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CFA Level I Exam · Relative Value Equity Valuation Approaches

EV/EBITDA Valuation and Enterprise Value Multiples

Updated 7 October 2026 · Fact-checked

Enterprise value (EV) is the market value of the whole business: market capitalization plus debt, preferred stock and noncontrolling interest, minus cash and short-term investments. EV/EBITDA divides EV by EBITDA. To solve questions, build EV, divide by the metric, then apply a peer multiple and subtract net debt to reach equity value.

Understand Enterprise Value Multiples (EV/EBITDA)

A share price only values the equity. But a company is financed by equity and debt. Two firms with identical operations can have very different market caps if one uses more debt. Comparing their P/E ratios can mislead because leverage changes net income and risk.

Enterprise value (EV) fixes this. It values the operating business for all capital providers. You start with equity value (market cap), add the claims of other capital providers (debt, preferred stock, noncontrolling interest), and subtract cash and short-term investments. Cash is subtracted because an acquirer could use it to pay down the price. EV is sometimes described as the net price to buy the operations.

The multiple must match the numerator. EV covers all capital providers, so the denominator must be a measure before interest paid to them. EBITDA (earnings before interest, taxes, depreciation and amortization) fits. Other EV multiples use EBIT, operating income, EV/Sales or EV/FCFF. P/E is different: it uses price (equity only) over earnings after interest.

EV/EBITDA is popular because it is less affected by capital structure and by differences in depreciation methods and tax. It works for firms with heavy depreciation, and for firms with negative earnings but positive EBITDA. It is common for comparing firms across countries with different tax and financing patterns.

Its limits matter for the exam. EBITDA ignores capital expenditure, so a capital-intensive firm can look cheap. EBITDA can be distorted by revenue recognition choices and working capital changes. It is not cash flow. If EBITDA is negative, the multiple is not meaningful. EV/Sales is usable for loss-making firms but ignores cost differences and margins.

Key formulas to remember

Enterprise value
EV = Market cap + Market value of debt + Preferred stock + Noncontrolling interest − Cash and short-term investments
Exams often use book value of debt as a proxy for market value. Use the figures the question gives.
EV/EBITDA
EV/EBITDA = EV ÷ EBITDA
Numerator covers all capital providers; denominator is before interest.
EV/Sales
EV/Sales = EV ÷ Sales (revenue)
Useful when earnings are negative; ignores margin differences.
Implied EV from a peer multiple
Implied EV = Peer EV/EBITDA × Target EBITDA
Then convert to equity.
Equity value from EV
Equity value = EV − Debt − Preferred stock − Noncontrolling interest + Cash
Divide by shares outstanding for value per share.

How to solve Enterprise Value Multiples (EV/EBITDA) questions

Use this order for any EV multiple question, whether it asks for a multiple, a value or a comparison.

  1. 1Read what is asked: EV, a multiple, equity value or value per share.
  2. 2List the claims: market cap (or price × shares), debt, preferred stock, noncontrolling interest, cash and short-term investments.
  3. 3Compute EV: add the claims, subtract cash.
  4. 4Check the denominator: EBITDA, EBIT or sales, in the same period as the multiple.
  5. 5Divide EV by the metric to get the multiple, or multiply the peer multiple by the target metric to get implied EV.
  6. 6If equity value is asked, reverse the bridge: subtract debt, preferred and noncontrolling interest, add cash.
  7. 7Divide by shares for per-share value, then compare with the options and sanity check the size.

Quickest way: Net debt shortcut

When to use it: Use when the question gives debt and cash and asks for EV or equity value, with no preferred or noncontrolling interest.

  1. Compute net debt = debt − cash.
  2. EV = equity value + net debt, or equity value = EV − net debt.
  3. Add preferred and noncontrolling interest to net debt if they appear.
  4. Eliminate options that move the wrong way: more cash should lower EV, more debt should raise it.

Common mistakes in Enterprise Value Multiples (EV/EBITDA)

  • Adding cash instead of subtracting it when computing EV.

    Students treat cash as an asset that adds value.

    Fix: Cash is subtracted from EV (it offsets the purchase price). It is added when going from EV back to equity value.

  • Dividing price or market cap by EBITDA.

    Students mix P/E logic with EV logic.

    Fix: Match numerator and denominator: EV goes with EBITDA, EBIT or sales; price or market cap goes with earnings after interest.

  • Forgetting noncontrolling interest or preferred stock.

    Students remember only debt and cash.

    Fix: Keep the full list: debt, preferred, noncontrolling interest, minus cash.

  • Stopping at EV when the question asks for value per share.

    Rushing under time pressure.

    Fix: Re-read the last line of the question and convert EV to equity, then divide by shares.

  • Claiming EBITDA is a good proxy for cash flow.

    It sounds cash-like because depreciation is added back.

    Fix: EBITDA ignores capex, working capital and taxes. Capital-intensive firms can look cheap on EV/EBITDA.

Worked examples

Example 1

A company has 50 million shares priced at $20. It has debt of $300 million, preferred stock of $50 million, noncontrolling interest of $25 million and cash of $75 million. EBITDA is $160 million. What is EV/EBITDA, rounded to one decimal? A) 7.7x B) 8.1x C) 9.1x

Show the solution
  1. Market cap = 50 million × $20 = $1,000 million.
  2. EV = 1,000 + 300 + 50 + 25 − 75 = $1,300 million.
  3. EV/EBITDA = 1,300 ÷ 160 = 8.125x, which rounds to 8.1x.
  4. Trap check: leaving out preferred stock and noncontrolling interest gives EV of $1,225 million and 1,225 ÷ 160 ≈ 7.7x (option A). Adding cash instead of subtracting it gives EV of $1,450 million and 1,450 ÷ 160 ≈ 9.1x (option C).

Answer: B) 8.1x

Example 2

A target firm has EBITDA of €80 million, debt of €200 million and cash of €40 million, with 20 million shares. Peers trade at 9.0x EV/EBITDA. What is the implied value per share? A) €28.00 B) €36.00 C) €38.00

Show the solution
  1. Implied EV = 9.0 × 80 = €720 million.
  2. Net debt = 200 − 40 = €160 million.
  3. Equity value = 720 − 160 = €560 million.
  4. Value per share = 560 ÷ 20 = €28.00.
  5. Trap check: €36.00 comes from ignoring net debt (720 ÷ 20 = 36). €38.00 comes from adding cash to EV and ignoring debt (720 + 40 = 760; 760 ÷ 20 = 38).

Answer: A) €28.00

Exam tips

  • Expect questions that test why EV/EBITDA beats P/E when comparing firms with different leverage.
  • Always check whether the question gives book or market value of debt and use what is given.
  • With three options, test direction first: extra cash lowers EV; extra debt raises it.
  • Remember the limitation answers: EBITDA ignores capex and can be manipulated through revenue recognition.
  • Use about 90 seconds per question; the EV bridge is quick if you write each item in a column.

Practice questions from Relative Value Equity Valuation Approaches

Enterprise Value Multiples (EV/EBITDA) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Enterprise Value Multiples (EV/EBITDA): frequently asked questions

How do I calculate enterprise value from market cap?

Start with market cap, add debt, preferred stock and noncontrolling interest, then subtract cash and short-term investments. Use market values where given, otherwise book values of debt are a common proxy.

What is the difference between P/E and EV/EBITDA?

P/E values only the equity relative to earnings after interest and tax. EV/EBITDA values the whole firm relative to earnings before interest, so it is less affected by leverage, tax and depreciation differences.

What are the advantages and limitations of EV multiples?

They allow comparison across different capital structures and work when net income is negative. But EBITDA ignores capex and working capital, so capital-intensive firms can look cheap, and EV needs reliable debt and cash data.

When is EV/Sales used?

It is used when earnings and EBITDA are negative or unreliable, such as for early-stage firms. It ignores profitability differences, so it should be read alongside margins.