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 31st, 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 |
1. What is Skive’s P/E-to-growth (PEG) ratio?
2. Using the information provided in Exhibit 1 and Exhibit 2, what is the enterprise value (EV) of Zeg?
1. P/E-to-growth (PEG) ratio = PE ratio/earnings growth rate
PE ratio = Market price per share/EPS or earnings per share = $200/$14 = 14.29
P/E-to-growth (PEG) ratio = 14.29/11 = 1.299 or 1.30
Skive’s P/E-to-growth (PEG) ratio is 1.30.
2. Enterprise value = Market value of Common stock + Market value of Preferred stock + Market value of Debt - Cash and Marketable Securities
Market value of Common stock = market price per share*no. of shares = $225*600,000 = $135,000,000
Enterprise value = $135,000,000 + $13,000,000 + $25,000,000 - $14,000,000 = $159,000,000
The Enterprise value (EV) of Zeg is $159,000,000.
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