Question

A firm's EV / EBITDA ratio has most recently (2018) been 7.8 but has grown as indicated in the below table since 2014. EBITDA over that same timeframe is given in the table also. An analyst wants to estimate the target price of the stock one year in the future. The analyst estimates the company's LT Debt in one year to be $1,400,000 and cash at $75,000. If 50,000 shares of stock will be outstanding, what would be the target price of a share of this stock at the end of 2019? 2014 7.1 805,000 EV/EBITDA | EBITDA 2015 7.3 825,000 | 2016 7.5 830,000 2017 7.6 850,000 2018 7.8 870,000 What is the projected 2019 EV/EBITDA ratio? (Round to one decimal) What is the projected 2019 EBITDA? (Round to the nearest $100) Target price at 12/31/2019: (round to the nearest dollar)

Please show any and all work or sub-calculations.

Answer 1

EV = Enterptise Value = Market capitalization of stock + Debt - total cash.

EBITDA= Earning before interest, tax, depreciation and Amortization.

By seeing the table, there is a change in EBITDA is around $20,000 every year

Projected EBITDA = 2018 EBITDA + 20000 = 870000 + 20000 = 890,000

(or)

we can find the same from the equation: New Year EBITDA - last year EBITDA/ Last year EBITDA

Between 2014 and 2015: (825000 - 805000) / 805000 = 20000/ 805000 = 0.025

Between 2015 and 2016: (830000 - 825000) / 825000 = 5000/ 825000 = 0.006

Between 2016 and 2017: (850000 - 830000) / 830000 = 20000/ 830000 = 0.025

Between 2017 and 2018: (870000 - 850000) / 850000 = 20000/ 850000 = 0.025

Average of above 4 = (0.025 +0.006+0.025+0.025)/ 4 = 0.020

Projected 2019 EBITDA = 0.020* 2018 EBITDA = 0.020* 870000 = $ 887,500

EV = Enterptise Value

Market capitalization of Stock = Outstanding Shares * $100 per share = 50000 * 100 = 5,000,000

Debt = Long term Debt = $ 1,400,000

Cash = $ 75,000

EV = 5,000,000 + 1,400,000 - 75,000 = 6,325,000

EV/ EBITDA = 6,325,000/ 890,000 = 7.11 or  6,325,000/887500 = 7.13 => 7.1 (Rounding to nearest one decimal).

Calculation of Target Price at 31/12/2019

Target Price = (EV - Debt Value)/ No. of Outstanding Shares

= (6,325,000 - 1,400,000)/ 50,000

= 4,925,000 / 50,000

= $ 98.50 or $99