ExpertHard1 markMultiple Choice
CPA · Question 22 · Area I: Business Analysis
Company A is considering acquiring Company B. <br/>Company B EBITDA: $10 million.<br/>Peer Group Average EV/EBITDA multiple: 8x.<br/>Company B Net Debt: $20 million.<br/><br/>Using the market multiple approach, what is the estimated Equity Value of Company B?
Company A is considering acquiring Company B. <br/>Company B EBITDA: $10 million.<br/>Peer Group Average EV/EBITDA multiple: 8x.<br/>Company B Net Debt: $20 million.<br/><br/>Using the market multiple approach, what is the estimated Equity Value of Company B?
Answer options:
A.
$80 million
B.
$60 million
C.
$100 million
D.
$160 million
How to approach this question
1. Calculate Enterprise Value (EV) = Metric x Multiple. 2. Calculate Equity Value = EV - Debt + Cash (Net Debt is Debt - Cash, so EV - Net Debt).
Full Answer
B.$60 million✓ Correct
EV = $80M. Equity Value = EV - Net Debt = $80M - $20M = $60M.
Common mistakes
Confusing Enterprise Value with Equity Value; adding debt instead of subtracting.
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