Individual Assignment 1 (Corporate Finance)

MBA HEC PARIS

January 20, 2014
Professor Alexei V. Ovtchinnikov

Assignment Questions:

1. Calculate the current stock price for Britannia based on a regression analysis of
comparable companies enterprise value to asset ratios as of 2006. Explain carefully
your choice of independent variables.

The question directs to conduct a regression analysis of comparable companies
enterprise value to asset ratio (EV/TA) as of 2006.

Based on the given data* of Britannia Corp, we identify the drivers of the Enterprise
Value to be Total Assets, OIBD, Leverage, and Sales.

*Note: In the absence of given data, we cannot use a factor for growth (Net Investments).

We do not include Net Income as a factor, since NI would have a high co-linearity with OIBD, which
has already been chosen as a variable.

EV = B0 + B1(TA) + B2(OIBD) + B3(Leverage) +B4(Sales)

However, since multiple regression equations based on absulute do not exhibit robust
econometric properties, we divide both sides of the equation by Total Assets.





To determine the sample space, we chose a set of suitable companies. The 2 factors to
filter the companies were basically as below:

i. Choose the data for year 2006 only*
ii. Choose companies which fall in the same industry as Britannia, based on the same
SIC (4731) as that of Britannia. (Companies which are engaged in arranging
transportation for freight and cargo services)

*Note: We take the data for 2006 only since market conditions including risk free rate, risk pricing, market
expectations significantly vary over time, and thus prior years data may result in an incorrect outcome. As
depicted later, even with just 2006 figures, we observe a high r squared number, and consistent results,
thus eliminating the need to increase the sample space.

The above exercise leaves us with 14 companies, all of them corresponding to the year
2006.

k
k
k
k
k
k
k
k k
k
Assets
Leverage
Assets
OIBD
Assets
Sales
Assets Assets
EV

4 3 2 1 0
1


Name EV/Asset 1/Asset Sales/Asset OIBD/Asset Leverage/Asset
C H ROBINSON WORLDWIDE
INC 4.33 0.000613 4.018031578 0.26913457 0
EGL INC 1.16 0.000847 2.725609477 0.10750078 0.000231754
EXPEDITORS INTL WASH
INC 4.74 0.000549 2.538478592 0.22604643 0
EXPRESS-1 EXPEDITED
SOLTNS 1.61 0.046277 1.952473506 0.19626082 0.003579899
FORWARD AIR CORP 4.13 0.004695 1.656031998 0.3926033 0.00002.00881
HUB GROUP INC -CL A 2.25 0.002064 3.321712194 0.17198915 0
JANEL WORLD TRADE LTD 1.16 0.148302 11.45187602 0.06065549 0.000236841
KITTY HAWK INC 0.55 0.018579 4.266614644 -0.2022184 0
PACER INTERNATIONAL
INC 2.06 0.001769 3.33946577 0.2163453 0.000263492
PACIFIC CMA INC 0.29 0.024181 3.723515899 0.01794221 0.006303553
TARGET LOGISTICS INC 1.41 0.022099 3.543987978 0.11915759 0.000302667
UNIVERSAL EXPRESS INC 9.47 0.166058 0.178180007 -3.1356692 0
UTI WORLDWIDE INC 1.95 0.000602 2.145568629 0.11568195 0.000162589
CHARTWELL INTL INC 2.62 0.064986 0.003314271 -0.1919028 0.024231734

On running the regression equation




We get the following regression statistics -

Regression Statistics

Multiple R 0.81857

R Square 0.67006

Adjusted R Square 0.52342

Standard Error 1.64555

Observations 14


Coefficients
Standard
Error t Stat P-value Britannia Product
Intercept 4.05381 0.988707 4.10011 0.0027 1 4.05381
1/Assets 23.56879 23.891132 0.98651 0.3497 0.002531 0.05964
Sales/Assets -0.58367 0.371160 -1.57254 0.1503 1.433906 -0.83692
OIBD/Assets -0.39039 1.476259 -0.26444 0.7974 0.168896 -0.06593
Leverage/Assets -150.37452 105.920436 -1.41969 0.1894 0.002065 -0.31045



EV/Assets 2.900

k
k
k
k
k
k
k
k k
k
Assets
Leverage
Assets
OIBD
Assets
Sales
Assets Assets
EV

4 3 2 1 0
1

EV 1,146,059

MVE 823,663

Share Price 30.529

The equation for regression line is as below:





2. Calculate the current stock price for Britannia with a traditional approach to valuation by
multiples. Explain carefully your choice of comparable companies. Explain carefully
your choice of bases for the multiples.

Ans 2.
i. For traditional analysis, we start by looking at selection of companies comparable
to Britannia out of the given data set of companies. Out of approximately 55
companies we first select the companies for which we have data available for the
target year 2006. The SIC (Standard Industry Classification) of Britannia is 4731,
so filtering the above resultant data set based on SIC (Standard Industry
Classification), we get a final set of 14 companies which are comparable to
Britannia.

ii. Next step is to select Multiples which we will use to run traditional analysis. We
cannot choose Earnings multiple since the leverage of Britannia is 81%, which is
very far from the range of leverage ratios that the selected companies have (they
range from 0% to 37%). Since at high leverage, the earnings do not have the same
Since we need to


Name EV/Assets

Name EV/OIBD
C H ROBINSON WORLDWIDE
INC 4.33

C H ROBINSON WORLDWIDE
INC 16.08
EGL INC 1.16

EGL INC 10.80
EXPEDITORS INTL WASH INC 4.74

EXPEDITORS INTL WASH INC 20.95
EXPRESS-1 EXPEDITED
SOLTNS 1.61

EXPRESS-1 EXPEDITED
SOLTNS 8.19
FORWARD AIR CORP 4.13

FORWARD AIR CORP 10.52
HUB GROUP INC -CL A 2.25

HUB GROUP INC -CL A 13.09
JANEL WORLD TRADE LTD 1.16

JANEL WORLD TRADE LTD 19.18
KITTY HAWK INC 0.55

PACER INTERNATIONAL INC 9.52
PACER INTERNATIONAL INC 2.06

PACIFIC CMA INC 16.00
PACIFIC CMA INC 0.29

TARGET LOGISTICS INC 11.83
TARGET LOGISTICS INC 1.41

UTI WORLDWIDE INC 16.84
UNIVERSAL EXPRESS INC 9.47


UTI WORLDWIDE INC 1.95


CHARTWELL INTL INC 2.62


k
k
k
k
k
k
k
k k
k
Assets
Leverage
Assets
OIBD
Assets
Sales
Assets Assets
EV

4 3 2 1 0
1







AVERAGE 2.693970381

13.90937

BRITANNIA

Assets 395173

OIBD 66743
No. of Shares 26980

No. of Shares 26980
LT Debt 322396

LT Debt 322396
EV (Britannia) 1064584.357

EV (Britannia) 928353.4
MVE (Britannia) 742188.3573

MVE (Britannia) 605957.4
Share Price 27.51

Share Price 22.46

Average Share Price 24.98