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

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