Measuring the Change in Market Multiples Resulting from a Change in Market Multiple Determinants

The Growing Company: Use the information in Problem 13.1 to examine the change in the firm value market

multiples computed in Problem 13.1 resulting from a change in the market multiple determinants described

below. For each of the changes in the market multiple determinants, measure the changes in the multiples of

firm value to free cash flow, unlevered earnings, EBIT, EBITDA, and revenue. Measure the market multiple

using the end of Year 0 firm value and Year 0 value driver (denominator).

a. The initial valuation of the company used a 3% perpetual growth rate. If the perpetual growth rate

decreases to 2%, the companys value decreases by 4.1%.

b. The initial valuation of the company used a 13% unlevered cost of capital. If the unlevered cost of capital

decreases to 12%, the companys value increases by 12.9%.

c. The initial valuation of the company used a 70% operating expense ratio (% of revenue). If the operating

expense ratio decreases to 65%, the companys value increases by 18.3%.

d. The initial valuation of the company used a 1.2 ratio of revenue to gross property, plant and equipment. If

the ratio of revenue to gross property, plant and equipment increases to 1.5, the companys value increases

by 1.4%.

e. The initial valuation of the company used a 10% net operating working capital ratio (% of revenue). If

the net working capital ratio increases to 15%, the companys value decreases by 1.3%.

f. The initial valuation of the company used a 35% income tax rate. If the income tax rate increases to 40%,

the companys value decreases by 5.6%.