CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
Which adjustment is most appropriate when calculating enterprise value for use in an EV/EBITDA multiple?
Non-controlling interest should be added to enterprise value. Consolidated EBITDA includes all of a subsidiary's earnings, so EV must include the minority holders' claim to match. Cash is deducted and preferred shares are added, so the other adjustments are wrong.
- AAdd non-controlling interestCorrect
- BAdd cash and short-term investments
- CSubtract the market value of preferred shares
Explanation
EBITDA includes 100% of consolidated subsidiaries' results, so enterprise value must include the non-controlling interest claim. Cash is subtracted, not added, and preferred shares are added, not subtracted.
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