October 28, 2015
Should American Greetings Repurchase its Shares?
1. Is 3.5x multiple appropriate for American Greetings? If not, what multiple of EBITDA to think is justified?
Based on the information provided, I believe that the EBITDA Multiple of 3.5x is not justified.
EBITDA Mutiple (or EV/EBITDA) is a better measure than P/E ratio because it is not affected by the changes in capital structure between debt and equity. And for this reason it also makes fair comparison to companies with different capital structures. It is also a pre-tax metric making it easier to compare across different companies preferably in the same industry. This metric is preferred over P/E ratio since it is not affected by …show more content…
Other operating expense is expected to decrease by 4% which is cost savings from innovation which would help improve working capital.
Depreciation/Amortization is added back to estimate free cash flow. (Data Source: American
Greetings 2012 10-K report)
Discount Rate or WACC is calculated as follows:
Cost of Equity:
CAPM = RF + Beta (Market Premium)
Beta given 1.63
Risk Free Rate = 2.8% which is on the 10-year Treasury Bond
Market Premium given = 5%
Cost of Equity =2.8%+1.63(5%)
Cost of Debt:
BB+ Bond Rating Yield = 5.80%
Tax Rate given 40%
Cost of Debt = 5.80% (1-.40)
Proportion of Debt to MV Equity Mix: 48%: 52%
Equity Mix based on market