Daphne’s Treats and Toys is a retail pet supply chain that is trying to value it
ID: 2793982 • Letter: D
Question
Daphne’s Treats and Toys is a retail pet supply chain that is trying to value itself for a potential sale. They currently earn $1.8 million in EBITDA, they have $5 M in outstanding par value debt, and their stock is currently trading at $55 per share with 100,000 shares outstanding.
One of Daphne’s competitors, Rover’s Rawhides was recently acquired for $33.68 per share. Prior to the acquisition attempt, they were trading at $18.61 per share. Analysts noted that the value of the consideration offered for the firm’s assets in the takeover offer was 10 times EBITDA (i.e. EV/EBITDA = 10).
Using the comparable transactions approach, what should Daphne’s Toys and Treats value their firm's stock at per share? Use the average of the two available methods.
Explanation / Answer
Daphne's Enterprise Value (EV) = EV/EBITDA x EBITDA
= 10 x 1.8 = $18 million
EV = Equity Value + Debt Value
=> 18 = Equity Value + 5
=> Equity Value = $13 million
Share Price = Equity Value / No. of shares = 13,000,000 / 100,000 = $130 using comparable transaction approach.
In case of Rover's, equity premium = 33.68 / 18.61 - 1 = 81%
Using this premium value, Daphne's share price = 55 x (1 + 81%) = $99.54
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