P/E is 20 Rev 2000 Gross Margin 50% EV/EBITDA 7.5x Debt 1000
Number of Shares = 100
Interest rate 10% Operating Expense 500
Above is the all the information I was given.
What is Equity Value?
A)
Is it 2000-1000-500 = 500 (EBIDTA) x 7.5 = 3,750 (Enterprise Value)
3,750 - 1000 = 2,750 Equity Value?? So, stock price being $27.50???
B)
P/E * Net income = Market Cap.
20*(2000-1000-500-100) = 8000.... divide by 100 shares... So $80?
I am lost...
Second equation is lacking both the taxes (40% assumed for simplicity) and other expenses in the net income calculation. A) looks right...
As mentioned above, you've omitted tax from your Net Income calc. You've also omitted excess cash from your EV calculation.
The EV/EBITDA approach is missing existing cash balance. The difference in implied share price could be explained by how much of that per share price is cash in the business.
Tax rate could be whatever, and that would moderate the difference in share price you've calculated.
I'd assume the "debt" is really "net debt" (inclusive of cash impact). The exercise above is high level and if they don't explicitly list cash and the corresponding balance, i imagine they baked it into debt. at which point your calculation in A is correct
I think you are approaching it wrong, you should be getting to one answer only.
The way to go, i think, is:
NI = (Revenue * GrossMargin - Opex - Interest ) * (1 - TaxRate) = (2,000 * (0.5) - 500 - (0.1) * 1,000) * (1-0.4) = 240
Equity Value = Market Cap = NI * P/E = 240 * 20 = 4,800
Share Price = Equity Value / Shares = 48
EV = Equity Value + Net Debt = 4,800 + 1,000 = 5,800
EBITDA = EV / Multiple = 773.3
Now, why do I believe you can't you calculate EBITDA the way you did it? Because you are not told to assume operating expense excludes D&A.
buddy you're wrong asf
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