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Valuation with Trading Multiples and Discounted Cash Flows

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1) Estimate the value of Makes-You-Better using trading multiples. (Numbers are in millions)

Per exhibit 2, the value of the company based on trading multiples ranges from $24,209 to $87,810. However, there are many missing values for several of the multiples from comparable companies, such as the ratio of stock price to EBT and to EBIT. Considering only two of five companies have calculable values for this ratio, the reliability of its use is very small. This sporadic data make interpreting the value of the company based on multiples much less reliable. Compounding the issue of sporadic data, there are also large and obvious variations in the sizes of the companies used for comparable analysis. Consider the variation in values calculated for the stock price to annual revenue ratio; Makes-You-Sleepy is many times larger than the other companies used, which could easily bias the multiple used to value Makes-You-Better. Additionally, certain trading multiples make comparison difficult. ...

Solution Summary

This solution discusses how to value a company using both trading multiples and discounted cash flow analysis. Also, this solution compares the different results.

$2.19