U.S. based retail company, Holmes & Holmes Inc., plans to expand to the European market. To establish an immediate presence in in Europe, the company considers buying Enola Plc, a privately owned company headquartered in the UK. The EBIT (earnings before interest and taxes) for Enola Plc. is expected to reach $17.5 million at the end of next year. The company's EBIT is projected to grow at 8.5% per year for the next five years before reaching a stable long-term growth at 3% indefinitely. The net working capital, capital expenditures, and depreciation as a percentage of EBIT are expected to be 10%, 12.5%, and 9%, respectively. Enola has 2.5 million shares outstanding. Holmes & Holmes has a total debt outstanding of $270 million with a YTM (yield to maturity) of 6%. The company has total market capitalization of $585 million with the required return on equity of 12.5%. Enola Plc. currently has a total debt outstanding of $75 million. The tax rate for both companies is 21%. a. You currently work at Goldman Sachs and as a lead analyst and you're tasked to perform a fair valuation of Enola's stock price. Based on the above information, what is the maximum share price that Holmes & Holmes should be willing to pay for Enola? b. After examining your analysis, the CEO of Holmes & Holmes thinks that it is more appropriate to estimate the terminal value based on EV/EBITDA multiple instead of perpetual growth rate. Assume that the appropriate EV/EBITDA multiple is 8, calculate the maximum shares price of Enola Plc based on this updated assumption.
U.S. based retail company, Holmes & Holmes Inc., plans to expand to the European market. To establish an immediate presence in in Europe, the company considers buying Enola Plc, a privately owned company headquartered in the UK. The EBIT (earnings before interest and taxes) for Enola Plc. is expected to reach $17.5 million at the end of next year. The company's EBIT is projected to grow at 8.5% per year for the next five years before reaching a stable long-term growth at 3% indefinitely. The net working capital, capital expenditures, and
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