Active Athletics Inc has an EBIT of 400000 150000 in depreci

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.

Solution

EBIT = $400,000

Depreciation = $150,000

EBITDA = EBIT + Depreciation

                = $400,000 + $150,000

                = $550,000

EBITDA of the firm is $550,000.

EV / EBITDA = 6

So Enterprise value = $550,000 × 6

                                 = $3,300,000

So enterprise value of firm is $3,300,000.

Value of debt = $500,000

So value of equity = $3,300,000 - $500,000

                              = $2,800,000

Value of equity is $2,800,000

Hence, Option (B) is correct answer.