The East-West Company is planning to expand internationally by realizing major i

Question

The East-West Company is planning to expand internationally by realizing major investments in several emerging markets such as Turkey and India. They estimate their investment needs to be around $50 Million and that the most sensible source of funding would be doing an IPO. Based on recent market trends, Deutsche Bank, their underwriter, established that the value of operations, or enterprise value (EV), of companies similar to East-West is equivalent to 6 times EBITDA. East-West latest figures are shown in the table below (in Thousands of USD):

East-West currently has $20 Million in medium and long-term bank debt outstanding, and no other form of debt. Management expects to have to pay about $300,000 in lawyer fees and other fixed costs for this issue. Deutsche Bank’s underwriting spread is 7% of the total amount of the issue. East-West currently has 1,000,000 shares or common stock outstanding.

1) What is East-West intrinsic stock price?

2) How many new shares should East-West issue, assuming that the price of new stocks issued is equal

to the current intrinsic price, to fund its expansion project?

Sales COGS Gross Profit SG&A; Expenses Depreciation expense Amortization Expense EBIT Interest EBT (Profit Before Tax Taxes (40% Net Profit 25,000 15,000 10,000 3,000 1.000 0 6,000 600 5,400 2,160 3,240

Explanation / Answer

Multiples Based Valuation

Comparable EBITDA Value = 6 Times
East West EBITDA = EBIT + Dep + AMortizayion = 6 +1+0 = 7 Million

Enterprise Value = EBITDA * Multiple = 7 * 6 = $ 42 Million

Debt = $ 20 Million
Equity Value = Enterprise Value - Debt Value = 42 - 20 = $ 22 Million

Common stock outstanding = 1 Million

1) Intrinsic Stock Price = Equity Value / Stock Outstanding = 22/1 = $ 22 per share

2)
Proceeds from Each Share * No. of Shares to be Issued - Lawyer Fees = Funds Needed
(Issue Price - Underwriting Charge)* No. of Shares to be Issued - 300,000 = 50,000,000
(22 - 7% of 22)* n = 50,300,000
20.46n = 50,300,000
n= 50,300,000/ 20.46 = 2458456 Shares

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