CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
Compared with a price-to-earnings multiple, an analyst is most likely to prefer EV/EBITDA when comparing two companies that differ mainly in:
EV/EBITDA is preferred when companies differ in capital structure. Enterprise value includes debt and equity, and EBITDA is before interest, so the multiple is comparable across firms with different leverage, unlike P/E, which is affected by interest expense and financial risk.
- Adividend payout ratio
- Bcapital structureCorrect
- Cshare price volatility
Explanation
EV captures both debt and equity financing and EBITDA is measured before interest, so EV/EBITDA is less affected by differences in leverage. P/E is distorted by differing interest burdens. Dividend payout and share price volatility do not drive the choice of EV/EBITDA.
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