Question

Theta Ltd had Cash Flow from Operations for the last financial year of $779,000. During the year it paid $110,000 in interest. Its tax rate is 25%. Its share price is $21.81 and it has 195,000 shares outstanding. What is its P/CF ratio?

a. 4.94

b. 4.78

c. 5.46

d. 6.11

the correct answer is A but no idea how we found it

Answer 1

Theta Limited had operating cash flows of $779,000 in the last financial year. During the year, the entity paid $110,000 as interest expenses and its effective rate of tax is 25%. Therefore, after tax cost of debt is $110,000 * (1-25%) = $82,500.

Hence, the adjusted operating cash flows or EBIT of Theta Limited is $779,000 + $82,500 = $861,500.

The P / CF ratio of the entity is computed as enumerated below:

195,000 * $21.81 / $861,500 = 4.94.

Hence, option a is considered to be correct.