a. Parry Electronics is a regional electronics wholesales and distributor that earned $1,250,000 in EBITDA this year based on revenues of $4,000,000. The enterprise values of publicly traded firms that operate in the same industry currently are valued at five to six times their current EBITDA. What is your estimate of the enterprise value of Parry Electronics? If Parry is small relative to the size of the comparison firms, with assets only one-tenth the size of the largest firm in the industry, how would this influence your valuation estimate? Explain.
b. Suppose we have two companies, A and B, that produce identical products using slightly different production processes. The process used by company A requires more capital equipment, which is already paid for, and can produce the product as lower per-unit costs. Now assume that you have been asked to value company B, which is privately held, and that you want to use company A, which is publicly traded, as the basis for your evaluation. Discuss how differences in the production processes of these firms affect both their multiples and discount rates.
c. In the tech sector, the price of an IPO is often stated as a multiple of its sales, which is then compared to the price/sales ratio of comparable firms. Why do you think that analysts use price/sales ratios in this setting rather than price/earnings ratios?