MGMT 332
Transactions
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
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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?
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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
