3e Chapter08_solutions.xls - PROBLEM 8-1 Given Sale price...

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PROBLEM 8-1 Given Comp #1 Comp #2 2121 Tartar Circle Sale price $ 240,000.00 $ 265,000.00 Square footage 2,240 2,145 3,000 Selling price/sq ft $ 107.14 $ 123.54 Time on the market 61 days 32 days Solution a. Average price per square foot $ 115.34 Estimated Value $ 346,028.97 b. Are there any unique features of the house: e.g., swimming pool or other special feature not available in the nearby houses. c. If the ask price was $315,000, it is worth buying.
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Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output
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PROBLEM 8-2 Current year EPS $ 2.50 Growth rate in EPS for next year 20% P/E Multiple (range) 10 15 Estimated Value (current EPS) $ 25.00 $ 37.50 Estimated Value (forward EPS) $ 30.00 $ 45.00 The fact that Garp's EPS are expected to grow more rapidly than the industry suggests that a forward P/E analysis would be appropriate. For Garp the use of next year's earnings in combination with the two comp P/E multiples raises the price for Garp significantly as we see above.
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Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output
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PROBLEM 8-3 THOUGHT QUESTION a. Parry Electronics is a regional electronics wholesaler and distributor which earned $1,250,000 in EBITDA this year based on revenues of $4,000,000. The enterprise values of publicly traded firms that operate in the same industry currently are valued at 5-6 times their current EBITDA. What is your estimate of the enterprise value of Parry Electronics? If Parry is small relative to the size of the comparison firms with assets only one-tenth the size of the largest firm in the industry, how would this influence your valuation estimate? Explain. THOUGHT QUESTION b. Suppose we have two companies, A and B which produce identical products using slightly different production processes. The process used by company A requires more capital equipment, which is already paid for, and can produce the the product at lower per unit costs. Now, assume that you have been asked to value Company B which is privately held and that you want to use Company A, which is publicly traded, as the basis for your valuation. Discuss how differences in the production processes of these firms affect both their multiples and discount rates. Relate your answer to the discussion of the valuation of the two office buildings discussed in the chapter. Answer: It is likely that Parry will have a higher cost of capital, and thus a lower EBITDA multiple. Of course, we should also consider differences in the firms' growth opportunities. Answer: The company with more capital equipment has higher operating margins, which makes it less risky, which will lower its discount rate. This will tend to increase its EBITDA multiple, however, the effect on EBITDA multiples for growth companies can be reversed.
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