Market-Based Valuation: Price and Enterprise Value Multiples

Correct Answer: Multiply XYZ's EBITDA by the industry median EV/EBITDA multiple to estimate its enterprise value.

The most appropriate way to estimate the value of XYZ Inc. for the potential acquisition is to multiply XYZ's EBITDA by the industry median EV/EBITDA multiple. This approach directly uses the available financial information and the relevant industry valuation benchmark. The enterprise value (EV) is a measure of a company's total value, including both equity and debt. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a widely used financial metric that serves as a proxy for a company's operating cash flow. The EV/EBITDA multiple is a common valuation multiple used to compare companies within the same industry. Given: - XYZ's EBITDA for the most recent fiscal year: $12 million - Industry median EV/EBITDA multiple: 9x Calculation: Estimated value of XYZ Inc. = XYZ's EBITDA × Industry median EV/EBITDA multiple = $12 million × 9 = $108 million Therefore, based on the industry median EV/EBITDA multiple, the estimated value of XYZ Inc. for the potential acquisition is $108 million.

Correct Answer: Multiply RST's revenue by the industry average EV/Revenue multiple to estimate the enterprise value of RST Inc.

The most appropriate way to estimate RST Inc.'s value for the potential acquisition is to multiply RST's revenue by the industry average EV/Revenue multiple. This method is commonly used in valuing companies, especially in the context of mergers and acquisitions. The EV/Revenue multiple is a valuation metric that compares a company's enterprise value to its annual revenue. The enterprise value is the total value of a company, including its equity and debt. By using the industry average EV/Revenue multiple, we can estimate the value of RST Inc. based on its revenue and the valuation norms in its industry. Given: - RST's revenue for the most recent year: $60 million - Industry average EV/Revenue multiple: 3x Calculation: Estimated RST Inc.'s value = RST's revenue × Industry average EV/Revenue multiple Estimated RST Inc.'s value = $60 million × 3 = $180 million Therefore, based on the industry average EV/Revenue multiple, the estimated value of RST Inc. for the potential acquisition is approximately $180 million. The other answers are less appropriate because they rely on DEF's market capitalization or enterprise value, which are not directly relevant to valuing RST Inc. as a separate entity. The key factors in valuing RST Inc. are its own revenue and the industry-specific valuation multiple.

Correct Answer: Using the industry average EV/EBITDA multiple of 8x, the estimated value of UVW Inc. is $240 million (8 x $30 million EBITDA).

The most appropriate way to estimate the value of UVW Inc. is by using the industry average EV/EBITDA multiple of 8x. This method directly considers UVW's EBITDA (earnings before interest, taxes, depreciation, and amortization) of $30 million, which is a key measure of the company's operating performance. Applying the industry average multiple to UVW's EBITDA results in an estimated value of $240 million (8 x $30 million). The other two methods are less suitable because: - Using the Price-to-Sales (P/S) multiple does not account for the company's profitability and may not reflect its true value. - Calculating the value based on the ratio of UVW's revenue to RST's implied revenue is an indirect approach that relies on assumptions about RST's valuation and may not accurately represent UVW's standalone value. Therefore, the EV/EBITDA multiple method is the most appropriate as it directly considers UVW's operating performance and uses an industry-specific benchmark to arrive at a reasonable estimate of its value.