Question

Cassidy Brooks is a freelance financial analyst currently residing in Phoenix, Arizona. A recent merger she provided her consultancy services for led to a compensation package of $250,000 along with the stock options of the merged company. Brooks has identified two startup browsing companies, Zeg and Skive, with significant growth potential and is looking to invest in one or both of these companies. To arrive at a justifiable fair share value of these companies, she has collected the following data displayed in Exhibit 1 relevant for the year ended December 31^st, 20X8.

Exhibit 1

	Zeg	Skive
EPS	$16.00	$14.00
DPS	$1.80	$1.40
Market Price of Shares	$225.00	$200.00
Return on Equity	18%	20%
Required Return	18%	20%
Number of Shares	600,000	650,000
Sales	$14,300,000	$15,700,000
Justified P/E	12.5	12.5
Operating Profit	N/A	$22,000,000
Non-Operating Loss	N/A	$6,000,000
Tax Rate	22%	18%
Invested Capital	$100,000,000	$102,000,000
Cash and Marketable Securities	$14,000,000	$19,000,000
Expected earnings growth rate	12%	11%

Brooks is careful in making investments which do not put at risk her future financial health. She is carrying out detailed research to evaluate the dividend security of both companies. She has decided to calculate the enterprise values of Zeg and Skive to evaluate the company on the basis of enterprise value to earnings multiples. The information she has collected on Zeg is displayed in Exhibit 2 below.

Exhibit 2

Book Value of Preferred Stock	$8,000,000
Market Value of Preferred Stock	$13,000,000
Market Value of Debt	$25,000,000

Question 1:

What is Skive’s P/E-to-growth (PEG) ratio?

Question 2

Using the information provided in Exhibit 1 and Exhibit 2, what is the enterprise value (EV) of Zeg?

Answer 1

Question 1:
What is Skive’s P/E-to-growth (PEG) ratio?

P/E ratio of Skive = 12.5
Expected earnings growth rate = 12%
PEG ratio = 12.5/12 = 1.04

Question 2
What is the enterprise value (EV) of Zeg?

Market Capitalisation = Market Price of Shares * No. of shares = $200 * 650,000 = $130,000,000
Prefered Stock = $13,000,000
Outstanding Debt = $25,000,000
Cash and cash equivalants = $19,000,000

EV = $130,000,000 + $13,000,000 + $25,000,000 - $19,000,000
EV = $149,000,000