Use the table for the question(s)below. Name Market Enterprise Enterprise Enterprise
Capitalization Value Price/ Value/ Value/
($ million)($ million)P/E Book Sales EBITDA
Gannet 6350 10,163 7.36 0.73 1.4 5.04
New York Times 2423 3472 18.09 2.64 1.10 7.21
McClatchy 675 3061 9.76 1.68 1.40 5.64
Media General 326 1192 14.89 0.39 1.31 7.65
Lee Enterprises 267 1724 6.55 0.82 1.57 6.65
Average 11.33 1.25 1.35 6.44
Maximum +60% 112% +16% +22%
Minimum -40% -69% -18% -19%
The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown)had sales of $620 million, EBITDA of $81 million, excess cash of $62 million, $11 million of debt, and 120 million shares outstanding. If the firm had an EPS of $0.41, what is the difference between the estimated share price of this firm if the average price-earnings ratio is used and the estimated share price if the average enterprise value/EBITDA ratio is used?

Question

Quizplus · Accepted Answer

We need to find the estimated share price using both the price-earnings ratio and the enterprise value/EBITDA ratio, and then find the difference between them. 
Using the price-earnings ratio: 
EPS = $0.41 
P/E ratio (average) = 11.33 
Estimated share price = EPS x P/E ratio = $4.65 
Using the enterprise value/EBITDA ratio: 
EV/EBITDA ratio (average) = 6.44 
Enterprise value = EV/EBITDA x EBITDA = 6.44 x $81 million = $522.6 million 
Add excess cash and subtract debt: 
Equity value = $522.6 million + $62 million - $11 million = $573.6 million 
Estimated share price = Equity value / number of shares = $4.78 
The difference between the two estimated share prices is: 
$4.78 - $4.65 = $0.13, which is answer choice B.

Use the Table for the Question(s)below