Valuation and Financial Modeling

Table 19.2 Ideko Financial Ratios Comprison, Mid-2005

Ratio	Ideko (Proposed)	Oakley, Inc	Luxottica Group	Nike, Inc	Sporting Goods Industry
P/E	21.6X	24.8X	28.0X	18.2X	20.3X
EV/Sales	2.0X	2.0X	2.7X	1.5X	1.4X
EV/EBITDA	9.1X	11.6X	14.4X	9.3X	11.4X
EBUTDA/Sales	21.7%	17.0X	18.5%	15.9X	12.1X

19-1.  You would like to compare Ideko’s
profitability to its competitors’ profitability using the EBITDA/sales
multiple. Given Ideko’s current sales of $75 million, use the information in
Table 19.2 to compute a range of EBITDA for Ideko assuming it is run as
profitably as its competitors.

Solution

Ideko’s 2005 sales are $75 million.

Find the highest and lowest EBITDA
values across all three firms and the industry as a whole:

	EBITDA/Sales (%)	EBITDA ($ mil)
Oakley	17.0	12.75
Luxcottica	18.5	13.875
Nike	15.9	11.925
Industry	12.1	9.075

This implies an EBITDA range of
$9.075 to $13.875 million

 

19-2.  Assume that Ideko’s market
share will increase by 0.5% per year rather than the 1% used in the chapter.
What production capacity will Ideko require each year? When will an expansion
become necessary (when production volume will exceed the current level by 50%)?

  Solution

First compute the projected annual
market share:

		2005	2006	2007	2008	2009	2010
Sales Data	Growth/Yr
1.  Market Size (000 units)	5.0%	10,000	10,500	11,025	11,576	12,155	12,763
2.  Market Share	0.5%	10.0%	10.5%	11.0%	11.5%	12.0%	12.5%
3.  Ave. Sales Price ($/unit)	2.0%	75.00	76.50	78.03	79.59	81.18	82.81

Using these projections, calculate
the projected annual production volume:

Production Volume (000 units)	2005	2006	2007	2008	2009	2010
1.  Market size	10,000	10,500	11,025	11,576	12,155	12,763
2.  Market Share	10.0%	10.5%	11.0%	11.5%	12.0%	12.5%
3.  Production Volume (1×2)	1,000	1,103	1,213	1,331	1,459	1,595

Based on these estimates, it will be 2010
before current capacity is exceeded and an expansion becomes necessary.

Requirements

These two problems have their solutions but I want you
to put the solution on excel spread sheet and show formulas in all cells.