Preston Woods has 17,500 shares of stock outstanding along with $408,000 of inte

Question

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 35 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 multiple? A) $1,018,097 B) $830,479 C) $994,520 D) $926,073 The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its: A) rate of return on equity C) average historical rate of growth. B) internal rate of growth. D) sustainable rate of growth.

Explanation / Answer

1)net profit of company=sales*profti margin
=697000*6.8%=47396
earning per share= net profit/shares outstaning
=47396/17500=2.71
PE ratio=11.8
price per share=11.8*2.71=31.96
the equity value=31.96*17500=559272.80
debt value=408000
the enterprise value=equity+debt-cash
=55972.80+408000-41200=926073(rounded)
option D

2)it is option D

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