Question

2. a. What are the determinants of Price-to-book ratio? (10 marks) b. Conglomerate Inc. is a company in three different businesses and its performance in each business for the most recent year is as follows (all figures are $ million). Interest Net income EBITDA 50 Business Steel Technology Financial Services Revenue 1,000 500 200 50 5 30 10 10 The company has $200 million in debt outstanding and no cash balance. The interest expense is allocated to each of the divisions based upon the debt of that division. There are 50 million shares outstanding. The median values for different multiples for comparable firms within each business are as follows: Median 5.00 Business Steel Technology Financial Services Multiple EV/EBITDA EV/Sales P/E 1.50 10.00 i. Assuming that each business of Conglomerate should trade at the median value for other companies in that business, estimate the value of equity per share in Conglomerate Inc. (8 marks) ii. What are the potential problems of the approach in (i) above? How could these problems be overcome in the relative valuation framework?

Answer 1

Equity Per share No oy slone eet 1100 % 22 on LBIDA NAGEHO DAL Potential problem of the approach in is a bine.. EV 5x50 - 1250. Determinants of Price to bello tychnolgy Based on data of which is not based technique. the other Companies on a tone valuation. tº Sales a (+50 the price book value ratio con be related to the same fundamentals that determine value in discounted casflow models. since this is an equity multiple we will use an equity discounted cash flow model, the divident discount model to explore the determinants.. Ev= 1.50x 500 dividend Equity per share of 422 por share is not a true valuation because it is based on median of other Companies. $780 the value of equity discount model can in be a stable growth writhen, as in i financial Services DPS, ke-gn- Price 10 Earning Redwotve No of share Net Income No. of share Po = value of aquity por share to day . DPS, = Expected Dividend per share next year ke cost of equity In a growth rate in dividend. = 10 Ev & No. of shares Noof stars Net income The froice book value ratio of a stable firm is determined by the differential between the return on equity es its Cost of equity of the return on equity exceeds the cost of equity, the price will exceed the book value of a equity of the return on equity is lower that the Cost of equity, the price will be lower tom RedMinotagok value ob equity Ev = 10x10 = $100. OO REDMI NOTE 8 AI QUAD CAMERA OO REDMI NOTE 8 C AI QUAD CAMERA • AI QUAD CAMERA