Page 21 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 31.n: Calculate and interpret EV multiples READING 31: MARKET-BASED VALUATION: PRICE AND
and evaluate the use of EV/EBITDA. ENTERPRISE VALUE MULTIPLES

EV = MODULE 31.4: EV AND OTHER ASPECTS
market value of common stock
+ market value of preferred equity
+ market value of debt
Price will be lowered by + minority interest Assume zero, unless provided in exams!
target’s liquid assets. - cash and investments

Advantages of EV/EBITDA: Disadvantages:
• More useful than P/E when comparing firms with • If working capital is growing, EBITDA will overstate CFO.
different degrees of financial leverage. • It ignores how different revenue recognition policies affect CFO.
• Useful for valuing capital-intensive businesses • Because FCFF captures the amount of capital expenditures, it is more
with high levels of depreciation and amortization. strongly linked with valuation theory than EBITDA. EBITDA will be an
• EBITDA is usually +ve even when EPS is not. adequate measure if capital expenses equal depreciation expenses.

EXAMPLE: Calculating
EV/EBITDA: An analyst
gathered the following data
for B. Industries [all amounts
in Swiss francs (Sf)]:

Based on this information,
calculate the EV/EBITDA
ratio for B. Industries.