Question

Cassidy Brooks is a freelance financial analyst currently residing in Phoenix, Arizona. A recent merger she...

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?

Homework Answers

Answer #1

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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