Suppose we want to check the robustness of an estimated terminal value (calculated in year 2)...

  

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Suppose we want to check the robustness of an estimated terminal value (calculated in year 2) for a company we are valuing. We look at a very similar company: • Its publicly listed stock sells for a price of $23, it has 1000 shares, $500 of debt and an EBIT of $2,000 The projected EBIT on our company is as follows: O O EBIT = 1400, EBIT₁ = 1700, EBIT₂ = = 1900 What is a terminal value we could use? Sun, Inc. produces solar heaters • Cash flows will be $1.8M/year for 10 years • Firm has $5M in debt, $5M in equity O r = 10%, and debt will be paid in equal installments over the next 10 years Tc = 46%; unlevered cost of equity r = 12% O What is the value of this firm? With the following information, what is the 'valuation' of Delta? • UA's D+E (market value of debt and equity) is $1B, and AA's is $2B • UA's sales = $1.5B, AA's sales = $1.25B • UA's EBIT = $0.5B, AA's EBIT = $0.75B Think of these EBIT values and the sales #'s as projected values for this year for UA and AA • Delta's projected sales this year is $2B, and projected EBIT is $0.75B O Suppose we want to check the robustness of an estimated terminal value (calculated in year 2) for a company we are valuing. We look at a very similar company: • Its publicly listed stock sells for a price of $23, it has 1000 shares, $500 of debt and an EBIT of $2,000 The projected EBIT on our company is as follows: O O EBIT = 1400, EBIT₁ = 1700, EBIT₂ = = 1900 What is a terminal value we could use? Sun, Inc. produces solar heaters • Cash flows will be $1.8M/year for 10 years • Firm has $5M in debt, $5M in equity O r = 10%, and debt will be paid in equal installments over the next 10 years Tc = 46%; unlevered cost of equity r = 12% O What is the value of this firm? With the following information, what is the 'valuation' of Delta? • UA's D+E (market value of debt and equity) is $1B, and AA's is $2B • UA's sales = $1.5B, AA's sales = $1.25B • UA's EBIT = $0.5B, AA's EBIT = $0.75B Think of these EBIT values and the sales #'s as projected values for this year for UA and AA • Delta's projected sales this year is $2B, and projected EBIT is $0.75B O

Answer rating: 100% (QA)

1 Estimate the terminal value using the EBIT multiples method For the comparable company EBIT 2000 Market value of equity 23 1000 23000 Enterprise val... View the full answer