IPO Valuation Using Marketing Multiple-Finance Assignment Solution Sample

QUESTION

 

This week we cover the DLJ case. For analysis, we will focus on how to value the IPO by the method of market multiples. 

The one-page memo needs to include ten rubrics. Four deal with your choices and justifications for choosing a set of “comparable” firms. Four deal with the actual valuation by alternative price multiples. Two deal with combining the pricing by alternative multiples and adjusting the combined pricing to arrive at the IPO price.

 

Exhibit 5

Exhibit 5
Donaldson, Lufkin & Jenrette, 1995
DLJ Historical Income Statements
(Dollars in Thousands)

 

                              Last Twelve Mos.  
  Years Ended December 31,   Six Months Ended June 30,   Ended June 30,  
Income Statement Data: 1990   1991   1992   1993   1994   1994   1995   1995  
Revenues:                                
Commissions $228.9   $257.9   $289.7   $358.8   $376.1   $194.2   $225.0   $406.9  
Underwritings 150.3   170.9   350.3   574.6   261.1   139.5   171.2   292.8  
Fees 88.9   166.2   158.1   211.3   281.3   112.9   173.5   341.9  
Interest – Net (a) 362.3   323.0   381.7   657.3   791.9   391.4   423.6   824.1  
Principal Transactions-Net:                                
Trading 98.9   264.2   272.0   381.5   165.7   99.2   154.9   221.4  
Investment 37.9   17.3   195.9   79.9   97.6   28.8   99.1   167.9  
Other 16.9   15.1   16.4   21.9   35.0   15.2   26.4   46.2  
Total Revenues 984.1   1,214.6   1,664.1   2,285.3   2,008.7   981.2   1,273.7   2,301.2  
                                 
Costs and Expenses:                                
Compensation and Benefits 413.1   567.9   886.6   1,200.4   897.8   477.1   598.1   1,018.8  
Interest 302.3   236.4   212.3   381.7   503.8   221.1   308.9   591.6  
Other Expenses 254.2   321.3   320.2   401.2   402.1   183.0   234.2   453.3  
Total Costs and Expenses 969.6   1,125.6   1,419.1   1,983.3   1,803.7   881.2   1,141.2   2,063.7  
                                 
Pre-Tax Income 14.5   89.0   245.0   302.0   205.0   100.0   132.5   237.5  
Provision for Income Taxes 1.5   31.2   98.0   115.9   82.0   40.0   53.0   95.0  
                                 
Net Income Before Preferred Dividends $13.0   $57.8   $147.0   $186.1   $123.0   $60.0   $79.5   $142.5  
                                 
Dividends on Preferred Stock         21.0   13.0   9.9   17.9  
                                 
Net Income Applicable to Common Shares $13.0   $57.8   $147.0   $186.1   $102.0   $47.0   $69.6   $124.6  
                                 
Earnings per Share                 $1.98   $0.91 (c) $1.35   $2.42 (c)
Dividends per Share                 $0.65   NA (c) $0.33   NA (c)
Common Shares Outstanding (b)                 51.5   51.5 (c) 51.5   51.5 (c)

 

Exhibit 6

Exhibit 6  
Donaldson, Lufkin & Jenrette, 1995  
Summary Balance Sheets & Pro Forma Capitalization  
(Dollars in Thousands)
  Years Ended December 31,   Six Months Ended June 30,  
Summary Balance Sheet Data: 1990   1991   1992   1993   1994   1994   1995  
Stock Price as of October 23, 1995                            
Shares Outstanding (Millions)                            
Market Capitalization $6,405.3   $10,942.5   $14,378.4   $21,575.2   $19,166.9   $22,886.1   $26,750.8  
Total Assets $13,997.1   $18,721.7   $24,436.2   $38,766.7   $33,161.1   $41,628.8   $42,417.1  
Total Market Capitalization                            
LIABILITIES & STOCKHOLDERS’ EQUITY                            
Securities Sold Under Agreements to                            
Repurchase and Securities Loaned $7,619.0   $11,200.8   $19.7   $24,116.7   $20,385.4   $25,705.6   $27,895.9  
Long-Term Borrowings 270.5   268.1   478.6   549.0   539.9   544.9   723.1  
Preferred Stock       225.0   225.0   225.0   225.0  
Current Implied Dividend $294.1   $340.3   $454.6   $750.3   $820.3   $775.9   $873.6  
                             
Ratio of Net Assets to Stockholders’ Equity 25.81 x 22.86 x 22.12 x 22.91 x 17.01 x 24.16 x 17.93 x
Ratio of Long-Term Borrowings to Total Cap 0.47   0.42   0.51   0.34   0.30   0.33   0.35  
Pre-Tax Return on Average Equity 5.0%   28.1%   61.6%   50.1%   23.4%   23.3%   28.9%  
                             
Current Implied Dividend Yield         As of June 30, 1995       Percent of Total Capital  
Pro Forma Capitalization (In Thousands) (a)         Actual   As Adjusted       Actual   As Adjusted  
Short-Term Borrowings         $1,651,914   $1,523,881              
Revenue Growth                            
Earnings ………                            
Notes         $-   $300,000       0.0%   14.2%  
Book Value         250,000   250,000       13.7%   11.9%  
Term Loan Agreement         250,000   100,000       13.7%   4.7%  
Beta vs S&P 500         105,022         5.8%   0.0%  
Employees         97,000   97,000       5.3%   4.6%  
Other Borrowings         21,067   21,067       1.2%   1.0%  
Total Long-Term Borrowings         723,089   768,067       39.7%   36.4%  
                             
Cumulative Exchangeable Preferred Stock, at Redemption Value         225,000   225,000       12.4%   10.7%  
                             
Stockholders’ Equity:                            
Common Stock ($0 10 Par Value) 150,000,000 Shares Authorized; 50,000,000                            
Actual Shares Issued & Outstanding; 53,300,000 as Adjusted         1,000   5,330       0.1%   0.3%  
Restricted Stock Units; No Actual Units Issued and Outstanding; 5,178,664                            
as Adjusted Units Issued and Outstanding           106,163       0.0%   5.0%  
Paid-in Capital         232,080   368,055       12.7%   17.4%  
Retained Earnings         640,855   637,157       35.2%   30.2%  
Cumulative Translation Adjustment         (321)   (321)       0.0%   0.0%  
Total Stockholders’ Equity         873,614   1,116,384       48.0%   52.9%  
                             
Total Capitalization (Excl Short-Term Borrowings)         $1,821,703   $2,109,451       100.0%   100.0%  
                             
(a) Pro forma effects include offering at mid-point of filing range for illustrative purposes and $300,000 proposed debt issuance.                            
                           

 

Exhibit 8

Exhibit 8  
Donaldson, Lufkin & Jenrette, 1995  
Comparable Analysis of Selected Securities Firms  
(Dollars in Millions, Except per Share Data)
                  Lehman   Merrill   Morgan       Salomon
  Alex. Brown   Bear Stearns   DLJ (a)   A.G. Edwards   Brothers   Lynch   Stanley   PaineWebber   Brothers
                                   
Stock Price as of October 23, 1995 $46.63   $20.00   NA   $25.13   $22.50   $56.98   $87.50   $21.50   $36.75
Shares Outstanding (Millions) 15.5   118.8   58.5   62.3   104.6   175.7   77.6   97.4   106.4
Market Capitalization $723   $2,376   NA   $1,565   $2,353   $10,011   $6,790   $2,095   $3,911
Long-Term Debt and Preferred Stock 173   4,792   993     13,605   16,775   9,929 2,710 14,353
Total Market Capitalization $897   $7,168   NA   $1,565   $15,958   $26,787   $16,719   $4,805   $18,264
                                   
Last Twelve Months Earnings per Share $5.39   $3.40   $2.42   $2.64   $1.59   $3.72   $4.06   $(0.26)   $0.58
Last Twelve Months Book Value per Share 29.53   16.59   19.72   15.80   27.95   31.06   52.34   15.04   34.64
Cal Yr 1995 Est Earnings per Share (Value Line) 6.16   1.70   NA   2.58   2.25   5.44   6.66   0.52   3.50
Cal Yr 1996 Est Earnings per Share (Value Line) 6.10   2.80   NA   2.80   2.45   5.85   8.00   2.40   3.75
Current Implied Dividend 0.80   0.60   0.50   0.56   0.20   1.00   1.28   0.48   0.64
                                   
Stock Price / LTM Earnings per Share 8.7 x 5.9 x NA x 9.5 x 14.2 x 15.3 x 21.6 x NMF x 63.4
Stock Price / Book Value per Share 1.6   1.2   NA   1.6   0.8   1.8   1.7   1.4   1.1
Stock Price / Cal Yr 1995 Est Earnings per Share 7.6   11.8   NA   9.7   10.0   10.5   13.1   41.3   10.5
Stock Price / Cal Yr 1996 Est Earnings per Share 7.6   7.1   NA   9.0   9.2   9.7   10.9   9.0   9.8
Current Implied Dividend Yield 1.7%   3.0%   NA   2.2%   0.9%   1.8%   1.5%   2.2%   1.7%
                                   
Value Line’s Estimated 1996-2000:                                  
Revenue Growth 7.5%   12.0%   NA   9.5%   8.0%   13.0%   7.5%   9.0%   7.5%
Earnings 5.0%   10.0%   NA   9.5%   14.5%   8.0%   10.0%   10.5%   NMF
Dividends 10.5%   8.0%   NA   11.5%   19.0%   11.5%   9.0%   11.5%   2.0%
Book Value 14.5%   14.0%   NA   13.0%   8.5%   14.5%   11.5%   9.0%   8.5%
                                   
Beta vs S&P 500 1.27   1.64   NA   1.41   1.20   1.79   1.66   1.67   1.13
Employees 2,300   7,500   4,676   10,741   7,771   46,023   9,236   16,025   6,400
Descriptive Information:                                  
Alex Brown, Inc: Founded in 1800, Alex. Brown was a Baltimore-based investment bank with traditional strengths in underwriting IPOs and common stock. AB had focused on                                
  diversifying revenues into M&A and sales and trading. Maintained strong banking and research presence in selected industries where it could be a leader.                                
                                   
Bear Stearns Cos, Inc: Bear Stearns traced its roots to 1923 and went public in 1985. One of the largest dealers in fixed income products, especially mortgage-backed securities. Large                                
  clearance activities. Recent strong gains in corporate finance and M&A practices. Primary focus on middle market companies and selected products.                                
                                   
AG Edwards, Inc: St. Louis-based A.G. Edwards was founded in 1887 and went public in 1971. AGE had 534 brokerage branches, serving over 1 million clients (est. 95% retail), with                                
  over 5,600 brokers. Also maintained investment banking operations, focusing on regional clients. Offered other products targeted to individual investors.                                
                                   
Lehman Bros Holdings: Lehman was a major global investment bank specializing in investment-grade debt and equity underwriting, and sales and trading. Founded in 1850, LEH was acquired                                
  by AMEX in 1983 then spun-off in 1994. Had undergone major cost reduction in recent years. Approximately 40% of revenues from abroad.                                
                                   
Merrill Lynch & Co, Inc: Merrill Lynch continued to be the number one global underwriter for debt and equity through the 1990s. Largest retail brokerage. Strong asset management business.                                
  Strengthening presence in M&A. Excellent research staff. Primary focus on Fortune 500 clients in corporate finance. Active in real estate and insurance, as well.                                
                                   
Morgan Stanley Group: Morgan Stanley was a major international investment bank, with particular strengths in global offerings, M&A, merchant banking and high yield underwriting.                                
  Building asset management business. Earned 40% revenues overseas. Historical focus on Fortune 100 expanded to cover emerging companies.                                
                                   
PaineWebber Group, Inc: PaineWebber maintained 3rd largest brokerage force, with 6,025 brokers handling 2.5 million clients. Corporate finance and research strengths in covering middle-                                
  market companies. Recent cost cutting initiative and $200 million settlement of limited partnership claims. Purchased Kidder, Peabody in 1994.                                
                                   
Solomon, Inc.: Salomon conducted business through Salomon Brothers and Phibro Energy (energy activities). Traditional leader in fixed-income underwriting and trading, with                                
  premier proprietary trading department. Recent shift towards developing corporate finance activities. Some turmoil with bonus plans, Treasury scandal, and 1994 loss.                                
(a) DLJ data is presented with certain expected post-offering adjustments.  

 

Exhibit 9

Exhibit 9            
Donaldson, Lufkin & Jenrette, 1995            
Inventory Holdings and Capital Structure Analysis of Selected Securities Firms            
(Dollars in Millions)          
                  Lehman   Merrill   Morgan       Salomon
  Alex. Brown   Bear Stearns   DLJ   A.G. Edwards   Brothers   Lynch   Stanley   PaineWebber   Brothers
Securities Inventory Analysis                                  
Government Obligations $3.3   $7,620.0   $7,336.4   $28.5   $24,162.0   $17,938.6   $23,582.0   $6,539.6   $66,959.0
Municipals 44.1   136.1   0.0   96.8   0.0   996.2   0.0   989.0   0.0
Mortgage-Backed 1.7   2,497.4   411.2   0.0   6,014.0   2,923.7   0.0   3,734.0   1,616.0
Corporate Debt 19.6   2,501.4   3,450.3   0.0   9,250.0   18,254.8   10,128.0   2,254.8   10,247.0
Corporate Stock 29.0   6,182.2   392.0   25.2   5,950.0   9,875.2   7,980.0   835.5   4,385.0
CDs & Money Market Instruments 0.0   0.0   0.0   0.0   2,799.0   1,551.5   0.0   820.4   0.0
Commodities & Other 0.0   1,841.2   0.0   0.0   0.0   11,463.1   7,987.0   0.0   8,412.0
Total $97.7   $20,778.3   $11,589.9   $150.5   $48,175.0   $63,003.1   $49,677.0   $15,173.3   $91,619.0
                                   
Percent of Total Inventory:                                  
Government Obligations 3.4% 36.7% 63.3% 18.9% 50.2% 28.5% 47.5% 43.1% 73.1%
Municipals 45.1% 0.7% 0.0% 64.3% 0.0% 1.6% 0.0% 6.5% 0.0%
Mortgage-Backed 1.7% 12.0% 3.5% 0.0% 12.5% 4.6% 0.0% 24.6% 1.8%
Corporate Debt 20.1% 12.0% 29.8% 0.0% 19.2% 29.0% 20.4% 14.9% 11.2%
Corporate Stock 29.7% 29.8% 3.4% 16.7% 12.4% 15.7% 16.1% 5.5% 4.8%
CDs & Money Market Instruments 0.0% 0.0% 0.0% 0.0% 5.8% 2.5% 0.0% 5.4% 0.0%
Commodities & Other 0.0% 8.9% 0.0% 0.0% 0.0% 18.2% 16.1% 0.0% 9.2%
                                   
Total Assets $1,915   $79,517   $42,417   $2,617   $117,518   $185,473   $132,264   $49,545   $162,586
                                   
Note: Resell Agreements $7   $24,741   $16,652   $114   $37,173   $45,502   $47,849   $27,622   $43,497
                                   
Capitalization Structure                                  
Short-Term Debt $73   $9,230   $1,524   $0   $9,167   $31,762   $6,707   $1,673   $6,420
Repurchase Agreements 0   31,907   25,076   0   57,887   54,274   62,322   29,540   77,817
Long-Term Debt 173   4,205   768   0   12,897   16,156   9,111   2,423   13,341
Preferred Stock 0   588   225   0   708   619   818   287   1,012
Total Common Equity 458   1,971   1,116   985   2,923   5,459   4,062   1,466   3,687
Total Equity 458   2,558   1,341   985   3,631   6,077   4,880   1,752   4,699
Total Capital Excluding Repos $705   $15,993   $3,633   $985   $25,695   $53,996   $20,698   $5,848   $24,460
                                   
Percent of Total Capital Structure (Excl Repos):                                  
Short-Term Debt 10.4%   57.7%   41.9%   0.0%   35.7%   58.8%   32.4%   28.6%   26.2%
Long-Term Debt 24.6%   26.3%   21.1%   0.0%   50.2%   29.9%   44.0%   41.4%   54.5%
Preferred Stock 0.0%   3.7%   6.2%   0.0%   2.8%   1.1%   4.0%   4.9%   4.1%
Total Common Equity 65.0%   12.3%   30.7%   100.0%   11.4%   10.1%   19.6%   25.1%   15.1%
                                   
Total Debt / Total Equity 53.8%   525.2%   170.9%   0.0%   607.7%   788.5%   324.1%   233.8%   420.5%
Long-Term Debt / Total Equity 37.8%   164.4%   57.3%   0.0%   355.2%   265.8%   186.7%   138.3%   283.9%
Total Equity as % Total Assets 65.0%   16.0%   36.9%   100.0%   14.1%   11.3%   23.6%   30.0%   19.2%
Senior Debt Rating (Moody’s/S&P) NR   A2/A   Baa1/A-   NR   Baa1/A   A1/A+   A1/A+   Baa1/BBB+   Baa1/BBB
Data as of: 9/30/1995   9/30/1995   6/30/1995   8/31/1995   8/31/1995   9/30/1995   8/31/1995   9/30/1995   9/30/1995
                                   
Source: D.P. Eberling, “Donaldson, Lufkin & Jenrette – Company Report,” Prudential Securities, December 15, 1995 and Company Reports.                                
Exhibit 10      
Donaldson, Lufkin & Jenrette, 1995      
Revenue and Income Analysis of Selected Securities Firms      
(Dollars in Millions)    
                  Lehman   Merrill   Morgan       Salomon
Income Statement Statistics Alex. Brown   Bear Stearns   DLJ   A.G. Edwards   Brothers   Lynch   Stanley   PaineWebber   Brothers
1990–94 Compound Average Growth Rates                                  
Gross Revenues 22.2%   8.6%   17.7%   17.0%   NA   13.1%   12.4%   7.4%   -8.5%
Net Revenues (a) 23.6%   14.8%   21.9%   17.1%   NA   13.6%   12.9%   9.9%   -17.5%
Commissions 19.8%   12.5%   13.1%   20.3%   NA   13.1%   13.0%   10.4%   12.9%
Investment Banking Revenues 21.4%   17.0%   22.7%   15.2%   NA   11.7%   9.0%   4.9%   4.0%
Principal Transactions 40.3%   14.9%   17.8%   11.4%   NA   12.8%   5.2%   2.4%   NM
Net Income 74.2%   21.1%   75.4%   24.7%   NA   51.7%   9.9%   -1.1%   NM
Earnings per Share 74.2%   37.0%   NA   23.9%   NA   56.1%   5.5%   NM   NM
Dividends per Share 26.3%   1.7%   NA   17.9%   NA   15.5%   12.9%   20.2%   0.0%
                                   
Last 12 Months Information                                  
Gross Revenues $716.5   $4,019.5   $3,818.6   $1,298.5   $11,040.0   $20,703.8   $10,391.0   $4,985.0   $8,086.0
Net Revenues 686.2   2,258.9   1,904.8   1,294.6   2,781.0   9,744.8   3,862.0   3,077.1   2,421.0
Commissions 163.3   581.9   437.3   621.9   452.0   2,917.6   479.0   1,156.0   331.0
Investment Banking Revenues 241.0   377.8   767.5   97.0   652.0   1,165.2   1,076.0   295.3   413.0
Principal Transaction Revenues 125.9   944.4   421.6   216.0   1,227.0   2,406.3   1,366.0   814.5   493.0
Net Income 82.4   298.9   159.0   148.6   202.0   1,061.5   532.0   2.7   132.0
Last Twelve Months Earnings per Share $5.39   $3.40   $2.42   $2.64   $1.59   $3.72   $4.06   $(0.26)   $0.58
Current Implied Dividend per Share $0.80   $0.60   $0.50   $0.56   $0.20   $1.00   $1.28   $0.48   $0.64
Dividend Payout (Implied Div/LTM EPS) 14.8%   17.6%   20.7%   21.2%   12.6%   26.9%   31.5%   NM   110.3%
                                   
Net Margin (Gross Revenues) 11.5%   7.4%   4.2%   11.4%   1.8%   5.1%   5.1%   0.1%   1.6%
Net Margin (Net Revenues) 15.3%   16.3%   10.6%   21.7%   13.6%   13.9%   24.6%   0.1%   5.7%
                                   
Percentage Change in Line Items YTD 1994–YTD 1995                                  
Gross Revenues 24.6%   28.8%   6.6%   15.1%   37.7%   18.0%   22.3%   34.9%   38.1%
Net Revenues 23.6%   20.9%   36.5%   15.4%   3.0%   1.6%   20.0%   28.2%   80.2%
Commissions 22.1%   24.3%   22.1%   -17.2%   3.0%   2.1%   13.0%   25.0%   -1.9%
Investment Banking Revenues 28.1%   18.3%   63.2%   -9.5%   24.8%   -7.3%   33.3%   4.9%   -19.4%
Principal Transaction Revenues 8.0%   21.3%   79.3%   -1.7%   -16.4%   3.8%   44.3%   76.5%   NM
Net Income 22.6%   40.9%   42.1%   26.6%   207.1%   5.5%   57.6%   -56.8%   NM
Earnings per Share 24.2%   51.2%   48.1%   4.2%   243.2%   -25.9%   -2.5%   -100.0%   NM
Dividend per Share 15.0%   0.0%   NA   10.5%   -40.0%   13.6%   8.0%   0.0%   0.0%
                                   
Business Composition Analysis                                  
Revenue Source as Percentage of Net Revenues                                  
Commissions 23.8%   25.8%   23.0%   48.0%   16.3%   29.9%   12.4%   37.6%   13.7%
Investment Banking Revenues 35.1%   16.7%   40.3%   7.5%   23.4%   12.0%   27.9%   9.6%   17.1%
Principal Transactions 18.3%   41.8%   22.1%   16.7%   44.1%   24.7%   35.4%   26.5%   20.4%
Other 22.7%   15.7%   14.6%   27.8%   16.2%   33.4%   24.4%   26.4%   48.9%
                                   
Average ROE for Previous Three Years 24.0%   24.4%   27.8%   20.3%   NA   23.8%   17.7%   17.5%   11.0%
                                   
Source: DP Eberling, “Donaldson, Lufkin & Jenrette – Company Report,” Prudential Securities, December 15, 1995 and Company Reports                                  
(a) Net revenues are net of interest expense to finance U.S. government and agency instruments.                                  
                  Lehman   Merrill   Morgan       Salomon
Calculation Section Alex. Brown   Bear Stearns   DLJ   A.G. Edwards   Brothers   Lynch   Stanley   PaineWebber   Brothers
                                   
Goodwill         182.00        
                                   
1990 Revenues 271.70   2,376.10   1,885.40   644.30   NA   11,150.80   5,869.60   2,978.50   8,946.00
1994 Revenues 605.50   3,305.70   3,621.50   1,208.30   9,190.00   18,233.10   9,376.00   3,964.10   6,278.00
YTD 1994 451.70   2,479.00   2,964.20   597.10   4,901.00   13,749.30   4,554.00   2,924.80   4,750.00
YTD1995 562.70   3,192.80   3,161.30   687.30   6,751.00   16,220.00   5,569.00   3,945.70   6,558.00
                                   
1990 Net Revenues 250.40   1,117.00   681.80   639.60   NA   5,786.90   2,158.20   1,736.30   2,987.00
1994 Net Revenues 583.60   1,942.70   1,504.90   1,203.10   2,738.00   9,624.50   3,501.00   2,535.40   1,386.00
YTD 1994 435.60   1,516.10   1,096.90   593.90   1,438.00   7,531.80   1,801.00   1,920.90   1,290.00
YTD1995 538.20   1,832.30   1,496.80   685.40   1,481.00   7,652.10   2,162.00   2,462.60   2,325.00
                                   
1990 Commission 68.00   307.90   228.90   329.40   NA   1,756.90   275.10   652.20   207.00
1994 Commission 140.00   492.90   375.10   690.60   445.00   2,870.50   449.00   970.30   336.00
YTD 1994 105.60   366.10   280.90   399.10   230.00   2,232.30   231.00   742.10   257.00
YTD1995 128.90   455.10   343.10   330.40   237.00   2,279.40   261.00   927.80   252.00
                                   
1990 Inv. Banking Fees 91.80   176.60   239.20   57.90   NA   795.40   652.20   234.80   416.00
1994 Inv. Banking Fees 199.10   331.00   542.40   102.00   572.00   1,239.50   919.00   284.50   486.00
YTD 1994 149.30   256.00   356.40   52.50   323.00   1,011.90   471.00   221.60   377.00
YTD1995 191.20   302.80   581.50   47.50   403.00   937.60   628.00   232.40   304.00
                                   
1990 Pre-Tax Profits 30.60   461.10   136.80   141.40   NA   1,441.40   901.80   472.10   2,389.00
1994 Pre-Tax Profits 118.50   803.90   263.30   217.90   1,345.00   2,334.90   1,104.00   519.00   (550.00)
YTD 1994 92.90   658.80   199.50   114.80   718.00   1,881.20   591.00   386.50   (234.00)
YTD1995 100.30   799.30   357.80   112.90   600.00   1,952.60   853.00   682.00   809.00
                                   
1990 Net Income 7.70   103.00   13.00   54.60   NA   191.80   270.30   33.00   396.20
1991 Net Income 52.00   232.50   57.80   91.80   NA   696.10   475.10   150.70   720.20
1992 Net Income 58.60   297.30   147.00   113.90   NA   893.80   510.50   213.20   736.00
1993 Net Income 89.20   474.30   186.10   151.20   355.00   1,394.30   786.10   246.20   827.00
1994 Net Income 70.90   221.70   123.00   132.10   115.00   1,016.80   395.00   31.60   (399.00)
YTD 1994 50.80   188.80   85.50   62.10   42.00   810.40   238.00   50.90   (242.00)
YTD1995 62.30   266.00   121.50   78.60   129.00   855.10   375.00   22.00   289.00
                                   
1990 EPS 0.50   0.78   NA   1.09   NA   0.80   3.37   (1.44)   2.08
1994 EPS 4.60   2.75   1.98   2.57   0.69   4.75   4.18   0.41   (4.31)
YTD 1994 3.27   1.27   0.91   1.67   0.37   3.98   4.76   0.67   (2.67)
YTD1995 4.06   1.92   1.35   1.74   1.27   2.95   4.64     2.22
                                   
1990 Dividends 0.27   0.59   NA   0.29   NA   0.50   0.75   0.23   0.64
1994 Dividends 0.68   0.63   NA   0.56   0.18   0.89   1.22   0.48   0.64
YTD 1994 0.50   0.45   NA   0.38   0.25   0.66   0.87   0.36   0.48
YTD1995 0.58   0.45   NA   0.42   0.15   0.75   0.94   0.36   0.48
                                   
                                   
Common Equity                                  
1990 170   1,076   294   386       3,094   2,002   583   3,065
1991 222   1,072   340   464       3,518   2,396   712   3,203
1992 274   1,180   455   580       4,269   2,930   892   3,496
1993 346   1,603   750   740       5,292   3,759   1,195   4,319
1994 373   1,869   820   881       5,199   3,836   1,530   3,480
                                   
Average 1991 196   1,074   317   425     3,306   2,199   648   3,134
Average 1992 248   1,126   397   522     3,894   2,663   802   3,350
Average 1993 310   1,392   602   660     4,781   3,345   1,044   3,908
Average 1994 360   1,736   785   811     5,246   3,798   1,363   3,900
                                   
ROEs                                  
Average 1991 26.5%   21.6%   18.2%   21.6%   #VALUE!   21.1%   21.6%   23.3%   23.0%
Average 1992 23.6%   26.4%   37.0%   21.8%   #VALUE!   23.0%   19.2%   26.6%   22.0%
Average 1993 28.8%   34.1%   30.9%   22.9%   #DIV/0!   29.2%   23.5%   23.6%   21.2%
Average 1994 19.7%   12.8%   15.7%   16.3%   #DIV/0!   19.4%   10.4%   2.3%   -10.2%
3 Yr Average 24.0%   24.4%   27.8%   20.3%   #VALUE!   23.8%   17.7%   17.5%   11.0%

Selecting comparable companies for the purpose of relative valuation can be a cumbersome process as we have studied that no two companies are similar. There businesses might be similar, but the way the management of a company runs it own business can differ from others. And with the amount of diversification that the companies are doing their businesses these days, it becomes very hard to find an exactly same company. Therefore, we look at the companies which are next to similar. We look for the companies who operate in the similar business groups and have more or less similar percentage of revenue.

In the above given case there are various competitors and it is hard to choose the ones for the purpose of relative valuation. Most of the companies are diversified into various business and have revenue percentage different from others. But the most closet to DLJ is Alex, Brown & Sons in terms of revenue share. Almost similar revenue share for commission but they vary in Investment Banking Revenues and Principal Transactions. Same is the case with Bear Stearns. Therefore, we are considering both of these firms for the purpose of relative valuation.

Coming to AG Edwards, there are pretty visible difference between the two companies. On one hand DLJ serves institutional clients, AG Edwards serves retail clients. Also, difference in revenue streams can be seen easily. That is AG Edwards is not considered for the purpose of relative valuation.

Coming to the three big firms, Lehman Brothers, Merrill Lynch and Morgan Stanley, they have to be considered for the purpose of relative valuation as they are the market leaders in their segments and most of the time the share price of a company who belongs to a particular sector moves along the lines of the market leader. Therefore, for the purpose of relative valuation these firms are required to be taken into consideration.

Paine Webber is not considered for the purpose of relative valuation as the two company differ in terms of their target clients. Moreover the revenue streams of the two company are different.

There is no point taking Salomon Brothers, as it consist of two subsidiaries, out of which one operates in oil segment and almost 50% of the revenue of the company comes from that oil business which is totally out of the sector.

For the purpose of relative valuation, we mostly consider the Price/EBITDA and Price /Earning multiple. But because of the lack of information given in the case we will be able to take only PE ratio and Book Value to Earnings Ratio. In PE also we would be taking the Last Twelve Months earning as estimated earning might be wrong and the IPO has to be valued at the current price not estimated earnings.

Price/LTM EPS

 

Price/Book Value

Alex Brown

8.7

  Alex Brown

1.6

Bear Stearns

5.9

  Bear Stearns

1.2

Lehman Brothers

14.2

  Lehman Brothers

0.8

Merrill Lynch

15.3

  Merrill Lynch

1.8

Morgan Stanley

21.6

  Morgan Stanley

1.7

Average PE

13.14

  Average PE

1.42

         
LTM EPS of DLJ

2.42

  Book Value of DLJ

19.72

         
Share Price

31.80

  Share Price

28.00

 

Out of these two valuation techniques more weightage would be given for the PE multiple valuation, thus 75% is allocated to the PE multiple and 25% to P/BV. This is because the book value of a company may not be able to show the correct picture.

The arrived valuation price would be discounted at 20% to arrive at the IPO price. 20% discount is to make sure that the shares are fully subscribed.

Share Price Calculation   Weightage Price
Price/LTM EPS

31.80

75%

23.85

Price/Book Value

28.00

25%

7.00

Valuation Price

30.85

Discount

20%

IPO Price

24.68

 

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