Lab International Inc Case Solution

1. Comparable Company Valuation Multiple Method 

The first method used to measure the share price for the initial price offering (IPO) is the comparable company valuation method. Under this approach, a number of comparable companies in the CRO industry have been identified as given in Exhibit 8 of the case study. Moreover, in order to further get a better comparable company, the companies with extremely high market capitalization and enterprise value have been excluded from analysis. Furthermore, the price to earnings multiple has been used to estimate the IPO price of LAB Research Division. The price to earnings (P/E) multiple is 26.02 which is the average P/E of the identified comparable companies. Moreover, the average number of shares outstanding for the same comparable companies has been used i.e. 19.24 million shares. Finally, the earnings for LAB Research Division as give in Exhibit 8 of the case study are US$ 3.2 million.

The estimate for the IPO share price of LAB Research has been obtained by multiplying the P/E multiple with earnings per share (earnings divided by an average number of shares outstanding). The price of the share in US$ came out to be US$ 4.33. Moreover, by using the CDN$/US$ exchange rate of 1.1345, as given in Exhibit 8, the price in Canadian dollars is CDN$ 4.91. See exhibit 1 for reference.

2. Discounted Cash Flow Method

The second method used to estimate the IPO share price of LAB Research is the Discounted Cash Flow method. Firstly, the free cash flows have been estimated by using the estimates given in Exhibit 10 of the case study. The operating profits (EBIT) have been obtained by multiplying EBITDA margin with the revenue for each year and subtracting the depreciation and amortization expense from the earnings before taxes, interest, depreciation and amortization (EBITDA). Furthermore, after-tax operating profits (NOPAT) have been obtained by subtracting tax from the EBIT according to a tax rate of 32%. Moreover, the capital expenditures and changes in working capital have been subtracted while depreciation and amortization have been added back to the NOPAT to get an estimate for the free cash flows. Finally, in order to estimate the terminal cash flows, a growth rate of 5% has been assumed.