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

Enterprise Value to EBITA= [(1-Tax rate){1-(Growth rate / ROIC)}]/(Cost of Capital-Growth rate)

Company A= [(1-.25){1-(0.02/0.15)}]/(0.10-0.02)= 8.13

Company B= [(1-.25){1-(0.06/0.10)}]/(0.10-0.06)= 7.50

Yes higher growth rate lead to higher multiple because due to higher growth rate denominator will decline which leads to higher multiple.

Company Name Tax Rate Cost of Cap. Growth Rate ROIC EBITDA EV/EBITDA A 25% 10% 2% 15% 160.00 8.13 B 25% 10% 6% 10% 100.00 7.50

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