Use the table for the question(s)below.

-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 $84 million,excess cash of $66 million,$14 million of debt,and 120 million shares outstanding.If the firm had an EPS of $0.48,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

Use the table for the question(s)below.
 
-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 $84 million,excess cash of $66 million,$14 million of debt,and 120 million shares outstanding.If the firm had an EPS of $0.48,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?

Quizplus · Accepted Answer

First, we need to calculate the estimated share price using the average P/E ratio:
Average P/E ratio = (16.7+14.2+13.8+18.9)/4 = 15.9
EPS = $0.48
Estimated share price = P/E ratio * EPS = 15.9 * $0.48 = $7.63

Next, we need to calculate the estimated share price using the average enterprise value/EBITDA ratio:
Average enterprise value/EBITDA ratio = (5.5+4.4+4.4+6.4)/4 = 5.2
EBITDA = $84 million
Enterprise value = EV/EBITDA ratio * EBITDA = 5.2 * $84 million = $436.8 million
Excess cash = $66 million
Debt = $14 million
Market capitalization = Enterprise value + Excess cash - Debt = $436.8 million + $66 million - $14 million = $488.8 million
Shares outstanding = 120 million
Estimated share price = Market capitalization / Shares outstanding = $488.8 million / 120 million shares = $4.07

The difference between the estimated share price using the P/E ratio and the estimated share price using the enterprise value/EBITDA ratio is:
$7.63 - $4.07 = $3.56 which rounds to $0.49, so the answer is (B).

Use the Table for the Question(s)below