Can anyone help me solve this practice problem? The question asks to determine the enterprise value (EV) of Company A, which is not listed on the stock market.

The following information is known:

  • Comparable company B (listed on the stock market) has an EV/Sales multiple of 0.9.
  • Company A's financial statement data is as follows:
  • EBITDA: 3 million
  • Total assets: 9 million
  • Total equity: 2 million
  • Cost of goods sold (COGS): 1.5 million
  • Depreciation expense: 0.5 million
  • Interest expense: 0.3 million
  • Taxes: 0.2 million

Based on the above data, to calculate Company A's enterprise value, you first need to determine its sales. Typically, "Sales" in the EV/Sales multiple refers to operating revenue or net sales. The problem does not directly provide sales, but it can be inferred through the income statement relationship:

EBITDA = Operating revenue - Cost of goods sold - Depreciation expense (is depreciation already included in the EBITDA calculation here? Note the standard definition). More rigorously, EBITDA = Operating revenue - Cost of goods sold - Other operating expenses (excluding depreciation and amortization). However, the problem only provides cost of goods sold and depreciation, not other operating expenses, so operating revenue cannot be directly derived.

If we assume that Company A's EBITDA is profit before depreciation, interest, and taxes, and that cost of goods sold is the only variable cost, then:

EBITDA = Operating revenue - Cost of goods sold - Other operating expenses (assumed to be 0)? But depreciation expense is usually not included in EBITDA, and since depreciation is listed separately in the problem, it may imply that EBITDA has already deducted depreciation? This needs clarification.

Another common solution: If EBITDA = Operating revenue - Cost of goods sold (ignoring other expenses), then Operating revenue = EBITDA + Cost of goods sold = 3 million + 1.5 million = 4.5 million. However, under this assumption, depreciation expense is not included, which contradicts the definition of EBITDA (depreciation should be added back).

A more reasonable path: work backward from net profit. Given interest of 0.3 million and taxes of 0.2 million, but net profit is not provided. If we assume EBITDA is profit before interest, taxes, depreciation, and amortization, then: EBIT = EBITDA - Depreciation = 3 million - 0.5 million = 2.5 million; Pre-tax profit = EBIT - Interest = 2.5 million - 0.3 million = 2.2 million; Net profit = Pre-tax profit - Taxes = 2.2 million - 0.2 million = 2 million. But this path still does not yield operating revenue.

Therefore, the problem may imply that "sales" needs to be inferred from other information, but the available data is insufficient. If we directly use the EV/Sales multiple, then Enterprise Value = Sales × 0.9. If sales are unknown, a numerical value cannot be obtained.

Suggestion: Please confirm whether the problem omitted the "operating revenue" or "net sales" data. If we assume sales is X, then EV = 0.9X. According to common financial formulas, EBITDA = Operating revenue - Cost of goods sold - Other operating expenses (excluding depreciation), but since other expenses are not provided, it cannot be uniquely determined.

In summary, the key to this problem is to clarify the value of sales. If the original intent is that "EBITDA is 3 million" and "cost of goods sold is 1.5 million," then it may imply Operating revenue = EBITDA + Cost of goods sold + Depreciation? But that would double-count. Please provide the full context of the original problem.

If we use the simplest assumption (ignoring other expenses, and EBITDA = Operating revenue - Cost of goods sold), then Operating revenue = 4.5 million, and EV = 4.5 million × 0.9 = 4.05 million. However, this assumption conflicts with the standard definition of EBITDA because depreciation is not added back.

Therefore, the correct answer to this exercise depends on the interpretation of "sales." It is recommended to consult the instructor or refer to application examples of the EV/Sales multiple in the textbook.