The fifty-year-old chairman and major shareholder of Private Health, a private r

Question

The fifty-year-old chairman and major shareholder of Private Health, a private regional maintenance Organization (HMO), is considering selling his stake in the company and retiring. He has asked Private Health's chief financial officer (CFO) to estimate the total value of the firm of the firm by the following morning. The CFO collects data (below) for the 2015 financial year (amounts in millions of dollars unless indicated) for Private Health and two comparable publicly traded firms. Happy Health Care and Community Health. What was her estimate of Private Health's total firm value based on the method of Comparable? (ii) What underlying economic principle forms the basis of the method of comparable? (iii) What are the strengths and weaknesses of the method? (iv) Branded food companies command the highest price-earnings multiple and Transportation/Trucking companies the lowest. Why? (v) You estimate the value of a firm using the Method of Comparable, applying a multiplier M = 10 to the Cash Flow. If you now estimate the DCF value of the firm assuming a constant perpetual growth g=2%, what value of the discount rate the DCF valuation would reconcile the DCF value with the value from Comparable?

Explanation / Answer

Average P/E ratio = (22.5+ 17.5)/2 =20

Hence the value is =P/E ratio *Earnings

=20*30 =$600 Mn

b) In relative valuation, the objective is to value assets, based upon how similar assets are currently priced in the market. While multiples are easy to use and intuitive, they are also easy to misuse.

c)First, a valuation based upon a multiple and comparable firms can be completed with far fewer assumptions and far more quickly than a discounted cash flow valuation. Second, a relative valuation is simpler to understand and easier to present to clients and customers than a discounted cash flow valuation. Finally, a relative valuation is much more likely to reflect the current mood of the market, since it is an attempt to measure relative and not intrinsic value.

Weakness

The strengths of relative valuation are also its weaknesses. First, the ease with which a relative valuation can be put together, pulling together a multiple and a group of comparable firms, can also result in inconsistent estimates of value where key variables such as risk, growth or cash flow potential are ignored. Second, the fact that multiples reflect the market mood also implies that using relative valuation to estimate the value of an asset can result in values that are too high, when the market is over valuing comparable firms, or too low, when it is under valuing these firms. Third, while there is scope for bias in any type of valuation, the lack of transparency regarding the underlying assumptions in relative valuations make them particularly vulnerable to manipulation

d) Branded companies are more valuable because people long to buy them and hence there sales are likely to be more predictable.Other eeason being they are less capital intensive buisness tthan others

Transportation companies/trucking companies have less p/e ratio because they are capital instensive , have high amount of debt

I can only answer four questions as per cheeg guidlines

Net Income 20 60 Price Per share 15 30 Shares Outstanding 30 35 EPS 0.67 1.71 P/E Ratio(Price per share/EPS) 22.5 17.5

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