Valuation · Relative Valuation
Leverage Effects On EV/EBITDA
Should two otherwise identical companies with different leverage ratios trade at different EV/EBITDA multiples?
Interview question
- Difficulty
- Easy
- Topic
- Valuation
- Subtopic
- Relative Valuation
What this question trains
This problem tests whether you understand how relative valuation isolates operating performance from capital structure. EV/EBITDA is designed to compare the value of a business before financing effects, so candidates need to think through why leverage usually has less impact on this multiple than it would on equity-based valuation measures. Interviewers ask this because they want to see that you can explain how enterprise value and EBITDA each remove different parts of the capital structure and why, even so, financing mix can still influence valuation through risk and cost of capital considerations.