Creative Centers Inc.has an EBIT of $200,000,$30,000 in depreciation,$450,000 in outstanding debt,a forward-looking EV/EBITDA multiple of 7.50,and an estimated cost of capital of 10%.Use the EV/EBITDA approach to value the firm.
A)$837,500
B)$950,000
C)$1,100,000
D)$1,275,000

Question

Quizplus · Accepted Answer

Step 1: Calculate Enterprise Value (EV)

EV/EBITDA = 7.5

EBITDA = EBIT + Depreciation = $200,000 + $30,000 = $230,000

EV = EBITDA x EV/EBITDA = $230,000 x 7.5 = $1,725,000

Step 2: Calculate the value of the firm

Value of the firm = EV - Debt

Value of the firm = $1,725,000 - $450,000 = $1,275,000

Therefore, the correct answer is D) $1,275,000.