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Last year Velocity Inc
Last year Velocity Inc.'s EBIT equaled $160 million. Velocity's depreciation expense equaled $30 million and its amortization expense equaled $10 million. It had $500 million of debt and $100 million of cash. The average enterprise value to EBITDA was 7,.Calculate a reasonable price per share for Velocity if there are 50 million shares outstanding. Answer:
Expert Solution
Answer:
Enterprise value means total value of the company it includes equity, long, short term debt and cash. It is useful when business is takeover.
The formula is,
Enterprise value = Equity fund + Debt - Cash
And here,
Average enterprise value to EBITDA = 7
Average enterprise value to EBITDA = Average enterprise value / EBITDA
So we need to find EBITDA
EBITDA = Earning before Interest, Tax, Depreciation, Amortization
So, We will add depreciation and amortization in EBIT (earing before interest and Tax)
= $ 160 + $ 30 + $ 10
= $ 200 Miilion
So,
Average enterprise value to EBITDA = Average enterprise value / EBITDA
7 = Average enterprise value / $ 200
Average enterprise value = $ 1,400 million
Enterprise value = Equity fund + Debt - Cash
$ 1,400 = Equity fund + $ 500 - $ 100
Equity fund = $1.400 - $500 + $100
Equity fund = $ 1,000
So value per share is,
Equity fund / number of share
= $ 1,000 / 50
= $ 20 per share
So reasonable price of per share is $ 20.
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