Topic: Stock valuation using multiples

Bloom’s: Level 4 Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

Topic: Stock valuation using multiples

Bloom’s: Level 4 Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

77) SK Enterprises has total assets of $421,800, outstanding debt of $129,000, cash of $18,700, sales of $387,400, costs of $241,900, and depreciation of $31,200. The firm has 11,300 shares of stock priced at $34.40 a share. What is the firm’s EV to EBITDA ratio?

A) 4.08

B) 3.43

C) 4.27

D) 3.67

E) 3.82

Answer: B

Explanation: EV/EBITDA = [(11,300 × $34.40) + $129,000 − $18,700] / ($387,400 − $241,900)

= 3.43

Difficulty: 3 Hard

Section: 6.3 Comparables

Topic: Stock valuation using multiples

Bloom’s: Level 4 Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

78) Lassiter Motors has a debt-equity ratio of 0.45 and total debt of $186,000. The firm’s market- to-book ratio is 2.6. The earnings before interest and taxes is $69,200, interest is $26,400, depreciation and amortization total $87,100, and the tax rate is 34 percent. What is the firm’s EV to EBITDA ratio if the firm has $31,000 in cash?

A) 7.34

B) 5.47

C) 6.01

D) 6.38

E) 7.87

Answer: E

Explanation: Market value of equity = ($186,000 / 0.45) × 2.6 = $1,074,666.67

EV/EBITDA = ($1,074,666.67 + $186,000 − $31,000) / ($69,200 + $87,100) = 7.87

Difficulty: 3 Hard

Section: 6.3 Comparables

Topic: Stock valuation using multiples

Bloom’s: Level 4 Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

79) Duncan Street Mills is an all-equity firm with 28,000 shares of stock outstanding. The firm expects sales of $400,000 next year. Sales are expected to grow by 5 percent for the following 2 years and then level off to a constant 3 percent growth rate. Net cash flow varies in direct proportion to sales and is currently equal to 15 percent of sales. The required return for this firm is 16 percent. What is the estimated current value of one share of stock?

A) $17.02

B) $16.21

C) $16.94

D) $18.76

E) $17.34

Answer: A

Explanation: Net cash flowYear 1 = 0.15 × $400,000 = $60,000

Terminal valueYear 3 = ($60,000 × 1.052 × 1.03) / (0.16 − 0.03) = $524,111.54

Total firm value = $60,000 / 1.16 + ($60,000 × 1.05) / 1.162 + [($60,000 × 1.052) +

$524,111.54] / 1.163 = $476,698.99

Price per share = $476,698.99 / 28,000 = $17.02

Difficulty: 3 Hard

Section: 6.4 Valuing Stocks Using Free Cash Flows Topic: Free cash flow models and valuations Bloom’s: Level 4 Analyze

AACSB: Analytical Thinking

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80) Hanover Inc. is an all-equity firm with 35,000 shares of stock outstanding. The firm expects sales of $750,000 next year. Sales are expected to grow by 10 percent the following year and then level off to a constant 4 percent growth rate. Net cash flow varies in direct proportion to sales and is currently equal to 17 percent of sales. The required return for this firm is 14 percent. What is the estimated current value of one share of stock?

A) $38.35

B) $36.21

C) $34.71

D) $35.20

E) $36.71

Answer: A

Explanation: Net cash flowYear 1 = 0.17 × $750,000 = $127,500

Terminal valueYear 2 = ($127,500 × 1.10 × 1.04) / (0.14 − 0.04) = $1,458,600

Current firm value = $127,500 / 1.14 + [($127,500 × 1.10) + $1,458,600] / 1.142 =

$1,342,105.26

Price per share = $1,342,105.26 / 35,000 = $38.35