Harman Electrical Engineering Hee Has Developed A Ground Bre

Harman Electrical Engineering Hee Has Developed A Ground Breaking Ne

Harman Electrical Engineering (HEE) has developed a groundbreaking new robotics technology used in large civil engineering construction projects. The firm is privately held, with no public market for its common stock. Its 2012 EBIT was $3.9 million, and at year-end 2012, the accumulated depreciation balance was $1.1 million, up from $800,000 at the end of 2011. HEE's total liabilities as of 2012 include $4.4 million, with a $2.6 million loan, and total shareholders’ equity stands at $1.6 million. The CEO has asked for a valuation of HEE's equity.

Research indicates that BridgeTech is a comparable public company specializing in robotics software for large-scale manufacturing. BridgeTech's share price is $120, with 500,000 shares outstanding, and it has $15 million in bonds. Its EBITDA is $18.75 million.

Your task involves several calculations:

- Determine BridgeTech’s enterprise value and EBITDA multiple.

- Calculate HEE’s EBITDA.

- Use BridgeTech’s EBITDA multiple to estimate HEE’s enterprise value and equity value.

---

Paper For Above instruction

Introduction

Valuation of private companies often relies on comparables from similar publicly traded firms. In this case, BridgeTech serves as a benchmark to estimate the value of Harman Electrical Engineering (HEE). By calculating BridgeTech’s enterprise value (EV) and EBITDA multiple, and then applying these to HEE’s financials, we can derive an estimated equity value for HEE. This process involves several steps, including determining BridgeTech’s EV and EBITDA multiple, calculating HEE’s EBITDA, and then applying these multiples to HEE.

Part A: Calculating BridgeTech’s Enterprise Value and EBITDA Multiple

The enterprise value (EV) is a comprehensive measure of a company's total value, reflecting both equity and debt. It is calculated as:

EV = Market Capitalization + Total Debt - Cash and Equivalents

From the data:

- Share Price = $120

- Shares Outstanding = 500,000

- Total Debt (Bonds Outstanding) = $15 million

Assuming BridgeTech has no significant cash holdings reported, the market capitalization is:

Market Cap = Share Price × Shares Outstanding = $120 × 500,000 = $60 million

Thus:

EV = $60 million + $15 million = $75 million

Next, EBITDA multiple is a valuation ratio indicating how many times EBITDA the enterprise is valued at:

EBITDA Multiple = EV / EBITDA

Given EBITDA = $18.75 million,

EBITDA Multiple = $75 million / $18.75 million = 4.0x

Therefore, BridgeTech’s enterprise value stands at $75 million, with an EBITDA multiple of 4.0x.

Part B: Calculating HEE’s EBITDA

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) can be derived from EBIT by adding back depreciation:

EBITDA = EBIT + Depreciation

From HEE’s data:

- EBIT = $3.9 million

- Depreciation (change in accumulated depreciation) = $1.1 million (end of 2012) - $0.8 million (end of 2011) = $0.3 million

Assuming depreciation expense reflects the change in accumulated depreciation (which may be an approximation), then:

EBITDA = $3.9 million + $0.3 million = $4.2 million

Thus, HEE’s EBITDA for 2012 is approximately $4.2 million.

Part C: Estimating HEE’s Enterprise and Equity Values Using the EBITDA Multiple

Applying the EBITDA multiple from BridgeTech to HEE:

- Implied Enterprise Value = HEE EBITDA × BridgeTech’s EBITDA multiple

Implied Enterprise Value = $4.2 million × 4.0 = $16.8 million

Next, to derive the estimated equity value of HEE:

- Equity Value = Enterprise Value - Net Debt

Net Debt = Total Liabilities - Cash and Equivalents

Since the cash position isn’t specified, we assume minimal cash holdings. The provided liabilities are $4.4 million, with a loan of $2.6 million. Therefore:

Net Debt = $4.4 million - (assumed negligible cash) = $4.4 million

Finally, the estimated equity value:

Equity Value = $16.8 million - $4.4 million = $12.4 million

This valuation suggests that HEE’s equity is approximately $12.4 million, based on the EBITDA multiple derived from BridgeTech.

Conclusion

By leveraging comparable company analysis, this valuation indicates that HEE’s enterprise value is approximately $16.8 million, translating into an estimated equity value of around $12.4 million. These calculations provide vital insights into HEE’s worth based on publicly available benchmarks, aiding the CEO’s strategic decision-making regarding the firm’s valuation and potential investment or sale considerations. The approach underscores the importance of reliable peer comparables and robust financial analysis in private company valuation.

References

  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley Finance.
  • Graham, J. R., & Harvey, C. R. (2001). The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 60(2-3), 187-243.
  • Horowitz, I. (2004). Valuation Techniques for Privatized Firms. Harvard Business School Publishing.
  • Koller, T., Goedhart, M., & Wessels, D. (2010). Valuation: Measuring and Managing the Value of Companies. Wiley.
  • Penman, S. H. (2012). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
  • Ross, S., Westerfield, R., & Jaffe, J. (2013). Corporate Finance. McGraw-Hill/Irwin.
  • Damodaran, A. (2015). Narrative and Discount Rate in Valuation. Stern School of Business, NYU.
  • Brigham, E. F., & Ehrhardt, M. C. (2013). Financial Management: Theory & Practice. Cengage Learning.
  • Healy, P. M., & Palepu, K. G. (2001). The Fall of Enron. Journal of Economic Perspectives, 15(2), 3-26.
  • McKinsey & Company. (2013). Valuation: Measuring and Managing the Value of Companies. Wiley Finance.

Related Assignments