MGMT 332 Transactions Transactions EPS EBITDA Premium Values for past transactions: – Average EPS Last 4Q Aerial EPS Average pric

MGMT 332

Transactions

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MGMT 332 Transactions Transactions EPS EBITDA Premium Values for past transactions: – Average EPS Last 4Q Aerial EPS Average pric
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Transactions

EPS EBITDA Premium

Values for past transactions:

– Average

EPS Last 4Q

Aerial EPS Average price per share using 3 references

Average EPS Multiple

Equity Value per Share

EBITDA

Aerial EBITDA (in M$, last 4Q)

Average EBITDA Multiple

Firm Value

Debt Value

Equity Value

Equity Value per Share

Premium

Pre-Merger Announcement Stock Price

Average Premium Multiple

# of shares outstanding (M) 90.50

Cost of Equity

Cost of Equity

Rf Beta Market Premium Equity Cost

Eastern

Western

Northern

Cost of Debt

Rd Debt/Assets

Eastern

Western

Northern

Weighed Average Cost of Capital

WACC

Eastern

Western

Northern

Tax rate

DDM

2019 Dividends

Dividends Growth/yr.

Eastern

Western

Northern

Dividend Stream

2020 2021 TV

Eastern

Western

Northern

DDM Value of each Firm

$/share

Eastern

Western

Northern College of Business | worldwide.erau.edu

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MGMT 332
Corporate Finance I

Module 6: Return, Risk, and the Cost of Capital

Problem Set 6 Return, Risk, and the Cost of Capital

1. Apache Airlines is looking to buy Aerial Airlines. Your boss, the CFO, wants a quick and
dirty valuation of Aerial. You choose to look at past transactions in the airline industry to
get some numbers. You find the following from reported transactions for the average
price paid:

a. 12.0x the acquired firms earnings per share (EPS)
b. 9.0x EBITDA
c. 45.0% premium of share price

For Aerial, you find out the following:

a. EPS = $4.00
b. EBITDA = $835 million (debt value = $2, 320 million)
c. Stock Price = $42

Using EPS, EBITDA, and premium over stock price, what should be Aerial’s prices per
share? What is the average of the three?

2. You have been asked to calculate the cost of equity for three firms- Eastern, Western,
and Northern. You know the following:

Firm Beta Cost of Debt Debt/Assets

Eastern 1.10 3.8% 50%
Western 1.20 4.35% 65%
Northern 1.15 4.1% 57%

You know the following:

10-year Treasury yield = 3.20%
Market Premium = 5.0%
Average Tax Rate = 21%

What are the expected returns on equity and WACCs for each of these firms?

CONTINUES ON THE NEXT PAGE

http://www.worldwide.erau.edu/

Page 2 of 2

3. You have been asked to calculate the dividend discount model-based price per
share for the three airlines shown above. You know the following for 2019:

Firm Dividend Growth/year

Eastern 2.00 2.0%
Western 1.50 2.5%
Northern 1.20 3.0%

You already know their WACCs, so you can use them to present value the stream of
dividends. Remember that the terminal value uses the perpetuity formula and that it
automatically shows the value as of the beginning of the year when it is calculated!

Module 6: Return, Risk, and the Cost of Capital

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