ABC PQR Post merger -

Company Company ABC Company

Stock Price 100 25 100
EPS 5.0 2.0 5.33
P/E Ratio 20 13 18.8
Total shares outstanding 100,000 50,000 112,500
Total earnings 500,000 100,000 600,000
Market capitalisation 10,000,000 1,250,000 11,250,000
Question

Income Statement
2009 2010 2011 2012

Revenues 1,000 1,150 1,323 1,521

COGS 500 560 627 702
Gross profit 500 590 695 818
SG&A 120 138 159 183
Depreciation 100 100 100 100
EBIT 280 352 437 536
Net Interest Expense 50 58 66 76
EBT 230 295 370 460
Income Tax 115 147 185 230
Net Income 115 147 185 230

Other Financial Information

Change in Working Capital 50 25 10 40
Change in Deferred Taxes 20 22 24 26
Capital expenditures 125 145 165 185
Tax Rate = 50%
WACC = 10.5%
WACC(adjusted) = 10.0%
Terminal growth rate = 5%
Solution

Step 1 and 2 are already complete

Step 3
Calculate the free cash flow using the pro forma data
2009 2010 2011 2012
Net Income 115 147 185 230
Add: Net Interest after Tax 25 29 33 38
Unlevered Net income 140 176 218 268
Add:Change in deferred taxes 20 22 24 26
NOPLAT 160 198 242 294
Add:Depreciation 100 100 100 100
Less: Change in working capital 50 25 10 40
Less: Capital Expenditure 125 145 165 185
Free cash flow 85 128 167 169

Step 4
Discount free cash flows to the present at the1appropriate
2 discount3rate 4
Years 2009 2010 2011 2012
Free Cash Flow 85 128 167 169
PV of Cahs Flows 77 106 126 115
Sum of PV of Cash Flows 424
Step 5
Determine terminal value and discount it back to the present

Terminal Value 3,548

PV of Terminal Value 2,423
Step 6
Determine Firm Value
Target Value 2,847
Question
Comparable Company Stock
PQR Firm-1 Firm-2 Firm-3
Current Stock Price 30.0 45.0 20.0
Earnings Per Share 3.5 2.0 4.0 1.5
Book value per share 13.5 9.0 12.5 5.0
Cash flow per share 4.0 2.5 4.5 1.5
Sales per share 40.0 25.0 30.0 20.0

Take over prices of recent M&A Transactions

Target Company Stock Price prior to Take Over Price

take over
Target 1 30 40
Target 2 20 23
Target 3 100 135
Target 4 50 65
Solution

Step 1
Identify set of comparable firms

Step 2 & 3
Calulate various relative value measures based on current market prices of companies in the
sample. Calculate mean of the relative measures

Relative Value Measures Firm - 1 Firm - 2 Firm - 3 Mean

Current Stock Price 30.0 45.0 20.0

P/E 15.0 11.3 13.3 13.2
P/BV 3.3 3.6 4.0 3.6
P/CF 12.0 10.0 13.3 11.8
P/S 1.2 1.5 1.0 1.2
Estimted stock value of PQR
Mean RV Est. Stock
Target Company Statistics PQR Data RV Multiple
Value Price of PQR

Earnings Per Share 3.5 P/E 13.2 46.2

Book value per share 13.5 P/BV 3.6 49.2
Cash flow per share 4.0 P/CF 11.8 47.1
Sales per share 40.0 P/S 1.2 49.3
Mean Estimated Stock Value = 48.0
Step 4
Estimate Takeover Premium
Target Company Stock Price prior to take Take Over Price Takeover Premium
over
Target 1 30 40 33%
Target 2 20 23 15%
Target 3 100 135 35%
Target 4 50 65 30%
Mean Premium = 28%
Step 5
Calculate estimated takeover price for target as the sum of estimated value based on comparables and
the takeover premium

Estimated Stock Value of PQR = 48.0

Estimated Takeover premium = 28%
Estimated takeover price = 61.5
Question

Company Statistics ABC Acquired Acquired Acquired

Company Company 1 Company 2 Company 3

Deal Price Per Share 40.0 55.0 25.0

Earnings Per Share 3.5 2.0 4.0 1.5
Book value per share 13.5 9.0 12.5 5.0
Cash flow per share 4.0 2.5 4.5 1.5
Sales per share 40.0 25.0 30.0 20.0
Solution

Step 1
Identify a set of recent takeover transactions
Provided in the question

Step 2 & 3
Calculate various relative valuation measures based on completed deal prices
for the peer companies

Acquired Acquired Acquired Mean Relative

Relative Value Measure
Company 1 Company 2 Company 3 Value Measure

P/E 20.0 13.8 16.7 16.8

P/BV 4.4 4.4 5.0 4.6
P/CF 16.0 12.2 16.7 15.0
P/Sales 1.6 1.8 1.3 1.6

Step 4
Estimted stock value of PQR
Target Company PQR Data RV Multiple Mean RV Value Est. Stock Price
Statistics of PQR
Earnings Per Share 3.5 P/E 16.8 58.8
Book value per share 13.5 P/BV 4.6 62.3
Cash flow per share 4.0 P/CF 15.0 59.9
Sales per share 40.0 P/Sales 1.6 62.4
Mean Estimated Stock Value = 60.9