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

Price and Enterprise Value Multiples Overview for CFA Level II

Updated 7 October 2026 · Fact-checked

Valuation multiples divide a market value by a fundamental such as earnings, book value, sales or cash flow. Price multiples (P/E, P/B, P/S, P/CF) use equity price. EV multiples (EV/EBITDA) use total firm value. To solve a question, pick the multiple that fits the vignette, compute it, and compare it with a benchmark.

Understand Price and Enterprise Value Multiples Overview

A valuation multiple is a ratio of a market value to a fundamental. The market value is on top. The fundamental is below. A high multiple means the market pays more per unit of earnings, book value, sales or cash flow.

There are two families. Price multiples put the share price or equity market value on top: P/E, P/B, P/S, P/CF and dividend yield (which is dividend per share ÷ price, so price is below). Enterprise value (EV) multiples put the value of the whole firm on top, such as EV/EBITDA. EV = market value of equity + market value of debt + preferred stock − cash and short-term investments (and other adjustments). EV is the price to buy the operations, so it pairs with a fundamental that belongs to all capital providers, such as EBITDA, EBIT or sales.

The key matching rule: equity value goes with an equity-level fundamental (net income, book equity, cash flow to equity). Enterprise value goes with a pre-financing fundamental (EBITDA, EBIT, operating income). Mixing them gives a meaningless ratio.

Multiples are a relative valuation tool. Discounted cash flow (DCF) models estimate intrinsic value from forecast cash flows and a required return. Multiples compare the asset with peers, an index, or its own history. They are fast and tied to market prices. But they inherit market errors: if peers are all overpriced, a stock priced in line with them looks fair. Multiples also hide assumptions about growth and risk that a DCF states openly.

Each multiple has a rationale. P/E is popular because earnings drive value. P/B suits asset-heavy firms and banks. P/S works when earnings are negative or volatile, since sales are harder to manipulate. P/CF is less open to accounting choices. EV/EBITDA is useful when comparing firms with different leverage or depreciation policies, or when earnings are negative. Dividend yield suits mature, stable payers.

Key formulas to remember

Price multiple
Price multiple = Market price per share ÷ Fundamental per share
Fundamental can be EPS, book value, sales or cash flow per share. The same ratio works with total equity value over total fundamental.
Enterprise value
EV = Market value of equity + Market value of debt + Preferred stock − Cash and short-term investments
Subtract cash because it can pay down debt. Use market values where given; book debt is a common approximation.
EV/EBITDA
EV/EBITDA = EV ÷ EBITDA
Both numerator and denominator relate to all capital providers, so leverage differences matter less.
Dividend yield
Dividend yield = Dividends per share ÷ Price per share
Price is in the denominator, so this is the inverse of a typical price multiple. A lower yield means a higher price for the same dividend.
Implied value from a multiple
Equity value per share = Benchmark multiple × Company fundamental per share
For EV multiples: EV = multiple × EBITDA, then subtract debt and preferred, add cash, divide by shares.

How to solve Price and Enterprise Value Multiples Overview questions

Use this method for any question on multiples in an item set.

  1. 1Identify what the question asks: compute a multiple, choose a multiple, interpret a difference, or derive a value from a benchmark.
  2. 2Find the data in the vignette and exhibits. Note whether figures are per share or totals, and the units (millions, currency).
  3. 3Check the match: price multiples use equity-level fundamentals; EV multiples use pre-financing fundamentals.
  4. 4If EV is needed, build it: equity market value + debt + preferred − cash. Use market capitalisation = price × shares outstanding.
  5. 5Compute the multiple or the implied value. Keep the same basis (per share or total) on top and bottom.
  6. 6Compare with the benchmark (peer, sector or history). Ask whether growth, risk, leverage or accounting differences explain the gap.
  7. 7State the conclusion: higher than benchmark suggests overvalued only if fundamentals are comparable; otherwise the gap may be justified.

Quickest way: Match, compute, compare

When to use it: Use when the vignette gives clean numbers and the question asks for a multiple, an implied value, or which multiple is more suitable.

  1. Underline the market value in the vignette (price or EV) and the fundamental.
  2. Check the pairing in one second: equity with equity, EV with operating.
  3. Convert to the same basis, then divide.
  4. For choice questions, eliminate options that ignore the firm's situation: negative earnings rules out P/E, high leverage differences favour EV multiples, financial firms favour P/B.
  5. Before answering, check the direction: yield is dividend ÷ price, other multiples are price ÷ fundamental.

Common mistakes in Price and Enterprise Value Multiples Overview

  • Dividing EV by net income or price by EBITDA

    Candidates grab the nearest earnings figure without checking who it belongs to.

    Fix: Equity value pairs with equity earnings; EV pairs with EBITDA or EBIT. Say the pairing out loud before dividing.

  • Forgetting to subtract cash when computing EV

    Candidates memorise 'equity plus debt' and stop.

    Fix: Write EV = equity + debt + preferred − cash every time, then fill in each term from the vignette.

  • Treating a low multiple as proof of undervaluation

    Multiples feel like a price tag, so cheaper looks better.

    Fix: A low multiple can reflect low growth, high risk or weaker returns. Check fundamentals before concluding.

  • Mixing per-share and total figures

    Exhibits often show market cap in millions and EPS in currency units.

    Fix: Convert both to the same basis first. Price × shares gives total equity value.

  • Inverting dividend yield or using it as a price multiple

    Other multiples have price on top, so yield looks reversed.

    Fix: Remember yield is dividend ÷ price. A rising price lowers the yield.

  • Assuming multiples are independent of DCF inputs

    Multiples seem simple and model-free.

    Fix: Remember each multiple embeds growth, required return and payout assumptions. Differences in these explain differences in multiples.

Worked examples

Example 1

Vignette: Alder Corp has 40 million shares at a price of $25.00. It has debt of $300 million, preferred stock of $50 million and cash of $90 million. EBITDA is $160 million and net income is $80 million. (1) Compute EV. (2) Compute EV/EBITDA. (3) Compute P/E.

Show the solution
  1. Market value of equity = 40 million × $25.00 = $1,000 million.
  2. EV = 1,000 + 300 + 50 − 90 = $1,260 million.
  3. EV/EBITDA = 1,260 ÷ 160 = 7.875, about 7.9x.
  4. EPS = 80 ÷ 40 = $2.00. P/E = 25.00 ÷ 2.00 = 12.5x.

Answer: EV = $1,260 million; EV/EBITDA ≈ 7.9x; P/E = 12.5x.

Example 2

Vignette: An analyst values Birch Ltd using a peer median EV/EBITDA of 9.0x. Birch has EBITDA of $50 million, debt of $120 million, cash of $20 million, no preferred stock and 10 million shares. (1) What is the implied EV? (2) What is the implied value per share? (3) Which is the better reason to prefer EV/EBITDA over P/E for comparing Birch with peers that carry very different debt levels?

Show the solution
  1. Implied EV = 9.0 × 50 = $450 million.
  2. Equity value = EV − debt + cash = 450 − 120 + 20 = $350 million.
  3. Value per share = 350 ÷ 10 = $35.00.
  4. EV/EBITDA is measured before financing costs and uses firm-wide value, so leverage differences distort it less than they distort P/E.

Answer: Implied EV = $450 million; implied value = $35.00 per share; EV/EBITDA is less affected by differences in capital structure.

Exam tips

  • Always write the EV build-up on your scratch sheet. Examiners often hide cash or preferred stock in an exhibit footnote.
  • When a question asks which multiple is most suitable, link the firm's feature (negative earnings, high leverage, asset-heavy, stable dividends) to the multiple's rationale.
  • Read for traps: units in millions versus thousands, and per-share versus total figures.
  • Interpretation questions usually reward the answer that says the multiple gap may be justified by growth or risk, not the one that declares mispricing outright.
  • With no penalty for wrong answers, answer every question, but do the matching check first because it removes many options quickly.

Price and Enterprise Value Multiples Overview in other exams

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

Price and Enterprise Value Multiples Overview: frequently asked questions

What is the difference between a price multiple and an EV multiple?

A price multiple uses the equity price or market value of equity over an equity-level fundamental, such as P/E. An EV multiple uses total firm value over a pre-financing fundamental, such as EV/EBITDA. EV multiples are less affected by capital structure.

Why subtract cash when calculating enterprise value?

Cash can be used to repay debt or pay out to investors, so it reduces the net cost of buying the operating business. EV therefore reflects the price paid for operations, not for idle cash.

How do multiples compare with DCF valuation?

DCF estimates intrinsic value from forecast cash flows and a required return, so assumptions are explicit. Multiples are quick and market-based, but they assume the benchmark is fairly priced and hide growth and risk assumptions.

When is EV/EBITDA better than P/E?

EV/EBITDA is often better when firms differ in leverage or depreciation policy, or when earnings are negative. It compares operating performance before financing and non-cash charges.