EB interview questions about enterprise value/ EPS
What's the right answer to these? I thought about it but have no idea lol
- Company A trades at 20x P/E and buys company B, which trades at 25x P/E, for a 30% premium. What is the pro forma EPS?
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?
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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