Use the information for the question(s)below.
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.
-Based upon the price earnings multiple,the value of a share of Texas Trucking is closest to:
A)$49.30.
B)$43.13.
C)$24.15.
D)$27.60.

Question

Quizplus · Accepted Answer

STEP 1: Find the enterprise value of Texas Trucking using EBITDA
Enterprise Value = EV/EBITDA x EBITDA = 7 x $45 million = $315 million

STEP 2: Calculate the equity value of Texas Trucking
Equity Value = Enterprise Value - Debt + Cash = $315 million - $150 million = $165 million
Note that cash was not given, but assuming it is negligible compared to debt, we are essentially subtracting debt from enterprise value.

STEP 3: Calculate the price per share
Price per share = Equity Value / No. of Shares = $165 million / 5 million = $33 per share

STEP 4: Calculate the P/E ratio based on earnings per share
P/E Ratio = Price per share / EPS = $33 / $3.45 = 9.56

STEP 5: Calculate the valuation based on Oklahoma Logistics and Transport
Using the P/E ratio of OLT, the valuation of Texas Trucking would be:
Valuation = EPS x P/E Ratio = $3.45 x 12.5 = $43.13

Therefore, the closest option is B) $43.13.

Use the Information for the Question(s)below