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CMA Final · Strategic Performance Management and Business Valuation · Valuation in Mergers and Acquisitions

When using the comparable company multiple method to value a target in an acquisition, which adjustment is most appropriate before applying a peer EV/EBITDA multiple to the target's EBITDA?

The target's EBITDA should be normalised for one-off items before applying the peer EV/EBITDA multiple. The multiple reflects recurring operating earnings, so exceptional gains or losses would distort the enterprise value if they were left in the base.

  1. ANormalise the target's EBITDA for one-off itemsCorrect
  2. BApply the multiple to net profit instead
  3. CDeduct synergies from the peer multiple
  4. DUse the acquirer's book value as base

Explanation

Multiples should be applied to maintainable earnings, so one-off gains or losses are removed from EBITDA. Applying the EV/EBITDA multiple to net profit mismatches the base. Synergies are separately valued, and the acquirer's book value is irrelevant.

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