Question

Suppose Rocky Brands has earnings per share of ​$2.49 and EBITDA of ​$29.8 million. The firm also has 4.8 million shares outstanding and debt of ​$125 million​ (net of​ cash). You believe Deckers Outdoor Corporation is comparable to Rocky Brands in terms of its underlying​ business, but Deckers has no debt. If Deckers has a​ P/E of 13.3 and an enterprise value to EBITDA multiple of 7.4​, estimate the value of Rocky Brands stock using both multiples. Which estimate is likely to be more​ accurate?

The value of Rocky Brands stock using the​ P/E ratio is ___ million (Round to one decimal place.)

The value of Rocky Brands stock using the EBITDA ratio is ___ million (Round to one decimal place.)

Which estimate is likely to be more accurate?

Answer 1

Ans :

(a) PE ratio = Price of the share / Earning per share

13.3 = Price of the share / $ 2.49

Price of the share = 13.3 * $ 2.49

= $ 33.117

Value of the firm = price of the share * number of shares outstanding

= $ 33.117 * 4.8 million

= $ 159.0 million

(b) Using Enterprise to EBITDA ratio:

EV / EBITDA = 7.4

EV = 7.4 * 29.8 million

= $ 220.52 million

Value of the firm = EV - debt

= $ 220.52 - $ 125  

= $ 95.52 million

Value determined using PE ratio is better estimate