ExpertMedium2 marksMultiple Choice
ACCA · Question 17.5 · Business Valuations
CASE 2: AERODRONE TECH
AeroDrone Tech is an ungeared manufacturer of commercial delivery drones. The company currently has a cost of equity of 12%. The board is considering a major restructuring to issue debt and repurchase equity. The corporate tax rate is 25%. The risk-free rate is 4% and the equity risk premium is 6%.
A private equity firm wants to buy AeroDrone and uses the EV/EBITDA multiple for valuation. AeroDrone's EBITDA is $5,800,000. The industry average EV/EBITDA multiple is 8x. AeroDrone has $2,000,000 in cash and no debt.
What is the estimated Equity Value of AeroDrone?
CASE 2: AERODRONE TECH
AeroDrone Tech is an ungeared manufacturer of commercial delivery drones. The company currently has a cost of equity of 12%. The board is considering a major restructuring to issue debt and repurchase equity. The corporate tax rate is 25%. The risk-free rate is 4% and the equity risk premium is 6%.
A private equity firm wants to buy AeroDrone and uses the EV/EBITDA multiple for valuation. AeroDrone's EBITDA is $5,800,000. The industry average EV/EBITDA multiple is 8x. AeroDrone has $2,000,000 in cash and no debt.
What is the estimated Equity Value of AeroDrone?
Answer options:
A.
$46,400,000
B.
$48,400,000
C.
$44,400,000
D.
$40,000,000
How to approach this question
First calculate Enterprise Value (EV) = EBITDA × Multiple. Then bridge to Equity Value: Equity Value = EV - Debt + Cash.
Full Answer
B.$48,400,000✓ Correct
1. Calculate Enterprise Value (EV): EBITDA × Multiple = $5,800,000 × 8 = $46,400,000.
2. Bridge EV to Equity Value: Equity Value = EV - Debt + Cash.
3. Equity Value = $46,400,000 - $0 + $2,000,000 = $48,400,000.
Common mistakes
Stopping at Enterprise Value ($46.4m) or subtracting cash instead of adding it.
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