8. Market multiple analysis Aa Aa The discounted cash flow model and the corpora

Question

8. Market multiple analysis Aa Aa The discounted cash flow model and the corporate valuation model are the most widely used valuation techniques. Often these valuations are accompanied by market multiple analysis, which is based on the fundamental concept that similar assets should have similar values. Mitata Co. is a privately owned firm with few investors. Investors forecast their earnings per share (EPS) to reach $5 this coming year. The average price-to-earnings (P/E) ratio for similar companies in the S&P 500 is 10. What will be the estimated intrinsic value of the Mitata Co.'s stock? Market multiple analysis is also used to calculate the value of a company, which is further used to calculate the intrinsic value per share of the firm. Suppose you have the information given in the following table for Company X. EBITDA Total value of equity Total firm value Year 1 $17,800 $202,500 $303,750 Year 2 $20,625 $187,500 $337,500 What is value of the entity multiple of Company X in Year 1? O 16.36 O 17.07 O 11.38 O 22.19

Explanation / Answer

(a) The EPS is given as $5. Average P/E is given by 10. Hence we can estimate the price or intrinsic value by multiplying these two values which gives $50.

(b) Entity multiple example is Enterprise value (EV) or Firm Value divided by EBITDA

Estimating the multiple in this case : EV/ EBITDA = 303,750/17,800 which is 17.04 approx.

Hence the second option would be the correct answer as that is approximately equal to the derived number.

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