Jason Kidwell is considering whether to acquire a local toy manufacturing company, Toys n Things Inc The companys annual income statements for three years are as follows 2014 2013 2012 Revenues $ 2,243,155 $ 2,001,501 $ 2,115,002 Cost of goods sold $ (1,458,051) $ (1,300,976) $ (1,374,751) Gross profits $ 758,104 $ 700,525 $ 740,251 Depreciation and administrative expenses $ (574,316) $ (550,150) $ (561,500) Net operating income $ 210,798 $ 150,375 $ 178,751 b The current owner of Toysn Things indicated to Jason that he would not take less than five times 2014 EBITDA to sell out Jason decides that, based on what he knows about the company, the price could not be justified However, upon further investigation, Jason learns that the owners wife is paid $100,000 a year for administrative services that Jason thinks could be done by a $50,000 per year assistant Moreover, the owner pays himself a salary of $250,000 per year to run the business, which Jason thinks is at least $50,000 too high based on the demands of the business In addition, Jason thinks that, by outsourcing raw materials to Asia, he can reduce the firms cost of goods sold by 10 After making adjustments for excessive salaries, what value should Jason place on the business Can Jason justify the value the owner is placing on the business Given Shares outstanding 9 40 million Offering Price 10 16 02 $ 12 25 Exhibit P6 12 3 Dick's Sporting Goods Financial Data ($ millions) Revenues $ 1,173 794 Gross Profit $ 298 453 EBIT $ 55 899 Depreciation Amortization $ 13 499 EBITDA $ 69 398 Balance Sheet Data 8 3 02 Checks Drawn $ 33 584 Current Portion of Long Term Debt $ 0 211 Revolving Bank Line of Credit $ 90 299 Long Term Debt Capital Leases $ 3 466 Total Debt $ 127 560 Cash $ 13 874 Stockholder's Equity $ 78 984 Debt Capitalization 62 Debt EBITDA 1 84x Source Dick's Sporting Goods Prospectus S 1 dated September 27, 2002 Solution a Implied Enterprise Valuation for DKS Based on Market Comparables Average Comps DKS Statistic Implied EV Revenue Multiple 0 37x $ 1,173 794 $ 434 304 EBITDA Multiple 5 20x $ 69 398 $ 360 870 EBIT Multiple 8 30x $ 55 899 $ 463 962 b Determine DKS' Implied Equity Value by subtracting Net Debt Implied Enterprise Value DKS Net Debt Implied Equity Value Implied IPO Value Per Share Revenue Multiple $ 434 304 $ (113 686) $ 320 618 $ 34 11 EBITDA Multiple $ 360 870 $ (113 686) $ 247 184 $ 26 30 EBIT Multiple $ 463 962 $ (113 686) $ 350 276 $ 37 26 Dick's IPO priced at $12 25 Its market multiples were valued at a significant discount to the comparables Equity Market Capitalization based on 9 47 million shares DKS Net Debt DKS Enterprise Value at IPO actual price of $12 25 Implied Multiple based on IPO Price Discount to Comps EV Revenue Multiple EV EBITDA Multiple EV EBIT Multiple Analysis

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Jason Kidwell is considering whether to acquire a local toy manufacturing company, Toys n Things Inc. The companys annual income statements for three years are

Jason Kidwell is considering whether to acquire a local toy manufacturing company, Toys n Things Inc. The companys annual income statements for three years are as follows:

2014

2013

2012

Revenues

$ 2,243,155

$ 2,001,501

$ 2,115,002

Cost of goods sold

$ (1,458,051)

$ (1,300,976)

$ (1,374,751)

Gross profits

$ 758,104

$ 700,525

$ 740,251

Depreciation and administrative expenses

$ (574,316)

$ (550,150)

$ (561,500)

Net operating income

$ 210,798

$ 150,375

$ 178,751

b. The current owner of Toysn Things indicated to Jason that he would not take less than five times 2014 EBITDA to sell out. Jason decides that, based on what he knows about the company, the price could not be justified. However, upon further investigation, Jason learns that the owners wife is paid $100,000 a year for administrative services that Jason thinks could be done by a $50,000-per-year assistant. Moreover, the owner pays himself a salary of $250,000 per year to run the business, which Jason thinks is at least $50,000 too high based on the demands of the business. In addition, Jason thinks that, by outsourcing raw materials to Asia, he can reduce the firms cost of goods sold by 10%. After making adjustments for excessive salaries, what value should Jason place on the business? Can Jason justify the value the owner is placing on the business?

Given
Shares outstanding	9.40	million
Offering Price 10/16/02	$ 12.25

Exhibit P6-12.3
Dick's Sporting Goods Financial Data ($ millions)
Revenues		$ 1,173.794
Gross Profit		$ 298.453
EBIT		$ 55.899
Depreciation & Amortization		$ 13.499
EBITDA		$ 69.398
Balance Sheet Data 8/3/02
Checks Drawn		$ 33.584
Current Portion of Long Term Debt		$ 0.211
Revolving Bank Line of Credit		$ 90.299
Long Term Debt & Capital Leases		$ 3.466
Total Debt		$ 127.560
Cash		$ 13.874
Stockholder's Equity		$ 78.984

Debt/Capitalization	62%
Debt/EBITDA	1.84x
Source: Dick's Sporting Goods Prospectus S-1 dated September 27, 2002

Solution
a. Implied Enterprise Valuation for DKS Based on Market Comparables
	Average Comps	DKS Statistic	Implied EV
Revenue Multiple	0.37x	$ 1,173.794	$ 434.304
EBITDA Multiple	5.20x	$ 69.398	$ 360.870
EBIT Multiple	8.30x	$ 55.899	$ 463.962

b. Determine DKS' Implied Equity Value by subtracting Net Debt
	Implied Enterprise Value	DKS Net Debt	Implied Equity Value	Implied IPO Value Per Share
Revenue Multiple	$ 434.304	$ (113.686)	$ 320.618	$ 34.11
EBITDA Multiple	$ 360.870	$ (113.686)	$ 247.184	$ 26.30
EBIT Multiple	$ 463.962	$ (113.686)	$ 350.276	$ 37.26

Dick's IPO priced at $12.25. Its market multiples were valued at a significant discount to the comparables.

Equity Market Capitalization based on 9.47 million shares	??????????
DKS Net Debt	??????????
DKS Enterprise Value at IPO actual price of $12.25	??????????

	Implied Multiple based on IPO Price	Discount to Comps
EV/Revenue Multiple	??????????	??????????
EV/EBITDA Multiple	??????????	??????????
EV/EBIT Multiple	??????????	??????????

Analysis: ??????????