Active Athletics Inc.has an EBIT of $400,000,$150,000 in depreciation,$500,000 in outstanding debt,a forward-looking EV/EBITDA multiple of 6.0,and an estimated cost of capital of 14%.Use the EV/EBITDA approach to value the firm.
A)$2,800,000
B)$2,400,000
C)$1,700,000
D)$1,500,000

Question

Quizplus · Accepted Answer

To value the firm using the EV/EBITDA approach, first calculate the EBITDA by adding back depreciation to EBIT: $400,000 (EBIT) + $150,000 (Depreciation) = $550,000 (EBITDA). Then, multiply the EBITDA by the EV/EBITDA multiple: $550,000 * 6.0 = $3,300,000. This is the firm's enterprise value (EV). However, to find the firm's equity value, subtract the outstanding debt: $3,300,000 (EV) - $500,000 (Debt) = $2,800,000.