Suppose that Texas Trucking (TT) has earnings per share of $3.45 and EBITDA of $

Question

Suppose that Texas Trucking (TT) has earnings per share of $3.45 and EBITDA of $45 million. TT also has 5 million shares outstanding and debt of $150 million (net of cash). You believe that Oklahoma Logistics and Transport (OLT) is comparable to TT in terms of its underlying business, but OLT has no debt. OLT has a P/E of 12.5 and an enterprise value to EBITDA multiple of 7. 11) Based upon the enterprise value to EBITDA ratio, the value of a share of Texas Trucking is closest to: A) $82.50 B) $21.25 C) $33.00 D) $43.10 12) When discounting free cash flows in the discounted cash flow model you should use: A) the debt cost of capital. ) the weighted average cost of capital. B) the risk-free rate the equity cost of capital.

Explanation / Answer

1)Enterprise value = multiple*EBITDA

     = 7*45

     = 315 million

value of equity = 315 -150 debt = 165 million

value per share = 165 /5 million shares

       = $ 33 per share

correct otpion is "C"-33

12)correct option is "C" -weighted avergae cost of capital

Due to presence of debt ,WACC should be used as cost of capital

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