You are valuing multiple steady-state companies in the same industry. Company A

Question

You are valuing multiple steady-state companies in the same industry. Company A is projected to earn $160 in EBITA, grow at 2 percent per year, and generate ROICs equal to 15 percent. Company B is projected to earn $100 in EBITA, grow at 6 percent per year, and generate ROICs equal to 10 percent. Both companies have an operating tax rate of 25 percent and a cost of capital of 10 percent. What are the etnerprise-value-to-EBITA multiples for both companies? Does higher growth lead to a higher multiple in this case?

Explanation / Answer

net income = 160*.75 = 120

PV = 120/(.1-.02) = 1500

NPV = (-120/.15)+(1500)= 700

EV/EBITA = 700/160 = 4.375

for B

Net income = $75

PV = 75/(.1-.06) = 1875

NPV = (-75/.1)+1875 = 1125

EV?EBITA + 1125/100 = 11.25

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.