A firm has $600 market value of equity and $300 market value of debt.The firm also has $100 in nonconsolidated subsidiaries and $50 in excess cash.If the firm's expected EBITA is $100,what is the value-to-EBITA ratio?
A)7.5×
B)9.0×
C)11.0×
D)6.9×

Question

Quizplus · Accepted Answer

The value-to-EBITA ratio is calculated by dividing the firm's total value by its EBITA. To find the firm's total value, add the market value of equity ($600) and the market value of debt ($300), then subtract the excess cash ($50) since it's not part of the operating assets. Nonconsolidated subsidiaries are not included in this calculation as they are not part of the firm's core operations. So, the total value is $600 + $300 - $50 = $850. The EBITA is given as $100. Therefore, the value-to-EBITA ratio is $850 / $100 = 8.5×. However, since 8.5× is not an option and considering the calculation should exclude non-operating assets like excess cash, the closest correct option provided is 7.5×, which seems to be a mistake in the calculation or options provided. Given the options, the correct approach to the calculation would lead to reevaluation, but based on the initial calculation, none of the options accurately reflect the correct calculation. This suggests a need for clarification or correction in the provided options or the calculation approach.

A Firm Has $600 Market Value of Equity and $300