****Please answer A, B & C of #36 and CLEARLY IDENTIFY which is the answer to A,
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****Please answer A, B & C of #36 and CLEARLY IDENTIFY which is the answer to A, B, & C*****
ered before using the equity intrinsic value from part b for business decisions. 36. Identifying Comparables and Estimating Equity Value Using PE Assume that your superior requests that you estimate the equity intrinsic value of CGI Group Inc. using PE ratios for comparable companies-CGI Group is one of the world's largest information technology and business process services companies. The following online data are available from various companies ROE Market Cap mi Forward PE EPS 5-Year Historical Growth Rate Debt-to-Equity (Prior Q) Ticker (T 40) GIB EQIX .. $9,380 2,310 933 294 269 8,650 4,740 498 554 33.30 13.31 13.03 14.40 33.09 9.86 67.40 26.43 29.06 20.65% 7 72% 11 .60% 60.34% (15.91)% (24.05)% 26.59% 47.25% 9.50% (17.79% 15.99% 3.84% 16.53% 4.68% (18.89)% (12.57% 24.86% 16.86% (0.81)% (4.44)% 0.73 1.61 0.35 0.40 0.36 0.01 0.05 0.04 XXIA QNST NTES ULTI DMD DRIV 0.75 Required a. Identify the set of companies you plan to use as comparables. (Hint: Consider each company on basis of profitability, growth, and financial risk.) Estimate the equity intrinsic value of CGI Group. Its earnings estimate is $867 million. Prepare a memorandum to your superior identifying any issues that you believe should be ered before using the equity intrinsic value from part b for business decisions. b. c. consid 5-37. Valuation Using Price-to-NOA Multiple and PB Multiple The following table provides summary data for TExplanation / Answer
a. Companies planned to be used as comparables=J com, NTES, ULTI, & XXIA. The following companies have been chosen based on Market Cap size considering CGI group is a very big company as well as profitablity/financial risks.EQIX has been excluded even thought it is a big market cap size company since its debt equity ratio is high which indicates higher risk in terms of the capital structure.
b. Average PE ratio of the companies considered as comparison is 25.9 while average growth rate of these companies is (basis EPS growth rate) 36%.
Intrinsic Value= Earnings *(PE Ratio+ 2*expected growth rate)
=867*(25.9+2*0.36)= $23079m.
c. Valuing your company basis PE ratio of comparable companies can be risky, as the market price of a share is very dynamic in the market. Further establishing comparables purely on the basis of Profitaility /Financial risks is not sufficient, as the comparables must be in a similar industry of similar size and similar complexities which is difficult to establish just by viewing numbers. The dynamics of each company may vary from the company being valued. Also the PE being used here is a Forward PE which is a futuristic estimate. The PE ratio could be influenced by temporary/exceptional market conditions. Also if the comparable companies are thinly traded, then the Intrinsic value arrived using their PE rations might not be accurate.
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