.

The company’s initial earnings per share EPS is $2.4.

The required net capital expenditure per share for the next five years are $3, $2.5, $2, $1.5, and $1.

The required net working capital expenditure is the half of fixed capital expenditure for each year

The company will borrow as much as the 30 percent of total capital investment required (fixed capital plus working capital) for each year

The cost of equity is assumed to be flat 10.4 percent for the entire period.

P/E ratio of similar companies is 30.

Question:

If the P/E ratio of similar companies is 30, what is the value of this company using price multiples approach?

Explanation / Answer

Solution.

Calculation for value of this company using price multiples approach.

Company’s initial earnings per share EPS is $2.4.

P/E ratio of similar companies is 30.

Value of a company = $2.4 / 30% = $80.

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