{"id":1992,"date":"2019-09-27T13:33:00","date_gmt":"2019-09-27T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1992"},"modified":"2026-03-26T08:00:15","modified_gmt":"2026-03-26T08:00:15","slug":"enterprise-value-multiples","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/equity\/enterprise-value-multiples\/","title":{"rendered":"Enterprise Value Multiples"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n\n  \"name\": \"Equity Valuation: Concepts and Basic Tools (2024\/2025 Level I CFA\u00ae Exam \u2013 Equity \u2013 Module 8)\",\n\n  \"description\": \"This module explores equity valuation concepts and tools, focusing on evaluating securities for overvaluation, fair valuation, or undervaluation. It covers equity valuation models, dividend types, payment chronology, present value models like dividend discount and free cash flow to equity, intrinsic value calculations, price multiples, enterprise value multiples, and asset-based valuation. Advantages and limitations of these models are also discussed.\",\n\n  \"uploadDate\": \"2023-07-27T00:00:00+00:00\",\n\n  \"thumbnailUrl\": \"https:\/\/analystprep.com\/path-to-thumbnail\/equity-valuation-thumbnail.jpg\",\n\n  \"contentUrl\": \"https:\/\/youtu.be\/GWw4je023oo\",\n\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/GWw4je023oo\",\n\n  \"duration\": \"PT53M43S\",\n\n  \"publisher\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\",\n    \"logo\": {\n      \"@type\": \"ImageObject\",\n      \"url\": \"https:\/\/analystprep.com\/path-to-logo\/logo.jpg\",\n      \"width\": 600,\n      \"height\": 60\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which correction would on its own cause a decrease in the EV\/EBITDA multiple?\",\n    \"text\": \"A junior analyst made several errors when calculating Confuzzled Inc.\u2019s EV\/EBITDA multiple. Which correction on its own would cause the calculated EV\/EBITDA multiple to decrease?\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Correcting EBITDA upward by $25 million would decrease the EV\/EBITDA multiple.\",\n      \"upvoteCount\": 0,\n      \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/equity\/enterprise-value-multiples\/\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Correcting the overstatement of cash equivalents.\",\n        \"upvoteCount\": 0\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Correcting the book value of debt used in the calculation.\",\n        \"upvoteCount\": 0\n      }\n    ]\n  }\n}\n<\/script>\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/GWw4je023oo\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Enterprise value (EV), often viewed as the cost of a takeover, is most frequently determined as market capitalization plus the\u00a0market value of preferred stock plus the\u00a0market value of debt minus cash equivalents and short-term investments.<\/p>\n<div style=\"text-align: center; margin: 25px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 10px 18px; border: 2px solid #1a73e8; border-radius: 999px; color: #1a73e8; text-decoration: none; font-weight: 500; background-color: #f5f9ff; white-space: nowrap;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Practice EV\/EBITDA valuation with a free trial <\/a><\/div>\n<h2><strong>EV\/EBITDA<\/strong><\/h2>\n<p>EBITDA (earnings before interest, taxes, depreciation, and amortization) can be viewed as a source of funds to pay off the financial stakeholders in the company (lenders, shareholders, the government, etc.). EV\/EBITDA\u00a0 is arguably the most common EV multiple.\u00a0 The EV\/EBITDA ratio for S&amp;P 500 companies has averaged 13 over the past few years. As a general guideline, an EV\/EBITDA value below 10 is commonly interpreted as healthy by analysts. Since EBITDA is usually positive even when net income is negative, EV\/EBITDA can be calculated when a price-to-earnings (P\/E) multiple may not be available.<\/p>\n<h2><strong>EV\/Operating income<\/strong><\/h2>\n<p>EV\/Operating income can also be used as an alternative to EV\/EBITDA. Analysts may have difficulty finding the market value of a company\u2019s debt, in which case the value may have to be estimated based on comparable bond values.<\/p>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>A junior analyst made a number of mistakes when performing an analysis of Confuzzled, Inc., a soft drink manufacturer as of year-end 2018. The analyst accidentally used the company\u2019s 2017 book value of debt ($200 million) instead of the 2018 book value of debt ($150 million) when calculating relevant financial ratios. The analyst also overstated the company\u2019s marketable securities by $20 million and understated EBITDA by $25 million. All else equal, the correction of which one of these errors on its own will cause a decrease in the analyst\u2019s calculation for Confuzzled\u2019s EV\/EBITDA multiple?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">EBITDA.<\/li>\n<li data-tadv-p=\"keep\">Cash equivalents.<\/li>\n<li data-tadv-p=\"keep\">Book value of debt.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Correctly increasing EBITDA by $25 million would, in fact, decrease the calculated EV\/EBITDA for Confuzzled, Inc.<\/p>\n<p><strong>B is incorrect.<\/strong> In correcting the marketable securities error, cash equivalents would be reduced by $20 million causing a corresponding increase in enterprise value and, therefore, an increase in the EV\/EBITDA multiple.<\/p>\n<p><strong>C is incorrect.<\/strong> The book value of debt should not be used in calculating enterprise value. Thus, the correction should have no effect on the EV\/EBITDA multiple.<\/p>\n<\/blockquote>\n<div style=\"text-align: center; margin: 40px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 20px; border-radius: 999px; background-color: #1a73e8; color: #ffffff; text-decoration: none; font-weight: 600;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Start Free Trial \u2192 <\/a>\n<p style=\"font-size: 15px; margin-top: 12px; color: #555;\">Practice enterprise value multiples and CFA Level I equity valuation questions with AnalystPrep.<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Enterprise value (EV), often viewed as the cost of a takeover, is most frequently determined as market capitalization plus the\u00a0market value of preferred stock plus the\u00a0market value of debt minus cash equivalents and short-term investments. Practice EV\/EBITDA valuation with a&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8],"tags":[],"class_list":["post-1992","post","type-post","status-publish","format-standard","hentry","category-equity","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Enterprise Value Multiples | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Understand enterprise value (EV), its role in takeovers, and the EV\/EBITDA ratio calculation, offering insights into valuation and financial analysis.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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