Multiples valuation and financial distress

Multiples Valuation and Estimation of Financial Distress of William Companies

The paper uses the market approach to calculate the William Companies multiples-based valuation of shares. The direct competitors of Williams Companies are:

Dynegy

Dominion Resources

Murphy Oil

The paper uses 2001 financial statements of Williams Companies and its competitors to carry out the multiple valuation of shares.

The next step is to determine the correct P/E (Price Earning) Ratio and the formula to calculate the P/E ratio is as follows:

P/E = "Current Stock Price / (Net Profit / Weighted average number of shares)"

The P/E ratio of Williams Companies peer companies is as follows:

Stock Price

Plus: Debt

Less: Cash

Market Capitalization

Net profit

Number of Shares

P/E

Enterprises Value

EBITDA

Dynegy

$127.50

4, 324 M

2.372B

$643.000.000

2.762 B

1,517M

Dominion Resources

$60.10

13,251 M

B

$544.000,000

31.14B

3, 030M

Murphy Oil

$84.04

83M

3.288

$331.000.000

9.9

3.774B

769M

The enterprise value reflects the market value of an organization. The enterprises value also reflects the worth of market value of a business. In other words, the enterprise value captures the costs of the business that include equity and debt. Theoretically, the enterprise value is the price that a purchaser is ready to pay for a business in case of taking over the business. The formula to calculate the enterprise value is:

Enterprise Value = "Market Capitalization + Current Portion of Long-Term Debt + Notes Payable + Long-Term Debt + Book Value of Preferred Stock + Book Value of Minority Interest - Cash and Cash Equivalents" (Y Chart, 2015).

Using the multiple valuation method, the paper estimates the valuation of Williams Companies using the P/E ratio of the peer companies. The value of the William Companies is calculated as follows:

Formula:

"Average corrected P/E ratio x net profit at the end of the forecast period." (Y Chart, 2015).

William Companies net profits at the end of 2001 fiscal year is $835 Million. The paper uses the following calculation to estimate the value of the Willimans Companies;

=(Sum P/E of Peer Company / 3) *835 M

((17.3 + 27.42 + 9.9) / 3) * 835.000.000

=(54.62/3)* 835,000,000

= 18.206 *835,000,000

= $15.2 Billion

Using the multiples-based valuation of shares, the enterprises value of Williams Companies is $15.2 Billion. ( The Appendix 1 and 2 provide the balance sheet and income statement of Williams Companies)

Question 2.

Williams Companies should carry out major restructuring to come out from the financial distress. First, the company should re-organize its extensive pipeline holdings. Williams should separate the company into stand alone two business publicly traded corporations. For example, Williams should separate the production and exploitation into two different businesses. The separation of two line of businesses will assist the company to focus on each line of business to achieve high profitability. For example, the Williams management should put directors specializing in production line to run the area of business. The strategy will assist the directors to devote their expertise to remove the company from financial distress. It is essential to realize that the Williams Companies is a big company, thus, separating the production from exploitation will assist Williams to run the company effectively.

Despite the benefits that Williams will derive from the structuring procedure, Williams should implement the structuring with caution. The's company should carry out the feasibility study of this process before carrying out the full implementation. For example, the company should estimate the costs of separating the two line of business and the revenue to derive from the line of business. More importantly, the company should use different capital budgeting techniques to determine whether this line of business is worthwhile.

First, Williams should use the NPV (net present value) to determine whether the business venture is worthwhile. If the NPV is greater than one, Williams should implement the business venture. The company should also calculate the DCF (discounted cash flow) to estimate the outcome of the business between 5 and 10 years. Using this strategy, Williams will be able to determine the profitability of the business and come out from financial stress.

Reference

Y Chart, (2015) About Enterprise Value. Y Chart Inc.

Appendices

Appendix 1

Williams Balance Sheet (U.S.$)

Assets (Annual)

2001-12

2000-12

1999-12

1998-12

Cash & Equivalents

1.258B

1.092B

Cash & Short-Term Investments

1.258B

1.092B

Accounts Receivable

2.762B

3.357B

2.508B

1.725B

Other Receivables

Total Receivables

2.762B

3.357B

2.508B

1.725B

Inventories

Current Deferred Tax Assets

Other Current Assets

8.261B

8.995B

2.285B

Total Current Assets

12.82B

14.20B

6.517B

3.532B

Other Properties

Construction in Progress

Gross PP&E

Accumulated D&A

-4.046B

-4.823B

-4.094B

-3.621B

Net PP&E

14.39B

14.21B

15.16B

12.60B

Goodwill

Other Intangible Assets

Goodwill and Intangibles

1.141B

42.50M

Long-Term Investments

Derivative Instruments

Long-Term Deferred Charges

Other Long-Term Assets

9.295B

6.331B

3.181B

1.927B

Total Long-Term Assets

25.79B

20.58B

18.77B

15.12B

Total Assets

38.61B

34.78B

25.29B

18.65B

Liabilities (Annual)

2001-12

2000-12

1999-12

1998-12

Accounts Payable

2.571B

3.088B

2.050B

1.158B

Current Tax Payable

Total Payables

2.571B

3.088B

2.050B

1.158B

Accrued Expenses

8.387B

8.985B

2.148B

1.838B

Payables and Accrued Expenses

10.96B

12.07B

4.197B

2.996B

Commercial Paper Liability

Other Current Borrowings

Current Portion of Long-Term Debt

2.424B

3.671B

1.575B

1.443B

Current Debt & Capital Lease Obligation

2.424B

3.671B

1.575B

1.443B

Current Deferred Revenue

Current Deferred Liabilities

Other Current Liability

2.424B

3.671B

1.575B

1.443B

Total Current Liabilities

13.38B

15.74B

5.772B

4.439B

Non-Current Portion (Long-Term Debt)

8.693B

6.830B

9.235B

6.366B

Non-Current Portion & Capital Lease Obligation

8.693B

6.830B

9.235B

6.366B

Deferred Tax Liabilities (Long-Term)

3.690B

2.864B

2.582B

2.061B

Deferred Revenue (Non-Current)

Deferred Liabilities (Non-Current)

3.690B

2.864B

2.582B

2.061B

Derivative Contract Liabilities

Minority Interest Ownership

1.061B

98.10M

Preferred Securities which is out of Shareholders Equity

1.068B

Other Long-Term Liabilities

8.459B

5.145B

4.134B

3.076B

Total Long-Term Liabilities

19.19B

13.14B

13.93B

9.951B

Total Liabilities

32.57B

28.88B

19.70B

14.39B

Shareholder's Equity (Annual)

2001-12

2000-12

1999-12

1998-12

Total Capital Stock

Retained Earnings

3.066B

2.807B

2.850B

Additional Paid In Capital

5.085B

2.474B

2.357B

Treasury Stock

39.70M

42.50M

45.10M

47.20M

Preferred Stock

Accrued Comprehensive Inc.

-53.00M

21.90M

-61.80M

Shareholders Equity