8–13. Siebel Incorporated, a non-publicly traded company, has 2009 earnings before interest and taxes (EBIT) of $33.3 million, which is expected to grow at 5 percent annually into the foreseeable future. The firm’s combined federal, state, and local tax rate is 40 percent; capital spending will equal the firm’s rate of depreciation;

and the annual change in working capital is expected to be minimal. The firm’s beta is estimated to be 2.0, the 10-year Treasury bond is 5 percent, and the historical risk premium of stocks over the risk-free rate is 5.5 percent. Rand Technology, a direct competitor of Siebel’s, recently was sold at a purchase price of 11 times its 2009 EBIT, which included a 20 percent premium. Aware of the premium paid for the purchase of Rand, Siebel’s equity owners would like to determine what it might be worth if they were to attempt to sell the firm in the near future. They chose to value the firm using the discounted cash flow and comparable recent transactions methods. They believe that either method provides an equally valid estimate of the firm’s value.

a. What is the value of Siebel using the DCF method?

b. What is the value using the comparable recent transactions method?

c. What would be the value of the firm if we combine the results of both methods?
Answers:

a. $228.9 million.

b. $220 million.

c. $224.5 million.