Chapter 4, Problem 4P

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

MARKET/BOOK AND EV/EBITDA RATIOS Edelman Engines has $17 billion in total assets —of which cash and equivalents total$100 million. Its balance sheet shows $1.7 billion in current liabilities—of which the notes payable balance totals$1 billion. The firm also has $102 billion in long-term debt and$5.1 billion in common equity. It has 300 million shares of common stock outstanding, and its stock price is $20 per share. The firm's EBITDA totals$1.368 billion. Assume the firm's debt is priced at par, so the market value of its debt equals its book value. What are Edelman's market/book and its EV/EBITDA ratios?

Summary Introduction

To Determine: The market/book ratio and EV/EBITDA ratio of Company EE.

Introduction: The market to book ratio is additionally called as the price to book ratio, is a money related valuation metric used to assess an organization's present market value in respect to its book value. The EV/EBITDA ratio is a correlation of enterprise value and the EBIT (earnings before interest on taxes), deterioration, taxes and amortization.

Explanation

Determine the book value of shares of the company

BookāValue=[LongāTermāDebtStockāOutstanding]=[$5,100,000,000300,000,000]=$17

Therefore the book value of shares of the company is $17. Determine the market to book ratio of the company MarketātoāBookāRatio=[StockāPriceBookāValue]=[$20\$17]=1.17647āorā1.18

Therefore the market to book ratio of the company is 1.8

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