Chartered Financial Analyst Level 2

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Explanation:

Let's calculate the values for each option:

Sell the business: $625 million offer

Spin off the business:

Value at 15× EBITDA: 15 × $45 million = $675 million
Less 5% flotation costs: $675 million × 0.95 = $641.25 million

Peer valuation:

14.5 × $45 million = $652.5 million

Analysis:

Selling the business provides $625 million immediately
Spinning off would provide $641.25 million in value (after costs)
The peer valuation suggests $652.5 million

Since the spin-off value ($641.25 million) is higher than the sale offer ($625 million), and considering the peer valuation of $652.5 million, the best option is to sell the business as it provides immediate liquidity at a reasonable valuation compared to the spin-off alternative.

Explanation:

Let's calculate the values for each option:

Sell the business: $625 million offer

Spin off the business:

Value at 15× EBITDA: 15 × $45 million = $675 million
Less 5% flotation costs: $675 million × 0.95 = $641.25 million

Peer valuation:

14.5 × $45 million = $652.5 million

Analysis:

Selling the business provides $625 million immediately
Spinning off would provide $641.25 million in value (after costs)
The peer valuation suggests $652.5 million

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A company has received a `$625` million offer for its healthcare division, which has an EBITDA of `$45` million. Peer companies are valued at an average EV/EBITDA of 14.5. The company's investment banker suggests that the company can spin off the division at 15 times EBITDA, less 5% in flotation costs. The best option for the company would be to:

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sell the business.

retain the business.

spin off the business.