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

Question

2. 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 enterprise-value-to-EBITA multi-
ples for both companies? Does higher growth lead to a higher multiple in
this case?

PS: please provide the detailed solution. Thx so much.

Explanation / Answer

Net Income = 160*.75 = 120

PV = 120/(0.1 - 0.02) = 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 2
• Subjects

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