Why can't you use Equity Value/ EBITDA as a general valuation multiple?

Why can't you use Equity Value/ EBITDA as a general valuation multiple?

• A. Equity Value is available to all investors, while EBITDA is only available to equity holders
• B. EBITDA is available to all investors; Equity Value is only to equity holders
• C. EBITDA is affected by financing decisions
• D. Equity Value excludes taxes

Answer: (B)

Think of what each number represents. EBITDA is an operating cash-flow proxy that reflects performance before any financing decisions or taxes and is accessible to all capital providers (both debt and equity holders). Equity Value, on the other hand, is the residual claim of shareholders after debt and taxes are accounted for. If you divide Equity Value by EBITDA, you’re mixing a claim that depends on financing and taxes with an operating metric that ignores them. That makes comparisons across companies with different capital structures unreliable. That’s why the standard practice is to use enterprise value (value to all providers) divided by EBITDA rather than Equity Value divided by EBITDA. The other options misstate who can access EBITDA, how financing affects EBITDA, or how taxes relate to equity value.

Think of what each number represents. EBITDA is an operating cash-flow proxy that reflects performance before any financing decisions or taxes and is accessible to all capital providers (both debt and equity holders). Equity Value, on the other hand, is the residual claim of shareholders after debt and taxes are accounted for. If you divide Equity Value by EBITDA, you’re mixing a claim that depends on financing and taxes with an operating metric that ignores them. That makes comparisons across companies with different capital structures unreliable. That’s why the standard practice is to use enterprise value (value to all providers) divided by EBITDA rather than Equity Value divided by EBITDA. The other options misstate who can access EBITDA, how financing affects EBITDA, or how taxes relate to equity value.