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 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

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

Answer 1

Market Capitalisation of Zeg = Market Price of Zeg * Number of Shares
= 225 * 600000
Market Capitalisation of Zeg = $135,000,000

Market Value of Preferred Stock = $13,000,000
Market Value of Debt = $25,000,000

Cash and Marketable Securities = $14,000,000

Enterprise Value = Market Capitalisation + Market Value of Preferred Stock + Market Value of Debt - Cash and Marketable Securities
= 135000000 + 13000000 + 25000000 - 14000000
Enterprise Value = $159,000,000