Please show formulas and workings Use the following information concerning Johns

Question

Please show formulas and workings Use the following information concerning Johnson Machine Tools Ltd in Part a & b.

Johnson’s income statement from the fiscal year that ended this past December is:

Revenue $995

Cost of sales 652

Gross profit $343

Selling, general, & administrative expenses 135

Operating profit (EBIT) $208

Interest expense 48

Earnings before tax $160

Tax 64

Profit $ 96

All dollar values are in millions.

Depreciation and amortisation expenses last year were $42 million, and the company has $533 million of debt outstanding.

You are an analyst at a company that buys private companies, improves their operating performance, and sells them for a profit.

Your boss has asked you to estimate the fair market value of the Johnson Machine Tools Ltd. Billy's Tools is a public company with business operations that are virtually identical to those at Johnson. The most recent income statement for Billy’s Tools is as follows:

Revenue $1,764

Cost of sales 1,168

Gross profit $ 596

Selling, general, & administrative expenses 211

Operating profit (EBIT) $ 385

Interest expense 12

Earnings before tax $ 373

Tax 147

Profit $ 226

All dollar values are in millions. Billy’s had depreciation and amortisation expenses of $71 million last year and 200 million shares and $600 million of debt outstanding as of the end of the year. Its share is currently trading at $12.25 per share.

Required - Using the enterprise (company) value/EBITDA multiple, what is the total value of Johnson Machine Tools Ltd? What is the value of Johnson’s shares?

Explanation / Answer

Answer:

The P/E multiple for Billy’s Tools is:

P/E = ($12.25 × 200 million shares)/$226 = 10.84

This implies a value of 10.84 × $96M = $1,040.64 million for the equity of Johnson Machine Tools Company.

Therefore, the implied total value of Johnson is:

EV or VF= VE+ VD= $1,040.64 + $533.00 =$1,573.64 million

The enterprise value/EBITDA multiple for Billy’s is:

EV/EBITDA = (($12.25 × 200 million shares) + $600 million debt)/($385 million EBIT+ $71 million D&A) = 6.69

Therefore, the implied total value of Johnson is:

EV or VF= 6.69 × ($208 million EBIT + $42 million D&A) = $1,672.50

And the value of its stock is:

VE= VF– VD= $1,672.50 million - $533.00 million = $1,139.50 million

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