HW 2
Corporate Finance
Homework #2
Prof. Qiao LIU
Due date: April 27
1. Pellagia Inc. is a nationwide retail chain specializing in women’s apparel. The company’s most popular lines are Aura and Home. Aura offers executive wear for women in the middle to high-end markets, and Home features casual but stylish clothes, also targeted at women in the middle to high-end markets. The company has 135 million shares outstanding, 30 percent of which are publicly traded with a current market price of $5.63 per share. The company is expected to have net income of $38 million in the next 12 months. Forecast sales and EBITDA are $633 million and $57 million, respectively. Debt outstanding is $120 million.
(a) What is the current enterprise value (EV) of Pellagia?
(b) Suppose you are asked to value Pellagia Inc. given the following information on comparables. What is your estimate of equity value? of enterprise value.
Price/Earnings
EV/sales
Abercrombie & Fitch
13.04
1.58
Ann Taylor
26.10
0.78
Bebe Stores
15.36
1.41
Gap
N.A.
0.76
Limited Brands
18.59
0.96
Talbots
14.11
1.06
(c) What potential problems are there for the method proposed in (b)? How can you improve it?
2. Newbridge is also interested in acquiring PrivCo, whose owner desires to retire. The firm is 100% owned by the current owner. PrivCo has revenues of $10 million and an EBIT of $2 million in the preceding year. The market value of the firm’s debt is $5 million; the book value of equity is $4 million. For publicly traded firms in the same industry, the average debt-to-equity ratio is 0.4 (based on market value of debt and equity), and marginal tax rate is 40%. Typically, the ratio of the market value of equity to book value for these firms is 2. The average beta of publicly traded firms that are in the same business is 2.00. Capital expenditures and depreciation amounted to $0.3 million and $0.2 million in the prior year. Both items are expected to grow at the same rate as revenues for the next
Homework #2
Prof. Qiao LIU
Due date: April 27
1. Pellagia Inc. is a nationwide retail chain specializing in women’s apparel. The company’s most popular lines are Aura and Home. Aura offers executive wear for women in the middle to high-end markets, and Home features casual but stylish clothes, also targeted at women in the middle to high-end markets. The company has 135 million shares outstanding, 30 percent of which are publicly traded with a current market price of $5.63 per share. The company is expected to have net income of $38 million in the next 12 months. Forecast sales and EBITDA are $633 million and $57 million, respectively. Debt outstanding is $120 million.
(a) What is the current enterprise value (EV) of Pellagia?
(b) Suppose you are asked to value Pellagia Inc. given the following information on comparables. What is your estimate of equity value? of enterprise value.
Price/Earnings
EV/sales
Abercrombie & Fitch
13.04
1.58
Ann Taylor
26.10
0.78
Bebe Stores
15.36
1.41
Gap
N.A.
0.76
Limited Brands
18.59
0.96
Talbots
14.11
1.06
(c) What potential problems are there for the method proposed in (b)? How can you improve it?
2. Newbridge is also interested in acquiring PrivCo, whose owner desires to retire. The firm is 100% owned by the current owner. PrivCo has revenues of $10 million and an EBIT of $2 million in the preceding year. The market value of the firm’s debt is $5 million; the book value of equity is $4 million. For publicly traded firms in the same industry, the average debt-to-equity ratio is 0.4 (based on market value of debt and equity), and marginal tax rate is 40%. Typically, the ratio of the market value of equity to book value for these firms is 2. The average beta of publicly traded firms that are in the same business is 2.00. Capital expenditures and depreciation amounted to $0.3 million and $0.2 million in the prior year. Both items are expected to grow at the same rate as revenues for the next