Business Valuation 619Victoria’s analysis looks at the public companies’ balance sheets and in-
come statements over several years, growth rates, margins, returns on assets
and equity, and financial ratios. She also analyzes various share price multiples
of the public companies such as:
- Market value of invested capital to sales.
- Market value of invested capital to earnings before interest, taxes, depre-
ciation, and amortization (EBITDA). - Market value of invested capital to earnings before interest and taxes
(EBIT). - Market value of equity to pretax income.
- Market value of equity to net income.
- Market value of equity to cash f low.
- Market value of equity to book value.
Based on her detailed analyses of the guideline companies and comparing
them to ACME, Victoria determines that the following price multiples of the
public companies appear to be most correlated and relevant for application to
ACME: market value of invested capital to sales, market value of invested cap-
ital to EBITDA, market value of invested capital to EBIT, and market value of
equity to pretax income.
The median price multiples for the five public companies are:
Then Victoria applies the median price multiples to ACME. See Ex-
hibit 18.12 for her calculations. Her analysis indicates a value of ACME’s eq-
uity at December 31, 2000, of $35.2 million on an as-if-freely-traded basis.
Since Victoria made adjustments to the 2000 income statement (see the
resulting pro forma column in Exhibit 18.5) for discretionary items (officers’
compensation and rent expense), she explains that the 2000 earnings and re-
sulting value of $35.2 million represents a value to an owner of a control eq-
uity interest. Thus, Victoria concludes that there is no need to add a control
premium. A control premium is an upward adjustment to the value that re-
f lects the power of control as compared to the value of a noncontrol equity in-
terest. (However, many analysts believe that a control premium would be
necessary simply because of the use of public minority share multiples even
though the income was adjusted upward to ref lect the discretionary expenses
of a control owner. Many of these people, however, would not use the median
multiple of the public companies as Victoria did but adjust it [usually down]
Median
Price
Multiple
Market value of invested capital to sales 0.54
Market value of invested capital to EBITDA 5.80
Market value of invested capital to EBIT 7.26
Market value of equity to pre-tax income 6.72