Question

Assume Company X had an 80,000 EBITDA in 2019 and its EBITDA is expected to grow by 4% per year. The company has no excess cash or marketable securities and does not project to have any excess cash or marketable securities in the future. The company has learned from its investment banker that its EBITDA multiple for purposes of arriving at its enterprise value is 14 and this EBITDA multiple is not projected to change in the future.
Using the company’s projected 2022 EBITDA and the EBITDA multiple approach to arrive at a year-end 2022 valuation, what is the company’s projected 2022 enterprise value and what is its projected total value? You may want to refer to the March 4 lecture on valuations using EBITDA as posted on Blackboard Learn.

Answer this financial planning and analysis problem:

A firm has a product with $200,000 in annual sales. Management is considering two different pricing alternatives for this product for next year.
Alternative one is to not change the price of this product next year. The expected result would be 5% sales growth and a 30% gross margin.
Alternative two is to increase the price of this product by 5% next year. The expected result would be 1% sales growth and a 33.3% gross margin.

Based on these expected results, which would you recommend? What is next year’s expected gross profit in each case?

Answer 1

Solution and Explanation:

1….                                            2019  2020  2021 2022

EBITDA                              80000  83200  86528  89989

EBITDA Multiple                            14     14               14  14

Enterprise or Total Value

= EBITDA*Multiple             1120000  1164800  1211392  1259848    

2012 Enterprise/Total Value =  1259848

2…Next year's expected gross margin

Alternative :1

Gross Margin= ($200000 * 1.05) * 30 \%=63000$

Alternative :2

Gross Margin= $(200000 * 1.01) * 33.3 \%=67266$

Alternative 2 is recommended   as there Increase in price is 1% . But increase in gross margin is 3.3%

Next year’s expected gross margin in dollars in each case

Alternative :1------------ 63000

Alternative :2------------67266