Since EBITDA are distributed between all types of investors in a company (common shareholders, preferred shareholders, and creditors), they reflect the fundamental value of the company as a whole. Therefore, a multiple using total company value is logically most appropriate. The EV/EBITDA ratio responds to this need.
Enterprise value (EV) is total company value minus the value of cash and investments.
EV/EBITDA is an indication of company value, not equity value.
The company's financial statements show that the only interest-paying liability assumed by the company is a 5-year $200MM note maturing in 3 years' time and currently trading at 4.13%. The note is paying semi-annual coupons and all interest payments have been met so far.
The company also has preferred stock that is not trading on any exchange. The book value of the preferred stock is $45. No preferred dividends are currently in arrears.
1. Calculation of EBITDA
EBITDA = Net Income + Interest Expense + Depreciation and Amortization + Tax Expense
2. Calculation of Enterprise Value (EV)
Total market value of common stock = price per share of common stock x number of shares outstanding = Price per share x (shares issued - treasury stock) = 13.8 x (20,000,000 - 1,320,000) = 257.7 MM
Since the company's preferred stock is not publicly traded, we will use its book value for calculation of EV.
Semi-annual coupon on the bond = Cash outflow for interest payments / 2 = 4 / 2 = 2
Therefore, we can calculate the bond's total current market value = $188.1.
EV = Total market value of common stock + Total market value of preferred stock + Total market value of debt - Cash balances - Investments = 257.7 + 45.0 + 188.1 - 8.9 - 6.2 = 475.7.
3. Calculation of EV/EBITDA ratio
EV/EBITDA = 475.7 / 70.12 = 6.78
| RubaHassan: Bond current market price |
PMT = 4/2 = 2
i = 4.13/2 = 2.065
n = 3*2 = 6
FV = 200
then PV = 188.1
|moneyguy: thank you very much Ruba|
|gill15: Couple of nice little tricks in there bringing topics together....Getting bond price, figuring out tax expense....|
| olympria: In calculation of EV, value of equity is taken as total market value but value of preferred is taken as book value per share ($45 - this cant be the total market value right?).|
Also, in finding the Present Value of bond, how do they take 2MM as the coupon payment? There is no mention of the coupon payment.
|irapp92: @olympria it says it in the example. Cash outflows for interest payments: 4.0. then divide by 2 for semiannual.|
|Natk: @olympria - they take book value because preferred stock is not traded in this example. It's mentioned in the text.|
|unknown: What are the steps from 200 to 188.1 and why are they not mentioned, incredibly annoying.|
|sshetty2: read the comments|
|: Why calculate tax expense as such ? Shouldn't it be 34m x .25 =8.5 ?|
| JCarney: Net Income = 34 m|
Net Income = EBT - Tax Expense.
So by doing 34m x 0.25 you're deducting tax rate from an amount that has already had tax deducted.
|MathLoser: Wow this reading is awesome!|