ACCA Strategic Professional · Advanced Financial Management · Valuation and the use of free cash flows
Zeta Co has equity market value of $600m and net debt of $200m. It reports earnings before interest and tax of $80m and its sector peers trade at an enterprise value to EBIT multiple of 9. Using the peer multiple, what is the estimated equity value of Zeta Co?
The estimated equity value is $520m. An enterprise value multiple gives enterprise value of 9 x $80m = $720m, and net debt of $200m must then be deducted to reach the value attributable to shareholders.
- A$520mCorrect
- B$720m
- C$920m
- D$120m
Explanation
Enterprise value = 9 x $80m = $720m. Equity value = enterprise value less net debt = $720m - $200m = $520m. Option $720m forgets to deduct net debt; $920m adds net debt instead of deducting it.
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