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

An analyst values a target company using the median EV/EBITDA of its peer group. To arrive at the estimated value of the target's equity, the analyst should most likely:

The analyst should multiply the peer EV/EBITDA by the target's EBITDA to get implied enterprise value, then subtract net debt and other senior claims such as preferred shares and noncontrolling interest. That residual is the equity value attributable to common shareholders.

  1. Amultiply the multiple by target EBITDA and subtract net debt and other claimsCorrect
  2. Bmultiply the multiple by target EBITDA and add net debt to the result
  3. Cmultiply the multiple by target net income and subtract preferred dividends

Explanation

Multiple times EBITDA gives implied enterprise value. Equity value is obtained by subtracting debt, preferred shares and noncontrolling interest and adding cash, i.e., subtracting net debt and other claims. Adding net debt is the wrong sign, and net income is not the multiple's denominator.

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