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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

## Continuous compounding, FV, multiple cash flows, stock valuation

10. Continuous Compounding Compute the future value of \$1,000 continuously compounded for
a. 5 years at a stated annual interest rate of 12 percent.
b. 3 years at a stated annual interest rate of 10 percent.
c. 10 years at a stated annual interest rate of 5 percent.
d. 8 years at a stated annual interest rate of 7 percent.

67. Future Value and Multiple Cash Flows An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child's birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company:
First birthday: \$750
Second birthday: \$750
Third birthday: \$850
Fourth birthday: \$850
Fifth birthday: \$950
Sixth birthday: \$950
After the child's sixth birthday, no more payments are made. When the child reaches age 65, he or she receives \$250,000. If the relevant interest rate is 11 percent for the first six years and 7 percent for all subsequent years, is the policy worth buying?
Chapter 5
7. Stock Valuation Suppose you know that a company's stock currently sells for \$70 per share and the required return on the stock is 12 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?
(Ross, Stephen A.. Corporate Finance, 8th Edition. Irwin/McGraw-Hill, 112006. 5.11).
1. Discuss the time value of money analysis, the process of compounding, discounting, and amortization of cash flows; and various applications of the concept of time value of money on financial management analysis and corporate finance.
2. Discuss bond valuation, stock valuation, the constant growth model and the dividend growth model.

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