Question

You are valuing multiple steady-state companies in the same industry. Company A is projected to earn $160 in EBITA, grow at 2 percent per year, and generate ROICs equal to 15 percent. Company B is projected to earn $160 in EBITA, grow at 6 percent per year, and generate ROICs equal to 10 percent. Both companies have an operating tax rate of 25 percent and a cost of capital of 10 percent. What are the enterprise-value-EBITA multiples for both companies

Answer 1

Company A

EBITA = $160m, growth = 2%, Cost of Capital = 10%, ROIC = 15%

Value = (EBITA * (1 - Growth/ROIC)) / (WACC - g)

Value = (160*(1 - 2/15)) / (0.1-0.02)

Value = 138.67 / 0.08

Value = 1,733

EV/EBITA = Value / EBITA

EV/EBITA = 1,733/160

EV/EBITA = 10.83x

Company B

EBITA = $160m, growth = 6%, Cost of Capital = 10%, ROIC = 10%

Value = (EBITA * (1 - Growth/ROIC)) / (WACC - g)

Value = (160*(1 - 6/10)) / (0.1-0.06)

Value = 64 / 0.04

Value = 1,600

EV/EBITA = Value / EBITA

EV/EBITA = 1,600/160

EV/EBITA = 10x