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CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches

A company has a market capitalization of 900 million, total debt of 300 million, preferred shares of 50 million, noncontrolling interest of 40 million, and cash and short-term investments of 190 million. EBITDA is 150 million. The company's EV/EBITDA is closest to:

EV/EBITDA is about 7.0x. Enterprise value is market cap plus debt, preferred shares and noncontrolling interest, less cash: 900 + 300 + 50 + 40 - 190 = 1,100 million. Dividing by EBITDA of 150 million gives 7.33, closest to 7.0x.

  1. A6.0x
  2. B6.6x
  3. C7.0xCorrect

Explanation

EV = 900 + 300 + 50 + 40 - 190 = 1,100 million. EV/EBITDA = 1,100/150 = 7.33x, which is closest to 7.0x. Failing to add preferred and noncontrolling interest gives 1,010/150 = 6.7x, and also ignoring cash subtraction errors give other values; 6.0x corresponds to 900/150.

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