PROBLEM 3

Given
Financial Information (Millions) O'Reilly Advance Auto Zone
Revenues $ 2,120.00 $ 4,400.00 $ 5,890.00
EBITDA 321.86 544.38 1,130.00
Net Income 171.62 240.16 562.44
Earnings per Share 1.507 2.183 7.301
Interest Bearing Debt 120.00 560.00 1,720.00
Common Equity 1,145.77 939.51 641.16
Total Assets 1,713.90 2,615.73 4,401.85

Financial Ratios
Debt to Equity 0.105 0.596 2.683
Gross Margins 43.95% 47.25% 49.09%
Operating Margins 12.47% 9.42% 16.77%
Expected Growth in EPS (5 yrs) 18.50% 16.00% 13.00%

Market Valuations (Millions)

Market Capitalization $ 3,240.00 $ 3,040.00 $ 6,290.00
Enterprise Value 3,360.00 3,600.00 8,010.00

Valuation Ratios
Enterprise Value/EBITDA 10.44 6.61 7.09
P-E Ratio (Trailing) 19.42 13.30 11.56
P-E Ratio (Forward) 15.24 11.21 10.21
Beta 1.24 1.79 1.25

Operating Margin 12.47% 9.42% 16.77%

Return on Equity 14.98% 25.56% 87.72%

Profit Margin 8.10% 5.46% 9.55%

Asset Turnover 123.69% 168.21% 133.81%
Leverage 149.59% 278.42% 686.55%

Product 14.98% 25.56% 87.72%

Solution

a. The initial estimate would involve using the average valuation ratios for the peer group
firms to place a value on Carquest. For example, Enterprise value/EBITDA and the P-E
ratio. Next, we should look at Carquest to see which of the peer firms is most similar in
terms of size, growth, and use of financial leverage. This would help us shade our initial
analysis toward the most similar firm.
b. O' Reilly seems to be the "hottest" company. EBITDA as well as PE multiples are the
highest. There are significant differences in leverage across the firms.

O'Reilly has the least financial risk (see Debt to equity ratio). Its profit margin is also pretty
good. Growth rate in EPS is also the highest.

Lower risk and higher growth justify high multiples for O'Reilly. Although Advance has
higher growth and lower financial risk than AutoZone, its profit margins and operating
margins are the lowest. Also beta for Advance is the highest. High beta low margins might
arise due to a higher operating leverage. It is not altogether surprising that Autozone has
a slightly higher multiple than Advance.
 PROBLEM 4

Given
Depreciation expense $ 50,000
Salary adjustments $ 100,000
Annual outsourcing savings/Cost of goods so 10%

Historical Incomes Statements for Toys 'n Thing, Inc.

2010 2009 2008
Revenues $ 2,243,155 $ 2,001,501 $ 2,115,002
Cost of goods sold 1,458,051 1,300,976 1,374,751
Gross profits 785,104 700,525 740,251
General and Administrative Expenses* 574,316 550,150 561,500
Net Operating Income $ 210,788 $ 150,375 $ 178,751

*Includes depreciation expense of $50,000 per year.

Solution
a. Years
2010 2009
Net Operating Income $ 210,788 $ 150,375
Plus: Depreciation expense 50,000 50,000
EBITDA $ 260,788 $ 200,375

Valuation EBITDA Multiple 2010 2009

3 $ 782,365 $ 601,126
4 1,043,153 801,501
Average $ 912,759 $ 701,314

b.
2010 2009
EBITDA $ 260,788 $ 200,375
Plus: Salary adjustments 100,000 100,000
Plus: Outsourcing savings 145,805 130,098
Adjusted EBITDA $ 506,593 $ 430,473

Valuation EBITDA Multiple 2010 2009

3 $ 1,519,780 $ 1,291,419
4 2,026,373 1,721,892
Average $ 1,773,077 $ 1,506,655

Asking price = 5 x 2010 Unadjusted EBITDA $ 1,303,941

Estimated value after adjustments $ 1,773,077
ars
2008
$ 178,751
50,000
$ 228,751

2008
$ 686,252
915,003
$ 800,627

2008
$ 228,751
100,000
137,475
$ 466,226

2008
$ 1,398,677
1,864,903
$ 1,631,790
 PROBLEM 6

Given
Levered equity beta 1.27
Risk free rate (10 year US Treasury bon 5.02%
Market risk premium 5.00%

Estimated earnings for 2007 $ 5.69 0.026462039

Dividend payout ratio 40.00%
Stock price (12/07/06) $ 86.01

Return on
Description Market Cap P/E Equity %
Sector: Industrial Goods 16.606 14.94%
Industry: Industrial Equipment & Components 15.900 18.40%
Emerson Electric Co. $34.61B 19.276 23.72%
Parker-Hannifin Corp. 9.81B 14.150 18.16%
Roper Industries Inc. 4.44B 24.685 14.27%
Pentair Inc. 3.23B 17.943 11.56%
Walter Industries Inc. 2.19B 23.537 15.70%

Given
a.
Emerson Comparison
to Industry
P/E Above
ROE Above
Dividend Yield Above
LTD to Equity Below
Price to Book Below -- But higher than
all comparison firms--
probably an outlier is
driving the industry
average.
Net Profit Margin Above
Price to Cash Flow Above
 BLEM 6

Given

Long-term Price To
Dividend Debt to Price to Net Profit Free Cash
Yield % Equity Book Value Margin Flow
1.48% 0.87 50.471 5.40% 75.481
1.41% 0.649 10.11 7.90% -134.900
2.40% 0.494 4.257 9.54% 65.156
1.20% 0.308 2.298 8.25% 34.392
0.50% 0.603 3.122 11.89% 232.735
1.70% 0.485 1.974 4.48% 147.667
0.30% 4.036 2.731 7.38% -10.682
 PROBLEM 10

Given
EXHIBIT 1
Earthlink Yahoo
Financial Information ELNK YHOO
2003 Shares Outstanding $ 159,399,000 $ 655,602,000
2003 Fiscal Close Stock Price $ 10.00 $ 45.03
Market Capitalization $ 1,593,990,000 $ 29,521,758,060
Short Term Debt $ 900,000 $ -
Long Term Debt $ - $ 750,000,000
Cash & Equivalents $ 349,740,000 $ 713,539,000
Short Term Investments $ 89,088,000 $ 595,975,000
EBITDA $ 218,100,000 $ 455,300,000
Net Income $ (62,200,000) $ 237,900,000
Calculated EPS (0.39) 0.36

Solution

Price to Earnings (25.63) 124.09

Enterprise Value $1,245,150,000 $29,558,219,060
EBITDA multiple 5.71 64.92

Part a.
Google
EBITDA $ 800,000,000
Cash $ 430,000,000
Debt $ 10,000,000
Net income $ 400,000,000
Shares 271,219,643
EPS $ 1.47
IPO proceeds $ 1,670,000,000

Earthlink Yahoo
Imputed IPO price per share from PE ratio ($37.79) $183.01
Impute EV from EBITDA multiples $4,567,262,724 $51,936,251,368
Owner's equity $4,987,262,724 $52,356,251,368
Impute IPO price per share $18.39 $193.04

Part b.
Fairly close to eBay in terms of EBITDA and NI. Microsoft and Earthlink have little debt. Microsoft seem to be much bigge
huge amounts of debt. They do not seem comparable. Yahoo has a similar businesses. So the choice is between Ebay a
best if considering the future business lines and growth potential, but then some adjustment should be made to reflect the
LEM 10

eBay Microsoft
EBAY MSFT
$ 646,819,000 $ 10,800,000,000
$ 64.61 $ 25.64
$ 41,790,975,590 $ 276,912,000,000
$ 2,800,000 $ -
$ 124,500,000 $ -
$ 1,381,513,000 $ 6,438,000,000
$ 340,576,000 $ 42,610,000,000
$ 818,200,000 $ 14,656,000,000
$ 441,800,000 $ 9,993,000,000
0.68 0.93

ution
Average
94.59 27.71 55.19
$40,536,762,590 $270,474,000,000
49.54 18.45 34.66

eBay Microsoft Average

$139.51 $40.87 $81.40
$39,635,064,864 $14,763,864,629 $27,725,610,896
$40,055,064,864 $15,183,864,629 $28,145,610,896 Equity= EV-net debt
$147.68 $55.98 $103.77

e little debt. Microsoft seem to be much bigger in size. Yahoo and e-Bay has
businesses. So the choice is between Ebay and Yahoo. Yahoo may be the
ome adjustment should be made to reflect the leverage difference.