Sharon wants to value the equity of Moon Corporation (MC), a private company, us

Question

Sharon wants to value the equity of Moon Corporation (MC), a private company, using the GPCM. The stock is currently trading at $45 per share. She gathers the following information regarding comparable public companies in the same industry as MC:

Average MVIC-EBITDA multiple = 7.2

An upward adjustment of 30% to the average comparable public company MVIC-EBITDA ratio is required to reflect the relative risk and growth characteristics of MC.

Based on past acquisitions of public companies in the industry, a 20% premium for control is considered appropriate.

Sharon also obtains the following information regarding MC:

Normalized EBITDA = $22.50 million

Market value of debt = $114 million

Normalized D/E ratio = 0.6

Given that the company has three million common shares outstanding, the stock is most likely:

Select one:

a. Undervalued.

b. Fairly valued.

c. Overvalued.

Explanation / Answer

Current given multiple of EV/ EBITDA=7.2

UPWARD ADJUSTMENT OF30%=7.2×1.3=9.36

NORMALISED EBITDA=22.50

THEREFORE COMPANY VALUE=EV/EBITDA*NORMALISED EBITDA

=9.36*22.5=210.6

ADJUSTING FOR CONTROL PREMIUM OF 20%=210.6×1.2=252.72

VALUE OF EQUITY=COMPANY VALUE -MARKET VALUE OF DEBT

=252.72-114=138.72

VALUE PER SHARE=138.72/3=46.24

SINCE INTRINSIC VALUE OF 46.24 IS GREATER THAN CURRENT VALUE OF 45 IT IS UNDERVALUED

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