Question

Preston Woods has 17,500 shares of stock outstanding along with $408,000 of interest-bearing debt. The market and book values of the debt are the same. The firm has sales of $697,000 and a profit margin of 6.8 percent. The tax rate is 21 percent, the debt-equity ratio is 40 percent, and the price-earnings ratio is 11.8. The firm has $130,000 of current assets of which $41,200 is cash. The inventory turnover ratio is 6.757. Current assets consist only of cash and inventory. Calculate the company’s enterprise value multiple (EBITDA ratio).

Answer 1

Answer:

Company’s enterprise value:

Net Profit = Sales * Profit margin = 697000 * 6.8% = $47,396

EPS = Net Profit / Number of shares outstanding = 47,396 / 17500

Price of share = EPS * Price-earnings ratio = 47,396 / 17500 * 11.8

Market value of Equity = Price of share * Number of shares outstanding = (47,396 / 17500 * 11.8) * 17500 = $559,272.80

Company’s enterprise value = Market value of Equity + Market value of debt - Cash

= 559272.80 + 408000 - 41200

=$926,073

Company’s enterprise value = $926,073

Let us calculate EBITDA:

Inventory = Current asset - Cash = 130000 - 41200 =$88,800

Cost of goods sold = Inventory * inventory turnover ratio = 88800 * 6.757 = $600,021.60

EBITDA = Sales - Cost of Goods sold = 697000 - 600021.60 = $96,978.40

Hence:

EBITDA multiple = Company’s enterprise value / EBITDA = 926,073 / 96,978.40 = 9.55

Hence:

Company’s enterprise value = $926,073

EBITDA multiple = 9.55