Answered: Enterprise Value to EBIT (EV/EBIT

Business

Accounting

Enterprise Value to EBIT (EV/EBIT

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 1eM

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Concept explainers

Cost of Capital

Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.

Capital Structure

Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.

Weighted Average Cost of Capital

The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.

Question

A broker has estimated the equity value of Kensington Homebuilders to be £4.0 billion by applying a P/E multiple of 10 times to forecast Earnings per Share (EPS) this year. The company has a corresponding Earnings before Interest and Tax (EBIT) of £500m and £1.0 billion of net debt. Which of the following figures would correspond to the Enterprise Value to EBIT (EV/EBIT) multiple implied by the £4.0 billion equity value?

a
6.0x
b
None of these options are correct.
c
8.0x
d
10.0x
e
12.0x

Leveraging special tenchniques in analyzing historical data to predict future trends. Forecasting covers the methods and types of forecasting and their application to case studies.

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