Conglomerate Inc. has 20 million shares outstanding and its stock is currently trading at $25 a share.
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Question:
Conglomerate Inc. has 20 million shares outstanding and its stock is currently trading at $25 a share. The firm has two divisions: industrial electrical equipment and machine tools. The following table provides financial information for each division (in millions of dollars): | ||
Industrial Electrical Equipment | Machine Tools | |
Net Income | 19.61 | 21.2 |
Sales | 52.9 | 278.71 |
Book Value of Equity | 134.83 | 279.32 |
EBITDA | 17.46 | 49.44 |
Total Debt | 7.33 | 55.01 |
Since the managers believe that both divisions are being undervalued by investors, they are considering a divestiture program. To justify this program, the managers have collected the following data for several industrial electrical equipment and machine tools companies: | ||
Industrial Electrical Equipment | ||
Nidec | Eaton | |
Market Value of Equity/Sales | 2.29 | 0.94 |
Market Value of Equity /Book Value of Equity | 4.04 | 1.65 |
Enterprise Value/EBITDA | 14.539 | 13.405 |
Enterprise Value/Sales | 2.31 | 1.17 |
Total Debt | $1,430M | $3,470M |
Price per Share | $24.53 | $67.61 |
Number of Shares | 557.17M | 166.7M |
Machine Tools | ||
Kaydon | Stanley Works | |
Market Value of Equity/Sales | 2.37 | 1.2 |
Market Value of Equity /Book Value of Equity | 1.6 | 2.27 |
Enterprise Value/EBITDA | 8.512 | 9.38 |
Enterprise Value/Sales | 1.84 | 1.47 |
Total Debt | 0 | $1,380M |
Price per Share | $33.70 | $53.36 |
Number of Shares | 33.23M | 80.63M |
Note: Enterprise value is equal to the market value of equity plus total debt. | ||
Should the firm go ahead with the divestiture program? Please justify your answer. |
Related Book For
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
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