Question

Suppose Rocky Brands has earnings per share of $2.24 and EBITDA of $30.6 million. The firm also has 5.7 million shares outstanding and debt of $135 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 7.1, 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.) Which estimate is likely to be more accurate? (Select from the drop-down menu.) Hint: The more accurate valuation method would take debt into consideration is the more accurate valuation method.

Answer 1

To estimate the value of Rocky Brands stock, multiply the EPS by the P/E ratio and the EBITDA by the enterprise value to EBITDA multiple. The estimate using the EBITDA ratio is likely to be more accurate as it considers debt.

Step-by-step explanation:

To estimate the value of Rocky Brands stock using the P/E ratio, we need to multiply the earnings per share (EPS) by the P/E ratio. In this case, the EPS is $2.24 and the P/E ratio for Jared's Outdoor Corporation is 13.1, so the estimated value of Rocky Brands stock using the P/E ratio is $29.34 per share ($2.24 x 13.1). To estimate the value of Rocky Brands stock using the EBITDA ratio, we need to multiply the EBITDA by the enterprise value to EBITDA multiple. In this case, the EBITDA is $30.6 million and the enterprise value to EBITDA multiple for Jared's Outdoor Corporation is 7.1, so the estimated value of Rocky Brands stock using the EBITDA ratio is $216.26 million ($30.6 million x 7.1).

The estimate that is likely to be more accurate is the one using the EBITDA ratio. This is because the EBITDA ratio takes into account the debt of a company, while the P/E ratio does not. Since Jared's has no debt and is comparable to Rocky Brands, using the EBITDA ratio would provide a more accurate valuation.