Topic 2 (Activity # 3) - AK

Additional Practice Questions – Solve end of chapter problems

Problem 1
Using the information provided for Gasparro Corp., complete the questions regarding fully diluted shares
outstanding
a. Calculate Gasparro Corp.'s in-the-money options/warrants
b. Calculate proceeds from in-the-money options/warrants
c. Calculate net new shares from the options/warrants
d. Calculate fully diluted shares outstanding
a. 2.75 million. The total number of in-the-money
options/warrants is calculated by adding the in-the-money
shares from the tranches which have an exercise price lower
than the current share price of $50.00. (1.250 million shares
+ 1.000 million shares + 0.500 million shares)
b. $62.5 million. The total proceeds from in-the-money
options/warrants is calculated by adding the proceeds from
the tranches which have an exercise price lower than the
current share price of $50.00. ($12.5 million + $30.0 million
+ $20.0 million)
c. 1.50 million. Under the TSM, the $62.5 million of
potential proceeds received by Gasparro is used to
repurchase shares that are currently trading at $50.00.
Therefore, the number of shares repurchased is 1.25 million
($62.5 million / $50.00) of the options. To calculate net new
shares, the shares repurchased are subtracted from the
total number of in-the-money options/warrants. (2.75
million shares − 1.25 million shares)
d. 100.0 million. Fully diluted shares are calculated as net
new shares plus basic shares outstanding. (98.5 million
shares + 1.50 million shares)
Problem 2
Using the prior answers and information, as well as the balance
sheet data below, calculate Gasparro's equity value and
enterprise value
a. $5,000.0 million. Equity value is calculated by
multiplying fully diluted shares by the current
share price. (100.0 million shares × $50.00)

b. $6,750.0 million. Enterprise value is calculated

as equity value plus total debt less cash and
cash equivalents. ($5,000.0 million + $1,850.0
million − $100.0 million)
Problem 3
Calculate fully diluted outstanding shares using the information below
As the company's current share price of $45.00 is greater than the conversion price of $30.00, the $300
million convert is in-the-money. Therefore, the convert's amount outstanding is divided by the conversion
price to calculate new shares of 10 million ($300 million / $30.00). The new shares from conversion are then
added to the company's basic shares outstanding of 250 million to calculate fully diluted shares outstanding
of 260 million
Problem 4
Using the information below, calculate the CAGRs for the 2010 – 2012 and 2012 – 2014 periods
Problem 5
Calculate LTM 9/30/2012 sales given the information below

LTM 9/30/2012 sales are calculated by taking $2,250.0 million

(2011 FY sales from 10-K), adding $1,600.0 million (2012 YTD sales
from 10-Q), and then subtracting $1,450.0 million (2011 YTD sales
from 10-Q)
Problem 6
Calculate adjusted LTM EBIT, LTM EBITDA, LTM Net Income using the information below:
Item Amount in millions
after-tax gain from favorable litigation settlements $25
after-tax loss from assets sale $30
after-tax inventory write-offs $15
LTM EBIT $705
LTM Depreciation $175
LTM Net Income $375
Tax Rate 38%

Adjusted LTM EBIT = $705 + (($30 +$15 - $25)/(1-0.38)) = $737.26

Adjusted LTM EBITDA = $705 + 175 + (($30 +$15 - $25)/(1-0.38)) = $912.26
Adjusted LTM Net Income = $375 + $30 + $15 -$25 = $395
 Problem 7
(Input sheet)              
($ in millions, except per share data)  
LTM Financial Data            
Company Enterprise
Company Share price Equity Value Value Sales EBITDA EBIT EPS
BuyerCo $70.00 $9,800.00 $11,600.00 $6,559.60 $1,443.10 $1,279.10 $5.03
Sherman Co. $40.00 $5,600.00 $8,101.00 $5,894.60 $1,047.00 $752.20 $2.99
Pearl Corp. $68.50 $5,171.80 $5,856.10 $4,284.50 $838.70 $624.50 $4.31
Gasparro Corp. $50.00 $5,000.00 $6,750.00 $4,725.00 $900.00 $725.00 $3.88
Kumra Inc. $52.50 $4,851.60 $5,344.60 $3,186.70 $665.30 $505.90 $2.70
(Output sheet)        
  Enterprise Value / Target Company Financial Data
Price /      
($ in millions, except per share data)  
Company LTM Sales LTM EBITDA LTM EBIT LTM EPS Cash and Cash
BuyerCo 1.8x 8.0x 9.1x 13.9x Debt Equivalents Sales EBITDA EBIT Net Income
Sherman Co. 1.4x 7.7x 10.8x 13.4x $ 2,000.00 $ 500.00 $3,500 $750.00 $550.00 $300.00
Pearl Corp. 1.4x 7.0x 9.4x 15.9x
Gasparro Corp. 1.4x 7.5x 9.3x 12.9x
Using the information above, determine the target company
Kumra Inc. 1.7x 8.0x 10.6x 19.4x implied share price ranges using both equity and enterprise
Mean 1.5x 7.7x 9.8x 15.1x value multiples? The fully diluted shares of the target
Median 1.4x 7.7x 9.4x 13.9x company is 90 million shares.
Step 1: Identify the trading multiple range
Step 2: Determine implied enterprise value range of the target company
Step 3: Determine implied equity value range of the target company
Step 4: Determine implied share price range of the target company
A. EV / Sales multiple range: 1.4X _____________ 1.8x
Implied enterprise value: multiply EV / Sales multiple range (1.4X ______ 1.8x) by the respective financial
metric (sales $3,500) of the target company. The result will be: $4,900 ______$6,300
Implied equity value based on EV/Sales multiple range: Subtract net debt ($2000 - $500) of the target
company from implied enterprise value calculated in step 2. The result will be: $3,400 ______$4,800
Implied share price range: divide the implied equity value range by the fully diluted shares outstanding. The
result will be: $37.78 _________ $53.33

B. EV / EBITDA multiple range: 7x ______________8 x

Implied enterprise value: multiply EV / EBITDA multiple range (7x _____8x) by the respective financial metric
(EBITDA $750) of the target company. The result will be: $5,250 ______ $6,000
Implied equity value based on EV/EBITDA multiple range : Subtract net debt ($2000 - $500) of the target
company from implied enterprise value calculated in step 2. The result will be: $3,750 ______ $4,500
Implied share price range: divide the implied equity value range by the fully diluted shares outstanding. The
result will be: $41.67 _____ $50
C. EV / EBIT multiple range: 9.1x ______________ 10.8x
Implied enterprise value: multiply EV / EBIT multiple range (9.1x _____10.8x) by the respective financial
metric (EBIT $550) of the target company. The result will be: $5,005 ______ $5,940
Implied equity value based on EV/EBIT multiple range : Subtract net debt ($2000 - $500) of the target
company from implied enterprise value calculated in step 2. The result will be: $3,505 ______ $4,440
Implied share price range: divide the implied equity value range by the fully diluted shares outstanding. The
result will be: $38.94 ______ $49.33

D. P / E multiple range: 12.9x ________________15.9x

Implied enterprise value will not be calculated for P / E multiple range because implied equity value can be
directly calculated from the multiple range
Implied equity value based on P/E multiple range : multiply P / E multiple range (12.9x _____15.9x) by the
respective financial metric (net income $300) of the target company. The result will be: $3,870 ______ $4,770
Implied share price range: divide the implied equity value range by the fully diluted shares outstanding. The
result will be: $43 ______ $53
Problem 8
Using the information below, calculate ValueCo's implied valuation ranges using the company's LTM
EBITDA and the EV/EBITDA multiple range of comparable companies
a. Calculate ValueCo's implied enterprise value range
b. Calculate ValueCo's implied equity value range
c. Calculate ValueCo's implied share price range
a. $4,900 million. Low implied enterprise value is calculated as LTM EBITDA multiplied by the low EBITDA
multiple range. ($700 million × 7.0x)
$5,600 million. High implied enterprise value is calculated as LTM EBITDA multiplied by the high EBITDA
multiple range. ($700 million × 8.0x)

b. $3,400 million. Low implied equity value is calculated as low implied enterprise value minus net debt.
($4,900 million − $1,500 million)
$4,100 million. High implied equity value is calculated as high implied enterprise value minus net debt.
($5,600.0 million − $1,500 million)

c. $42.50. Low implied share price is calculated as low implied equity value divided by fully diluted shares.
($3,400 million / 80 million)
$51.25. High implied share price is calculated as high implied equity value divided by fully diluted shares.
($4,100 million / 80 million)
Problem 9
Using the information below, calculate ValueCo's implied valuation ranges using the company's LTM net
income and the P/E multiple range of comparable companies
a. Calculate ValueCo's implied equity value range
b. Calculate ValueCo's implied share price range
a. $3,350 million. Low implied equity value is calculated as LTM net income multiplied by the low P/E multiple
range. ($258 million × 13.0x)
$4,123 million. High implied equity value is calculated as LTM net income multiplied by the high P/E multiple
range. ($258 million × 16.0x)

b. $41.88. Low implied share price is calculated as low implied equity value divided by fully diluted shares.
($3,350 million / 80 million)
$51.54. High implied share price is calculated as high implied equity value divided by fully diluted shares.
($4,123 million / 80 million)