8-5 VALUING A PRIVATELY HELD FIRM The auto parts business has three large publicly held firms: O'Reilly Automotive Inc. (Orly), Advance Auto Parts Inc. (AAP), and Auto Zone Inc. (AZO). In addition to these publicly held firms, Carquest is the largest pri- vately held firm in the industry. Assume that in summer 2010, your investment banking firm is considering whether to approach the top management of O'Reilly with a pro- posal that they consider acquiring Carquest, which owns over 4,000 auto parts outlets in the United States. As a preliminary step in the evaluation of the possible acquisition, you have assembled a team of analysts to prepare a preliminary analysis of acquisition price multiples that might be warranted based on current market conditions. The analyst team went to work immediately and compiled the following set of financial information and potential valuation ratios: Financial Information (Millions) O'Reilly Advance Auto Zone Revenues $ 2,120.00 $ 4,400.00 $ 5,890.00 EBITDA 321.86 544.38 1,130.00 Net income 171.62 240.16 562.44 Earnings per share 1.507 2.183 7.301 Interest-bearing debt 120.00 560.00 1,720.00 Common equity 1,145.77 939.51 641.16 Total assets 1,713.90 2,615.73 4,401.85 Financial Ratios Debt to equity 10.5% 59.6% 269.3% Gross margins 44.0% 47.3% 49.1% Operating margins 12.47% 9.42% 16.77% Expected growth in EPS (5 yrs.) 18.5% 16.0% 13.0% Market Valuations (Millions) Market capitalization $ 3,240 $ 3,040 $ 6,290 Enterprise value 3,360 3,600 8,010 Valuation Ratios Enterprise value/EBITDA 10.44 6.61 7.09 P/E ratio (trailing) 19.42 13.30 11.56 P/E ratio (forward) 15.24 11.21 10.21 Beta 1.24 1.79 1.25