Suppose you have gathered the following data on 2 large U.S. firms that primaril

Question

Suppose you have gathered the following data on 2 large U.S. firms that primarily own timber: Rayonier and Plum Creek. We are trying to use the market data on Rayonier to estimate the market value of Plum Creek. We have the following data (in $-billions):

Market value equity

Value debt

Cash

Net income

EBITDA

Plum Creek

?

3.3

.1

.19

.41

Rayonier

6.1

1.5

.2

.27

.56

Based on the EBITDA multiple, what is the estimated enterprise value of Plum Creek?

Based on the net income multiple, what is the estimated enterprise value of Plum Creek?

If the actual market cap of Plum Creek was $8 billion, would you recommend buying or selling Plum Creek? Why?

Market value equity

Value debt

Cash

Net income

EBITDA

Plum Creek

?

3.3

.1

.19

.41

Rayonier

6.1

1.5

.2

.27

.56

Explanation / Answer

Enterprise Value = Market Value of Debt + Market Value of Equity - Cash

For Rayonier,

Enterprise Value = 6.1 + 1.5 - 0.2 = $7.4 billion

EV / EBITDA = 7.4/0.56 = 13.21

EV / Net Income = 7.4/0.27 = 27.41

Based on EBITDA multiple,

Enterprise Value of Plum Creek = 13.21 * 0.41 = $5.42 billion

Based on Net Income multiple,

Enterprise Value of Plum Creek = 27.41 * 0.19 = $5.21 billion

If the actual market cap of Plum Creek was $8 billion,

Enterprise Value of Plum Creek = 8 + 3.3 - 0.1 = $ 11.2 billion

EV/EBITDA = 11.2/0.41 = 27.32

EV/Net Income = 11.2/0.19 = 58.95

Since EV/EBITDA and EV/Net Income of Plum Creek are higher than that of Rayonier, it is overvalued or more expensive as compared to Rayonier. Thus, I would recommend selling Plum Creek.

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