Chartered Financial Analyst Level 2
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39 An analyst gathers the following data about a conglomerate with two segments (Segment Y and Segment Z) and compares the data with its peers.
| Segment Y | Segment Z | |
|---|---|---|
| Sales (in $ millions) | 60.0 | 48.0 |
| EBITDA (in $ millions) | 9.0 | 30.0 |
| Segment peer ratio | EV/EBITDA | EV/Sales |
| Peer median valuation multiple | 10.8x | 2.5x |
If the conglomerate's market value of equity is 10 million, the conglomerate discount (in $ millions) is closest to:
A. 32.2
B. 77.2
C. 97.2
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A
32.2
B
77.2
C
97.2
Explanation:
Calculation of Conglomerate Discount
Step 1: Calculate Sum-of-the-Parts (SOTP) Value
Segment Y Valuation:
- Uses EV/EBITDA multiple: 10.8x
- EBITDA: $9.0 million
- Enterprise Value = 10.8 × 9.0 = $97.2 million
Segment Z Valuation:
- Uses EV/Sales multiple: 2.5x
- Sales: $48.0 million
- Enterprise Value = 2.5 × 48.0 = $120.0 million
Total SOTP Enterprise Value:
- 120.0 million = $217.2 million
Step 2: Calculate Actual Enterprise Value
- Market Value of Equity: $130 million
- Net Debt: $10 million
- Enterprise Value = Market Value of Equity + Net Debt
- EV = 10 million = $140 million
Step 3: Calculate Conglomerate Discount
- Conglomerate Discount = SOTP Value - Actual Enterprise Value
- Discount = 140.0 million = $77.2 million
Step 4: Verify Answer Options
- A. 32.2 (incorrect)
- B. 77.2 (correct)
- C. 97.2 (incorrect - this is Segment Y's valuation)
The conglomerate discount is $77.2 million, which corresponds to option B.
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