Enterprise Value
An analyst gathers the following balance sheet information for a company:
| Assets | (millions of $) | Liabilities and Equity | (millions of $) |
|------------------------|------------------------------|-----------------------------|------------------------------|
| Cash Equivalents | 0.22 | Short-Term Debt | 3.65 |
| Short-Term Investments | 4.17 | Long-Term Debt | 15.78 |
| Inventory | 5.63 | Preferred Stock | 11.97 |
| Accounts Receivables | 14.53 | Common Equity | 15.00 |
| Long-Term Assets | 39.64 | Retained Earnings | 17.79 |
| Total Assets | 64.19 | Total Liabilities and Equity | 64.19 |
The company has 6 million shares of preferred stock, priced at $5, and 15 million shares of common stock, priced at $8.25, outstanding. The company's EBITDA is $13.3 million. Its enterprise value to EBITDA (EV/EBITDA) ratio is _closest_ to:
Incorrect.
This answer can result from the use of book values in enterprise value computation. That is not the right approach.
Incorrect.
This is the enterprise value of the company (in millions of dollars). Note that the question asks you to compute a ratio.
Exactly!
First, you need to calculate the enterprise value using the market values of equity and debt:
$$\displaystyle MV_{preferred \: stock} = 6 \: million \: shares \times \$ 5 = \$ 30 \: million$$
$$\displaystyle MV_{common \: stock} = 15 \: million \: shares \times \$ 8.25 = \$ 123.75 \: million$$
Lacking any other information, you must assume that the book value of debt is also its market value. Both short-term and long-term debt should be included in the enterprise value (EV) calculation:
$$\displaystyle MV_{debt} = BV_{debt} = \$ 3.65 \: million + \$ 15.78 \: million = \$ 19.43 \: million$$
Now, you can calculate the EV for the company:
$$\displaystyle EV = MV_{debt} + MV_{common} + MV_{preferred} - Cash - Short \: term \: investments$$
$$\displaystyle \: \: \: \: = 19.3 +123.75 + 30 - 0.22 - 4.17 = \$ 168.79 \: million$$
With the given EBITDA, you can now calculate the company's EV/EBITDA ratio:
$$\displaystyle \frac{EV}{EBITDA} = \frac{\$ 168.79 \: million}{\$ 13.3 \: million} = 12.69$$
4.50.
12.69.
168.79.
