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

An analyst compares a European airline reporting under IFRS, where leases are largely capitalized, with a peer reporting under US GAAP that classifies most leases as operating, with lease cost within operating expenses. Using unadjusted EV/EBITDA, the airline reporting under IFRS will most likely appear:

The IFRS airline will most likely appear cheaper if its EV includes lease liabilities while the peer's excludes them, and its EBITDA excludes lease cost. Unadjusted multiples are inconsistent across frameworks, so the analyst should align lease treatment before comparing.

  1. Acheaper than the peer, if lease liabilities are included in its EV and the peer's are excludedCorrect
  2. Bidentical to the peer, because lease treatment affects only net income
  3. Cmore expensive than the peer, because its EBITDA is lower

Explanation

Under IFRS 16 lease expense is replaced by depreciation and interest, so EBITDA is higher. Lease liabilities are also in debt and EV. The effect on the ratio depends on both, but the stated EBITDA is higher, not lower, which rules out C. Option B is wrong since EBITDA changes. With EV including liabilities while the peer's EV excludes them, the comparison is inconsistent; the key reflects the standard teaching that EV and EBITDA must be made consistent by adjusting for leases.

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