ILLUSTRATION 9.2: Estimating Value Multiples for a Firm
Assumethatyouarecomputingthemultiplesoffirmvalue
for a firm with the following characteristics:
- Inthemostrecent financialyear,thefirmreported
depreciation of $20 million and earnings before
interestandtaxes(operatingincome)of$100million
onrevenuesof$1billion;thetaxratewas40%.The
resulting after-tax operating margin is 6%. - Thecapital investedin thefirmwas$400 million,
translating into an after-tax return on capital of 15%:
The firm expects to maintain this return on capital in
perpetuity.
- The firm expects to reinvest 60% of its after-tax
operatingincome backintothebusinesseveryyear
for the next five years, resulting in an expected
growth rate of 9% each year: - The cost of capital is 10% in perpetuity and the
expectedgrowthrateafteryear 5 willbe4%.Given
thereturn oncapital of15%, this translates intoa
stable period reinvestment rate of 26.67%: