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CFA Level II Exam · Market-Based Valuation: Price and Enterprise Value Multiples

Enterprise Value and EV/EBITDA Multiple Explained

Updated 7 October 2026 · Fact-checked

Enterprise value (EV) is the market value of a company's operating business to all capital providers. EV = market cap + preferred stock + debt + non-controlling interest − cash and short-term investments. EV/EBITDA divides EV by EBITDA. Value a target by applying a comparable multiple to its EBITDA, then subtract net claims to reach equity value.

Understand Enterprise Value and EV/EBITDA Multiple

Equity value is only part of what it costs to own a business. Lenders, preferred holders and minority shareholders in subsidiaries also have claims. Enterprise value adds all of these claims to the market value of common equity, then removes cash that could be used to pay them off. The result is the value of the operating assets.

Because EV is measured before the split between capital providers, it must be matched with an operating metric that is also before that split. EBITDA, EBIT and sales are all earned before interest and before payments to preferred holders. That is why EV is divided by EBITDA, not by net income. P/E pairs equity price with equity earnings. EV/EBITDA pairs total firm value with total firm operating earnings.

EV/EBITDA is useful when firms differ in leverage, depreciation policy or tax. It also works when net income is negative but EBITDA is positive. It suits capital-intensive firms, where depreciation is large. Its weakness is that EBITDA ignores capital spending and working capital changes. If capex is heavy, EBITDA overstates cash generation. Revenue recognition choices can also distort it.

In a vignette you will usually use EV/EBITDA in two directions. First, compute a firm's multiple from market data. Second, apply a peer multiple to the target's EBITDA to get EV, then bridge back to equity value and per-share value by subtracting debt, preferred stock and non-controlling interest and adding cash.

Watch the details. Use market value of equity, and the fair value of debt if given. Treat non-operating assets carefully. If EBITDA excludes income from a non-operating asset, subtract that asset's value from EV. Use the same definition of EBITDA for the target and for the comparables.

Key formulas to remember

Enterprise value
EV = Market value of common equity + Market value of preferred stock + Market value of debt + Non-controlling interest − Cash and short-term investments
Some texts also subtract non-operating assets such as investments in associates when their income is not in EBITDA. Follow the vignette's wording.
EV/EBITDA multiple
EV/EBITDA = EV ÷ EBITDA
Use the same EBITDA basis (trailing or forward) for the subject firm and the comparables.
Equity value from EV
Equity value = EV − Debt − Preferred stock − Non-controlling interest + Cash and short-term investments
This is the reverse of the EV formula. Divide by shares outstanding for value per share.
Other EV multiples
EV/EBIT = EV ÷ EBIT; EV/Sales = EV ÷ Sales; EV/FCFF = EV ÷ FCFF
All use an operating measure that is before payments to debt holders.
Value from a peer multiple
Estimated EV = Peer EV/EBITDA × Subject EBITDA
Then bridge to equity value and divide by shares.

How to solve Enterprise Value and EV/EBITDA Multiple questions

Use this sequence for any question on enterprise value or EV multiples.

  1. 1Identify what the question asks: EV, a multiple, or an equity value or share price from a multiple.
  2. 2Pull the claims from the vignette: market cap (or price × shares), debt, preferred stock, non-controlling interest, cash and short-term investments.
  3. 3Check units, dates and whether items are market or book values. Use market values where given.
  4. 4Compute EV by adding debt, preferred and non-controlling interest to market cap and subtracting cash.
  5. 5Match the metric: divide EV by EBITDA, EBIT or sales, never by net income or EPS.
  6. 6If valuing a target, multiply the peer multiple by the target's metric to get EV.
  7. 7Bridge back to equity: subtract debt, preferred and non-controlling interest, add cash, then divide by shares.
  8. 8Check reasonableness and note any non-operating assets or EBITDA quality issues the question hints at.

Quickest way: EV bridge in one line

When to use it: Use when the vignette gives all claims and you need a multiple or a per-share value quickly.

  1. Write net claims = debt + preferred + non-controlling interest − cash.
  2. EV = market cap + net claims.
  3. For per-share value from a peer multiple: (multiple × EBITDA − net claims) ÷ shares.
  4. Sanity-check the sign: more cash lowers EV; more debt raises EV.

Common mistakes in Enterprise Value and EV/EBITDA Multiple

  • Dividing EV by net income or EPS, or dividing price by EBITDA.

    Students mix the equity-level and firm-level multiples.

    Fix: Pair numerator and denominator by claimant. EV goes with pre-interest metrics. Price and market cap go with post-interest metrics.

  • Adding cash to EV instead of subtracting it.

    Cash looks like an asset that adds value.

    Fix: EV is the cost of the operating business. Cash offsets the claims, so subtract it. In the reverse bridge, add cash.

  • Leaving out preferred stock or non-controlling interest.

    Students remember only market cap plus net debt.

    Fix: EBITDA includes 100% of consolidated subsidiaries, so EV must include the minority's claim. Preferred holders rank ahead of common equity, so include them too.

  • Forgetting to go back from EV to equity value before finding a share price.

    The multiple gives EV and students stop there.

    Fix: Always subtract debt, preferred and non-controlling interest and add cash before dividing by shares.

  • Using inconsistent EBITDA bases between target and peers.

    Trailing and forward figures, or adjusted and unadjusted figures, get mixed.

    Fix: Check the definition of each figure in the exhibit and use the same basis for both sides.

  • Ignoring non-operating assets whose income is outside EBITDA.

    Students apply the standard formula mechanically.

    Fix: If the vignette says an asset's income is excluded from EBITDA, remove its value from EV before computing the multiple.

Worked examples

Example 1

Vignette: Northwind Corp has 50 million shares priced at $20. It has debt of $300 million, preferred stock of $40 million, non-controlling interest of $60 million, and cash and short-term investments of $90 million. EBITDA is $160 million. Questions: (1) What is Northwind's enterprise value? (2) What is its EV/EBITDA?

Show the solution
  1. Market cap = 50 million × $20 = $1,000 million.
  2. Claims added: debt 300 + preferred 40 + non-controlling interest 60 = 400.
  3. EV = 1,000 + 400 − 90 = $1,310 million.
  4. EV/EBITDA = 1,310 ÷ 160 = 8.19.

Answer: (1) EV = $1,310 million. (2) EV/EBITDA ≈ 8.2x.

Example 2

Vignette: An analyst values Harbor Ltd using a peer median EV/EBITDA of 9.0x. Harbor's EBITDA is $80 million. It has debt of $250 million, preferred stock of $20 million, non-controlling interest of $30 million and cash of $50 million. It has 20 million shares. Questions: (1) What is Harbor's estimated EV? (2) What is the estimated equity value per share?

Show the solution
  1. Estimated EV = 9.0 × 80 = $720 million.
  2. Net claims = 250 + 20 + 30 − 50 = $250 million.
  3. Equity value = 720 − 250 = $470 million.
  4. Per share = 470 ÷ 20 = $23.50.

Answer: (1) EV = $720 million. (2) Equity value per share = $23.50.

Exam tips

  • Read the exhibit for every claim on the capital structure. Vignettes often hide preferred stock or non-controlling interest in a footnote.
  • If a question asks for value per share, expect the EV-to-equity bridge. Do not stop at EV.
  • When comparing EV/EBITDA with P/E, the usual answer is that EV/EBITDA suits firms with different leverage or negative earnings, while it ignores capex.
  • Read for hints on non-operating assets and on whether EBITDA is trailing or forward.
  • With no penalty for wrong answers, never leave a question blank, but do the bridge in three lines to avoid slips.

Enterprise Value and EV/EBITDA Multiple 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 and EV/EBITDA Multiple: frequently asked questions

How do you calculate enterprise value for CFA Level II?

Start with market value of common equity. Add debt, preferred stock and non-controlling interest, then subtract cash and short-term investments. Use market values where the vignette gives them.

Is EV/EBITDA better than P/E?

Neither is always better. EV/EBITDA is more comparable across firms with different leverage, tax rates or depreciation, and it works when earnings are negative. It ignores capital spending and working capital, so P/E can be more informative for stable, low-capex firms.

Why does enterprise value include preferred stock and non-controlling interest?

EBITDA is consolidated and includes all of a subsidiary's earnings, not just the parent's share. So EV must include the minority's claim. Preferred stock is a claim senior to common equity and is part of the capital funding the operations.

How do you get a share price from an EV/EBITDA multiple?

Multiply the peer multiple by the firm's EBITDA to get EV. Subtract debt, preferred stock and non-controlling interest, add cash, and divide by shares outstanding.