Eight Questions About Valuing Companies

Investment Valuation

The value of ABV's equity per share can be calculated as follows. First, calculate the value of the operating assets, so EBITDA less the tax rate, adjusted downward for the reinvestment rate and then multiplied by the perpetual growth rate. This is then divided by the cost of capital less the growth rate:

To this, the cash should be added, the debt subtracted to get the value of the equity:

And this is divided by the number of shares 200 million, to give an earnings per share of:

If there are equity options on the shares, then those options would be subtracted from the share value. The value of the options is 50 * 5 = $250 million. This is then subtracted from the equity value above 799.90-250.00 = 599.90

And this is then divided by the number of shares outstanding

599.90 / 200 = $3.00

With the treasury stock approach, the first step is to calculate the exercise proceeds from the options: 6 * 50 = $300 million.

Then the Treasury Stock value per share has to be calculated:

= (Value of Equity + Exercise proceeds) / (# of shares + # of options)

= (799.9 + 300) / (200 + 50) = $4.40 per share

4. First, the enterprise value should be calculated: Me = $25 billion, Md = $5 billion = Market value of $30 billion. Less the cash ($3 billion) = enterprise value of $27 billion.

The cost of capital is calculated using the WACC = 12.5 (25/30) + 5 (5/30) = 11.25%

Then the following step can be used:

Enterprise Value = EBIT (1-t)(1-Reinvestment rate) (1+g)(r-g)

27000 = EBIT (1-.3)(1-.06/.15)(.1125/.06)

EBIT = $3,184 million.

5. a. You would expect to see $1.2 billion in EBIT in the consolidated statement, reflecting the EBITs of both of these companies. .

b. 400 (1-.4)(1+.11)/(.10-.05) = $5,328 million

This is for 100% of the equity. The 50% stake is worth $2,664

c. 400(1-.4)(1+.15)(.09-.05) = $6,900, which divided by two is $3,450 million

6. First, there is the value of Genome Sciences:

300(1.06)(1-.4)/(.12-.06) = $3,180 million

Then there is the value of Gene Therapies:

(100 * .50) * 10% = $500

So the combined is $3,680, then the debt must be subtracted: $3,680-800 = $2,880 million

Then this figure is divided by the number of shares outstanding:

2880 / 50 = $57.60

7. a) The discount at which the fund should trade is the discount of its earnings relative to the market: 9 / 12 = 75%

b) In this scenario, the fund will be liquidated in ten years. Then it is the value of the fund invested at 9% for the next ten years = 83%

This means that the discount should be 17%.

8.a) The analyst has derived a firm value of $11 * 1.4 million = $15.4 million