Breaking Into Wall Street 400 Practice Test

Why can't you use Equity Value / EBITDA as a multiple instead of Enterprise Value / EBITDA?

EBITDA is available to all investors and EV is available to all; equity value does not reflect capital structure Because EBITDA is not a real metric Because EV is less volatile Because equity value is always larger than EV

Correct Answer:

EBITDA is available to all investors and EV is available to all; equity value does not reflect capital structure

Explanation:

The key idea is that EV/EBITDA lines up a firm’s operating profitability with the value that all providers of capital can claim. EBITDA is a pre-financing measure of operating performance—before interest, taxes, and debt service—so it reflects the cash flows available to both debt and equity holders. Enterprise value represents the total price to acquire the whole firm (debt plus equity minus cash), i.e., the value available to all capital providers. Using equity value instead would tie the multiple to the shareholders’ claim only and ignore debt and cash, making the metric heavily depend on capital structure and less comparable across firms. That’s why the broader, capital-structure-neutral EV/EBITDA is preferred.

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