Firm’s Valuation Methods

Posted: August 26th, 2021

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Firm’s Valuation Methods

1. CompanyComparableTransactions

The use of company comps analysis is relevant in determining the enterprise value (EV) of the Barbados Cement (BC). Therefore, the value is obtained by first establishingthe P-E ratio of the Acquirer (Rausing Cement) as follows.

PEG Ratio =

Earnings Growth Rate =

=     = 13.94%

Indeed, the P/E ratio multiple of the market industry is comparatively regarded as the P/E of the Acquirer, which is RC. Accordingly, Rausing Cement (RC) has a multiplier PEG ratio of 0.77x, whereas the cement market industry has a multiplier, PEG ratio of 1.45x, implying that RC’s stock is undervalued as compared to the average stock of the market industry.The Enterprise Value (EV) of the target, BC, is obtained using the following formula is relevant.

EV/EBIT = Earnings Growth Rate

EV = Earnings Growth Rate x EBIT

= 1.88 x $9,000,000

= $16,920,000

• Acquisition Premium

Takeover premium entails the difference between the paid values for the target (BC) company minus the pre-merger value of the target company. Precisely, it is the price paid for each of the target firm’s shares by the Acquirer (RC), as illustrated by the following.

Takeover Premium = PT – VT

The PT equates to price to be paid by the acquirer (RC), and VT equates to the pre-merger value of the target company (BC). From the cement market industry, the average percentage acquisition premium is at 40% based on the following formula.

Mean Takeover premium in the industry = (60+20+50+30)/4

= 40% 

Nonetheless, the target company has recorded a large increase in EBIT, implying that its stock price is equally high due to its thriving business activities. In this case, the takeover premium is presumed at 75% since the acquirer must offer a higher price per share. Therefore, the estimated takeover premium is 75%.A premium of 75% implies that it is easy to calculate the value of the target company (BC) in terms of its price-earnings ratio as follows.

75% = PT – VT

75% = 10.73 – VT

75% of 10.73x = 8.05x

Therefore, 8.05x = 10.73x – VT

VT, the pre-merger value of BC = 2.68x

• Calculating Value of the Projected Synergies Using the DCF Analysis

From the Excel sheet, finding the projected synergies is the same as establishing the pre-tax synergies using the DFCs analysis model. Finding the pre-tax synergies entails a reverse process of discounting the cash flows in the sense that both the discounted rate of 12% and corporate tax of 25% are associated with the target company (BC). The perpetuity growth (TV) is assumed to be insignificant.

Since Barbados Cement has a greater PEG ratio than the acquiring company, it implies that the acquirer would benefit a lot from the market operating synergies for the reason that it would constantly record an increasing EBIT.From the value of the projected synergies, it is clear that the values have increased considerably as compared to the EBIT of the target company when we compare the 2020 EBIT of $9 million and the pre-Tax synergies of the year 2020 at $11.32 million. Therefore, it is clear that the synergies of the acquisition would be accretive, thus implying that the proforma acquisition company would experience higher economies of scale in the future.

• Comparing Firms’ Performance and Valuations

PEG ratio is essential in establishing the earnings growth rate for the various companies in the cement industry. The price per earning to the growth ratio helps determine how expensive a stock price is relative to the performance of the EBIT.

            From the analysis, the BC has a PEG ratio of 1.39, which is greater than that of the acquiring company at 0.77. Indeed, the acquirer, Rausing Cement(RC) stock price is undervalued as compared to the target company, implying that the acquirer would have to acquire the Barbados Cement through other measures, except trading of stock to compensate the shareholders. The acquiring company would employ other acquisition techniques like cash and debt financing to acquire Barbados Cement.