Referring to reading 37 here, for the EV/EBITDA multiple, why is this positively related to the growth rate in FCFF and EBITDA? I don’t see how it connects.
JJ1337
April 10, 2014, 9:52am
#2
Which page exactly in the CFAI book?
Volume 4, page 436, under 'Valuation Based on Forecasted Fundamentals".
JJ1337
April 10, 2014, 3:52pm
#4
Ah, I see.
Find the answer here (p. 15, 29): http://pages.stern.nyu.edu/~ekerschn/pdfs/readingsemk/EMK%20NYU%20S07%20Global%20Tech%20Strategy%20Valuation%20Multiples%20Primer.pdf
and here:
Going\_for\_CFA\_and\_ACCA:
To justify an EV / EBITDA multiple, the text mentions that the fundamentals drivers of this ratio are WACC, expected sustainable growth in FCFF, and ROIC. It doesnt show the derivation but I asumme it is based on the Firm Value formula: FCFF (1+g) / (WACC - g). Assuming firm value and enterprise value are the same concept, we can divide bother sides by EBITDA to get an expression for EV / EBITDA.
EV / EBITDA = (FCFF / EBITDA)(1+g) / (WACC - g). I am not sure of the role played by ROIC in this foumula, I assume it has something to do with the ratio of FCFF / EBITDA, which is the portion of pre-interest earnings that is availble for distribution to all providers of capital. If ROIC increases, then the portion of ROIC that is FCFF increases which increases EV / EBITDA.
(http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91309922 )