Which valuation multiple is stated as taking financing structure into account?

• A. Ebitda multiples
• B. P/E multiples
• C. Revenue multiples
• D. Free cash flow multiples

Answer: (A)

The main idea is that enterprise-value based valuations reflect the whole capital structure of a company. Using an enterprise value numerator means the multiple incorporates both debt and equity, so leverage affects the value you’re assigning. EBITDA, being earnings before interest and taxes, isolates operating performance from financing decisions, but because you divide by EBITDA using enterprise value, the leverage (how much debt the company has) shows up in the multiple. In other words, increasing debt raises enterprise value, which pushes up the EV/EBITDA multiple, even if operating earnings stay the same. That’s why this type of multiple is described as taking financing structure into account.

P/E multiples rely on equity value and net income after interest and taxes, so they reflect financing effects through interest costs and tax shields but in a different way and aren’t the same instrument for comparing capital structures. Revenue multiples look only at top-line sales and ignore financing and operating costs, so they don’t capture leverage effects. Free cash flow multiples can be used in a way that’s sensitive to capital structure, but the standard and most direct way to fold financing in is to use enterprise value in the multiple, hence EV/EBITDA.