Time Warner is considering a sale of its publishing division. The division had earnings before interest, taxes, and depreciation, of $550 million in the most recent year (depreciation was $150 million), growing at an estimated 5% a year (You can assume that depreciation grows at the same rate). The return on capital in the division is 15%, and the corporate tax rate is 40%. If the cost of capital for the division is 9%, find the following multiples (Please find forward multiples; i.e. find EV/FCF1). Hint: FCF1 is between 160 and 180.

a. the EV/FCF multiple based upon fundamentals

b. the EV/EBIT multiple based upon fundamentals

c. the EV/EBITDA multiple based upon fundamentals

Now suppose you have computed an average EV/EBITDA multiple of six for other publicly traded firms in the sector. The return on capital at these firms, on average, is 10%, while their cost of capital and expected growth are comparable to Time Warners publishing division.

d. If you were analyzing Time Warners publishing division for sale, based upon comparables, which of the following would you use an EV/EBITDA multiple that is greater than, less than, or equal to six? Explain briefly.