Jason Kidwell is considering whether to acquire a local toy manufacturing compan
ID: 2738493 • Letter: J
Question
Jason Kidwell is considering whether to acquire a local toy manufacturing company, Toys ’n’ Things Inc. The company’s annual income statements for three years are as follows:
b. The current owner of Toys’n’ Things indicated to Jason that he would not take less than five times 2014 EBITDA to sell out. Jason decides that, based on what he knows about the company, the price could not be justified. However, upon further investigation, Jason learns that the owner’s wife is paid $100,000 a year for administrative services that Jason thinks could be done by a $50,000-per-year assistant. Moreover, the owner pays himself a salary of $250,000 per year to run the business, which Jason thinks is at least $50,000 too high based on the demands of the business. In addition, Jason thinks that, by outsourcing raw materials to Asia, he can reduce the firm’s cost of goods sold by 10%. After making adjustments for excessive salaries, what value should Jason place on the business? Can Jason justify the value the owner is placing on the business?
Given
Shares outstanding
9.40
million
Offering Price 10/16/02
$ 12.25
Exhibit P6-12.3
Dick's Sporting Goods Financial Data ($ millions)
Revenues
$ 1,173.794
Gross Profit
$ 298.453
EBIT
$ 55.899
Depreciation & Amortization
$ 13.499
EBITDA
$ 69.398
Balance Sheet Data 8/3/02
Checks Drawn
$ 33.584
Current Portion of Long Term Debt
$ 0.211
Revolving Bank Line of Credit
$ 90.299
Long Term Debt & Capital Leases
$ 3.466
Total Debt
$ 127.560
Cash
$ 13.874
Stockholder's Equity
$ 78.984
Debt/Capitalization
62%
Debt/EBITDA
1.84x
Source: Dick's Sporting Goods Prospectus S-1 dated September 27, 2002
Solution
a. Implied Enterprise Valuation for DKS Based on Market Comparables
Average Comps
DKS Statistic
Implied EV
Revenue Multiple
0.37x
$ 1,173.794
$ 434.304
EBITDA Multiple
5.20x
$ 69.398
$ 360.870
EBIT Multiple
8.30x
$ 55.899
$ 463.962
b. Determine DKS' Implied Equity Value by subtracting Net Debt
Implied Enterprise Value
DKS
Net Debt
Implied Equity Value
Implied IPO Value Per Share
Revenue Multiple
$ 434.304
$ (113.686)
$ 320.618
$ 34.11
EBITDA Multiple
$ 360.870
$ (113.686)
$ 247.184
$ 26.30
EBIT Multiple
$ 463.962
$ (113.686)
$ 350.276
$ 37.26
Dick's IPO priced at $12.25. Its market multiples were valued at a significant discount to the comparables.
Equity Market Capitalization based on 9.47 million shares
DKS Net Debt
DKS Enterprise Value at IPO actual price of $12.25
Implied Multiple based on IPO Price
Discount to Comps
EV/Revenue Multiple
EV/EBITDA Multiple
EV/EBIT Multiple
Analysis: ??????????
2014 2013 2012 Revenues $ 2,243,155 $ 2,001,501 $ 2,115,002 Cost of goods sold $ (1,458,051) $ (1,300,976) $ (1,374,751) Gross profits $ 758,104 $ 700,525 $ 740,251 Depreciation and administrative expenses $ (574,316) $ (550,150) $ (561,500) Net operating income $ 210,798 $ 150,375 $ 178,751Explanation / Answer
Dicks IPO price discount comparable:
Revenue Multiple
EBITDA Multiple
EBIT Multiple
Equity market capitalization
$ 320.62
$ 247.18
$ 350.28
DKS Net Debt
$ 113.69
$ 113.69
$ 113.69
DKS Enterprise value
$ 434.30
$ 360.87
$ 463.96
Implied Multiple based on IPO
Discount to comps
EV / Revenue Multiple
$ 34.11
$ 12.73
EV/ EBITDA
$ 26.30
$ 13.72
EV/EBIT
$ 37.26
$ 12.45
Revenue Multiple
EBITDA Multiple
EBIT Multiple
Equity market capitalization
$ 320.62
$ 247.18
$ 350.28
DKS Net Debt
$ 113.69
$ 113.69
$ 113.69
DKS Enterprise value
$ 434.30
$ 360.87
$ 463.96
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