What's the right answer to these? I thought about it but have no idea lol
2. Company A is 50% equity and 50% debt and Company B is 100% equity. Assume both triple in Enterprise value and debt remains constant. Which would you prefer investing equity in?
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From my knowledge should be below but will let others chime in as well if there is an easier way:
1. For the first question it will be 26.25x proforma multiple. 20x P/E = $20m market cap / $1m NI + 25x P/E = $25m market cap / $1m NI but there is a 30% premium on the equity value, so it would be 25 * 1.3 = 32.5 / $1m NI = 32.5x P/E. Add both market cap and NI and you will be 26.25 (52.6 / 2).
2. Company A's EV is 100 with 50 in equity and 50 in debt, while company B has 100 equity. EV triples whilst debt steadies, then Company A will have EV of 300 with equity of 250 and debt of 50, while company B will have 300 pure equity. You invest in company A as the increase is greater.
I think the question is pro-forma EPS, which we can't calculate unless we have more info. But assuming its 100% stock deal, EPS will be lower after acquisition for A. And number 2 seems correct.
What more info do you need for the pro forma EPS? thanks
We need to get EPS of A & B, since PE is given, we can get EPS by share price. We also likely need total share count as well
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