Harley-Davidson Inc. produces motorcycles, motorcycle parts and related accessor

Question

Harley-Davidson Inc. produces motorcycles, motorcycle parts and related accessories and merchandise in the United States and internationally. It is headquartered in Milwaukee, Wisconsin. Use the following information on Harley-Davidson and five other similar companies to value Harley-Davidson as of December 31, 2004. Harley-Davidson Inc. 2004 ($ millions) Net income $      889.77 Number of common shares, millions          294.31 Earnings before interest and tax $   1,506.16 Tax rate 35.0% Book value of equity $   3,218.47 Book value interest-bearing debt $   1,295.44 Total Sales $   5,320.45 Total Assets $   5,483.29 Harley- Arctic Polaris Marine Winnebago Davidson Cat Brunswick Industries Products Industries Comparison of Timberland with Comparable Companies: Growth Rates, Financial Risks, Size, Returns 5-year growth rate in sales (%)               15.5             6.2             4.1             6.1           15.5            10.8 5-year growth rate in eps (%)               28.1           11.1           47.1           15.9           25.1            17.2 Interest coverage ratio (x)               60.9 *             8.9           85.1 * * Total liabilities to assets (%)                 0.4             0.3             0.6             0.5             0.2              0.5 Total assets ($ millions)              5,483            286         4,346            793            110             395 Indicators of Value Price/earnings (x) 16.9 17.8 27.8 28.6 18.6 MV firm/EBIT(1-tax rate) (x) 17.3 19.4 24.3 29.0 17.6 MV equity/BV equity (x) 2.8 2.8 8.0 7.7 6.5 MV firm/BV firm (x) 2.8 2.3 7.7 7.7 6.5 Price/sales (x) 0.8 0.9 1.6 2.7 1.2 MV firm/sales (x) 0.8 1.1 1.7 2.7 1.2 * These companies have little or no interest-bearing debt outstanding. Harley-Davidson Inc. produces motorcycles, motorcycle parts and related accessories and merchandise in the United States and internationally. It is headquartered in Milwaukee, Wisconsin. Use the following information on Harley-Davidson and five other similar companies to value Harley-Davidson as of December 31, 2004. Harley-Davidson Inc. 2004 ($ millions) Net income $      889.77 Number of common shares, millions          294.31 Earnings before interest and tax $   1,506.16 Tax rate 35.0% Book value of equity $   3,218.47 Book value interest-bearing debt $   1,295.44 Total Sales $   5,320.45 Total Assets $   5,483.29

Explanation / Answer

Answer: Estimated indicator of values for Harley davidson: P/E = 23 MV of firm/EBIT(1-tax rate) = 23 Price/sales = 3 MV of firm/sales = 3 MV of equity/BV of equity = 5.6 MV of firm/BV of firm = 5 Implied value of Harley-Davidson: By price earning multiple: As P/E = 23 and net income per share = $3.02 Therefore value of a share by P/E ratio = $69.53

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