P 10-18 (similar to) Question Help Suppose Rocky Brands has earnings per share o

Question

P 10-18 (similar to) Question Help Suppose Rocky Brands has earnings per share of $2.23 and EBITDA of $30.6 million. The firm also has 5.2 million shares outstanding and debt of $135 million (net of cash) You believe Deckers Outdoor Corporation is comparable to Rocky Brands in terms of its underlying business, but Deckers has no debt. If Deckers has a P/E of 13.4 and an enterprise value to EBITDA multiple of 7.4, estimate the value of Rocky Brands stock using both multiples. Which estimate is likely to be more accurate? The value of Rocky Brands stock using the P/E ratio is million. (Round to one decimal place.)

Explanation / Answer

P 10-18 Rocky Brands EPS 2.23 EBITDA 30.6 Mln. Shares o/s 5.2 Min. Debt 135 Mln. Given data about comparable: Deckers P/E=MPS/EPS=13.4 So, using this for Rocky brand MPS/EPS=13.4 ie. MPS/2.23=13.4 So, MPS of Rocky Brand=13.4*2.23= 29.882 So, market value of Equity=29.882*5.2= 155.3864 Millions Market value of Debt(net of cash)= 135 mlns. So,Enterprise value= Mkt. value of Equity+ Market value of Debt- Cash ie. 155.3864+135=290.3864 millions Given data about comparable: Deckers EV/EBITDA=7.4 So, using this for Rocky brand EV/30.6=7.4 So, Rocky's EV=30.6*7.4= 226.44 EV using the P/E ratio is likely to be more accurate as it uses the latest prevailing market conditions & takes into account the debt value also. So, ANSWER: Rocky Brand's Ev using the P/E ratio= 290.3864 millions   or 290.4 millions P 10-19 a. Using Dividend Discount Model Current market Price P(0)= D(1)/(r-g) D(1)= D(0)+ growth rate g r= reqd. return or the cost of equity capital Fixing the given values, we have, Current market Price P(0)=(1.25*(1.07))/(0.12-0.07)= 26.75 Revised expected price will be Current market Price P(0)=(1.25*(1.035))/(0.12-0.035)= 15.22 Drop in value=26.75-15.22= 11.53 b. Likely price after reading the news= 15.22 as comparatively reduced growth rate of dividends is predicted. P 10-21 a. Value of a firm is the present value of its future cash flows So, Decreased Value of equity=(182/1.135)+(63/1.135^2)= 209.26 Millions So,the change will be the decrease in stock price ,ie. =209.26 mlns./33 mln. Shares 209.26 6.34 Change of $ 6.34 decrease in price per share of Roybus Inc. b. It depends when the share was bought-- before or after the fire In case, before fire, then this decrease in price will result in a loss to the seller , who has bought the share relying on good cash flow predictions. If bought after the fire, probably, he himself would have bought at the reduced price, & may incur neither loss nor profit. In either case, he cannot make any profit. P10-23 Total spread= 11*5*30= 1650 So, % by which total return is lower=1650/102000= 1.62% lower P 10-24 At the end of 10 years, the portfolio will be lower by the amount of (18%-10%)* $ 110000*10 yrs.=   $ 88000

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