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CFA Level 2 - Equity Valuation - Market-Based Valuation: Price and Enterprise Value Multiples
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1/5
BCD Company, a publicly-traded firm, is considering acquiring UVW Inc., a privately-held company in the same industry. The following information is available: BCD's current market capitalization: $750 million UVW's revenue for the most recent fiscal year: $150 million UVW's EBIT for the most recent fiscal year: $30 million Industry average Price-to-Sales (P/S) multiple: 1.8x Industry average EV/EBIT multiple: 12x Based on the given information, what is the most appropriate valuation approach for estimating UVW Inc.'s value for the potential acquisition?
a.
UVW's estimated value can be calculated by multiplying its revenue of $150 million by the industry average P/S multiple of 1.8x, resulting in a valuation of $270 million. This approach is straightforward and relies on the company's top-line performance, making it a suitable choice for estimating the value of a privately-held firm for acquisition purposes.
b.
To estimate UVW's value, first calculate BCD's implied P/S multiple by dividing its market capitalization by its revenue. Then, apply this implied multiple to UVW's revenue to determine its estimated value. This approach assumes that both companies have similar profitability and growth prospects, allowing for a more accurate valuation of the privately-held firm.
c.
Using the industry average EV/EBIT multiple of 12x, UVW's estimated value is $360 million (12 x $30 million EBIT). This approach focuses on the company's operating performance and is more suitable for the acquisition of a privately-held firm.
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