Preston Woods has 17,500 shares of stock outstanding along with $408,000 of interest-bearing debt. The market and book values of the debt are the same. The firm has sales of $697,000 and a profit margin of 6.8 percent. The tax rate is 21 percent, the debt-equity ratio is 40 percent, and the price-earnings ratio is 11.8. The firm has $130,000 of current assets of which $41,200 is cash. What is the enterprise value?

The enterprise value is $926,450

Explanation:

First,  we need to calculate Earnings per share (EPS) as follow

EPS = Net profit / Numbers of outstanding shares = (

Where

Net Profit = Sales x Profit Margin = $697,000 x 6.8% = $47,396

Numbers of outstanding shares = 17,500 shares

Placing values in the formula

EPS = $47,396 / 17,500 shares = $2.71 per share

Now calculate market capitalization as follow

Market Capitalization = Price of stock x Numbers of outstanding shares

where

Price of stock = Price earning ratio x earning per share = 11.8 x $2.71 = $31.98

Numbers of outstanding shares = 17,500 shares

Placing values in the formula

Market Capitalization = $31.98 x 17,500 = $559,650

Enterprise value can be calculated using the following formula

Enterprise Value = Market capitalization + Value of debt - Cash

Where

Market capitalization  = $559,650

Value of debt = $408,000

Cash = $41,200

Placing values in the formula

Enterprise Value = $559,650 + $408,000 - $41,200

Enterprise Value = $926,450

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