Determine the enterprise value of Cenabal using the Earnings and Sales multiples

Question

Determine the enterprise value of Cenabal using the Earnings and Sales multiples approach. Use additional information provided in the “Cenabal Spreadsheet”.

L M N 1 Exhibit A 2 Cenabal Addition al Information ompetitor Information Pro Forma Income Statement(2007) Actual Income Statements of Competitors (2006) Organic As % Dressin As % of Mary Ranch As % of of Healthy As % of Industry Average Cenabal sal es Dressin 6 Net sales(a) 7 Cost of goods sold 255,000 4,200,000 50,000,000 2,700,000 186,000 73% 69,000 27% 40,000 16% 2,730,000 1,470,000 840,000 65% 28,000,000 56% 35% 22,000,000 44% 20% 15,000,000 30% 1.809.000 67% 891,000 33% 810,000 30% 63% 37% 27% Gross profit 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Operating expenses Interest expense 30,000 1% 1,000,000 2% 100,000 2% Profit (loss) before ta Income taxes(35%) 29,000 11% 10,150 1% ·0% 14% 6,000,000 12% 600,000 210,000 19,000 -6,650 9% 4% 2,100,000 4% 3% Net Income 18,850 7% 390,000 996 3.900,000 8% 12,350 -0% 6% (a) Assuming Cenabal sells 5000 cases with 12 bottles per case at $4.25 Latest Share Price Shares Outstandin g(in millions) 20.1 5.6 10.2 5.46 0.9 24 25 Debt($ from balance sheet) Cash ($ from balance sheet) 375,000 420,000 12,500,000 5,000,000 1,250,000 135,000

Explanation / Answer

Calculate Sales per share and earnings per share (EPS) for each competitor by dividing their sales and net income by no. of shares.

Now, calculate P/S and P/E for them by dividing the stock price by sales and earnings per share respectively. For Healthy, P/E is negative so we eliminate it as it is not meaningful.

Take the average P/S and P/E for them.

Equity Value of Cenabal = Average P/S x Sales = 2.25 x 255,000 = $573,124

Using P/E, Equity Value = P/E x Net Income = 28.82 x 18,850 = $543,170

Enterprise Value of Cenable = Equity Value + Debt - Cash

As Debt and Cash information for Cenable is not available, we cannot calculate EV.

Mary Organic Healthy Sales 4,200,000 50,000,000 2,700,000 Net Income 390,000 3,900,000 -12,350 Shares 1,100,000 5,600,000 900,000 Sales per share $     3.82 $       8.93 $     3.00 EPS $     0.35 $       0.70 -$     0.01 Stock Price $   10.20 $     20.10 $     5.46 Average P/S 2.67 2.25 1.82 2.25 P/E 28.77 28.86 0 28.82

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