comparing companies with significant differences in capital structure.

CFA Level I
#1

Which of the following multiples is most useful when comparing companies with significant differences in capital structure.

A. Ev/EBITDA

B. price to book value

C. Cprice to cash flow ratio

and why?..they chose EV/EBITDA

#2

An advantage of this multiple is that it is capital structure-neutral, and, therefore, this multiple can be used to directly compare companies with different levels of debt

#3

If you think about answers B and C you’ll realize that they’ll change with significant changes in capital structure. For B, book value will be considerably lower for a company with high debt and low equity than for a company with low debt and high equity. For C, cash flow will be significantly lower for a company with high debt than for a company with low debt.

For A, enterprise value won’t change with a change in capital structure (the sum of debt and equity will remain unchanged), and EBITDA won’t change with capital structure (because it doesn’t have interest subtracted).

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