Question

Use the table for the​ question(s) below. Name Market Enterprise    Enterprise Enterprise Capitalization Value   ​Price/ ​Value/ ​Value/ ​($ million) ​($ million) ​P/E Book Sales EBITDA Gannet 6350 ​10,163 7.36 0.73 1.4 5.04 New York Times 2423 3472 18.09 2.64 1.10 7.21 McClatchy 675 3061 9.76 1.68 1.40 5.64 Media General 326 1192 14.89 0.39 1.31 7.65 Lee Enterprises 267 1724 6.55 0.82 1.57 6.65 Average    11.33 1.25 1.35 6.44 Maximum    ​+60% ​112% ​+16% ​+22% Minimum    minus​40% ​69% minus​18% minus​19% The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm​ (not shown) had sales of​ $620 million, EBITDA of $ 89 ​million, excess cash of $ 69 ​million, $ 12 million of​ debt, and 120 million shares outstanding. If the firm had an EPS of $ 0.44​, what is the difference between the estimated share price of this firm if the average​ price-earnings ratio is used and the estimated share price if the average enterprise​ value/EBITDA ratio is​ used?

Answer 1

Share price based on average P/E ratio:

EPS = $0.44

Average P/E ratio = 11.33

Estimated share price based average P/E ratio = 0.44 * 11.33 = $4.9852

Share price based on average enterprise value / EBITDA ratio:

Enterprise value = EBITDA * Average enterprise value / EBITDA = 89 * 6.44 = $573.16 million

Market value of equity = Enterprise value - Debt + Excess cash = 573.16 - 12 + 69 = $630.16 million

Estimated share price = 630.16 / 120 = $5.2513

Hence:

Difference between two estimates of share price = 4.9852 - 5.2513 = -$0.266