Fight Finance

Courses  Tags  Random  All  Recent  Scores

Scores
keithphw$5,921.61
cuiting$1,159.70
Visitor$1,088.61
Skywalke...$1,070.00
Carolll$1,013.33
Visitor$854.70
Visitor$840.00
Emma Lu$810.00
trungbin$803.09
Jade$785.80
alison$771.70
Visitor$760.00
zy$679.70
ninalee$669.70
Visitor$650.00
Visitor$637.00
Visitor$624.70
Nisrita$620.33
Visitor$603.33
Visitor$600.00
 

Question 463  PE ratio, Multiples valuation

Private equity firms are known to buy medium sized private companies operating in the same industry, merge them together into a larger company, and then sell it off in a public float (initial public offering, IPO).

If medium-sized private companies trade at PE ratios of 5 and larger listed companies trade at PE ratios of 15, what return can be achieved from this strategy?

Assume that:

  • The medium-sized companies can be bought, merged and sold in an IPO instantaneously.
  • There are no costs of finding, valuing, merging and restructuring the medium sized companies. Also, there is no competition to buy the medium-sized companies from other private equity firms.
  • The large merged firm's earnings are the sum of the medium firms' earnings.
  • The only reason for the difference in medium and large firm's PE ratios is due to the illiquidity of the medium firms' shares.
  • Return is defined as: ##r_{0→1} = (p_1-p_0+c_1)/p_0## , where time zero is just before the merger and time one is just after.




Copyright © 2014 Keith Woodward