Series 79: Determine A Range Of Implied Values

Determine a Range of Implied Values

The benchmark data can then be used to determine a valuation range for Centennial Brewing in advance of its IPO. Since EV/EBITDA is a frequently used valuation metric, rely on it to estimate a range for Centennial’s expected value. The valuation range is determined by forming a range around the median (or mean) of the multiples. In this case, it makes sense to set the range around the 7.8x median value. Using an interval of 1.0 (in other words, 0.5 on either side of the median) gives us a range of multiples of 7.3x to 8.3x (7.8x plus or minus 0.5). Centennial’s LTM EBITDA is calculated by adding operating income to depreciation/amortization (EBITDA = operating income + depreciation/amortization), all of which can be found on the income statement. Centennial’s LTM operating income was $4.8 million, while depreciation/amortization totaled $1.2 million, resulting in a LTM EBITDA of $6.0 million (4.8 + 1.2 = 6.0). To determine Centennial’s implied valuation range, multiply the two endpoints by the LTM’s EBITDA (6.0 x 7.3 = 43.8; 6.0 x 8.3 = 49.8.). Thus, the range is $43.8 to $49.8 million.

Example Question 1

In its final prospectus, Centennial has revealed that the current IPO will involve 800,000 shares of its stock at the price of $50.00 per share. Would you advise your customers to purchase shares of this stock at that price?

Answer: Fifty dollars per share is below the estimated valuation range for Centennial’s public stock, and thus, it would be a good investment for your customers. The simplest way to determine individual stock price value is by dividing equity value by