Question

Suppose Rocky Brands has earnings per share of $2.28 and EBITDA of $30.1 million. The firm also has 5.5 million shares outstanding and debt of $120 million (net of cash). You believe Jared's Outdoor Corporation is comparable to Rocky Brands in terms of its underlying business, but Jared's has no debt. If Jared's has a P/E of 13.1 and an enterprise value to EBITDA multiple of 7.4 , estimate the value of Rocky Brands stock using both multiples. Which estimate is likely to be more accurate? Rocky Brands' stock value by using the P/E ratio is $ per share. (Round to two decimal places.) The value of Rocky Brands by using the P/E ratio is $ million. (Round to one decimal place.) The value of Rocky Brands by using the EBITDA ratio is $ million. (Round to one decimal place.) Rocky Brands' stock value by using the EBITDA ratio is \$ per share (Round to two decimal places.)

Answer 1

To estimate the value of Rocky Brands stock, we can use both the P/E ratio and the enterprise value to EBITDA multiple. Using the P/E ratio, the stock value is approximately $29.868 per share. Using the EBITDA ratio, the enterprise value is calculated to be around $222.74 million. The EBITDA ratio estimate is likely to be more accurate.

Step-by-step explanation:

To estimate the value of Rocky Brands stock, we can use both the P/E ratio and the enterprise value to EBITDA multiple. The P/E ratio is calculated by dividing the stock price by the earnings per share (EPS).

Using the P/E ratio, we can calculate the stock value of Rocky Brands by multiplying the EPS ($2.28) by the P/E ratio (13.1). This gives us a stock value of $29.868 per share.

On the other hand, the enterprise value to EBITDA multiple is calculated by dividing the enterprise value by the EBITDA. Given that Jared's Outdoor Corporation is comparable to Rocky Brands, we can use Jared's enterprise value to EBITDA multiple (7.4) to estimate the value of Rocky Brands. The enterprise value of Rocky Brands is calculated by multiplying the EBITDA ($30.1 million) by the enterprise value to EBITDA multiple (7.4). This gives us an enterprise value of $222.74 million.

Comparing the two estimates, the enterprise value using the EBITDA ratio (222.74 million) is likely to be more accurate as it takes into account the overall value of the firm and is a commonly used measure in valuation.