Annual interest of $20, equity value $1,000, EV/EBITDA 12x, P/E of 25x, interest of 10%, annual D&A of $30.
What is EV?
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GOBLINMODE
EV is $1,200. Back into Net Income ($1,000 ÷ 25 = $40), gross up for 20% taxes to get EBT of $50, add back interest ($20) to get EBIT of $70, add back D&A ($30) to get EBITDA of $100, then multiply by 12x. Cross-check: Equity ($1,000) + Debt ($200) = $1,200.
Intuition
Enterprise Value bridges from equity value to the total value of the firm by adding debt claims. The key here is that you cannot simply add interest and D&A to Net Income to get EBITDA — you must first gross up for taxes, since taxes sit between Net Income and EBT on the income statement. The balance sheet approach (Equity + Debt) serves as a clean cross-check.
Watch
The #1 trap is skipping the tax gross-up when backing from Net Income to EBITDA. If no tax rate is given, assume 20% and state it. You can verify your answer via the balance sheet: Equity Value ($1,000) + Debt ($200) = $1,200, which matches the income statement approach — always cross-check both ways.
Deep Dive
Determine Enterprise Value (EV) by working backwards through the income statement from Net Income to EBITDA, applying the EV/EBITDA multiple, and cross-checking via the balance sheet.
Assumption: No tax rate is provided, so we assume a 20% tax rate.
Step 1: Calculate Debt
Step 2: Calculate Net Income from P/E
Step 3: Gross up for taxes to get EBT
Step 4: Back into EBIT and EBITDA
Step 5: Apply EV/EBITDA multiple
Cross-check via balance sheet:
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