Free Cash Flow to the Firm = EBIT (1-t) - Net Cap Ex - Change in Working Capital = 3356(1- 0.36)+ 1100-2500- 250 = $498 million $ Value Correct Multiple FCFF $498 31.28382355 EBIT(1-t) $2,148 7.251163362 EBIT $3,356 4.640744552 EBITDA$4,456 3.49513885 Aswath Damodaran 78
valpacket2.ppt - relval.pdf 79 of 1582/11/2014 4:59 PM Reasons for Increased Use of Value/EBITDA 1.The multiple can be computed even for fi rms that are reporting net losses, since earnings before interest, taxes and depreciation are usually positive. 2.For fi rms in certain industries, such as cellular, which require a substantial investment in infrastructure and long gestation periods, this multiple seems to be more appropriate than the price/earnings ratio. 3.In leveraged buyouts, where the key factor is cash generated by the fi rm prior to all discretionary expenditures, the EBITDA is the measure of cash fl ows from operations that can be used to support debt payment at least in the short term. 4.By looking at cash fl ows prior to capital expenditures, it may provide a better estimate of “ optimal value ” , especially if the capital expenditures are unwise or earn substandard returns. 5.By looking at the value of the fi rm and cash fl ows to the fi rm it allows for comparisons across fi rms with different fi nancial leverage. Aswath Damodaran 79
valpacket2.ppt - relval.pdf 80 of 1582/11/2014 4:59 PM Enterprise Value/EBITDA Multiple The Classic De fi nition Value EBITDA = Market Value of Equity + Market Value of Debt Earnings before Interest, Taxes and Depreciation The No-Cash Version EnterpriseValue = Market Valueof Equity + Market Valueof Debt - Cash EBITDA Earningsbefore Interest, Taxes and Depreciation Aswath Damodaran 80
valpacket2.ppt - relval.pdf 81 of 1582/11/2014 4:59 PM Enterprise Value/EBITDA Distribution – US Aswath Damodaran 81
valpacket2.ppt - relval.pdf 82 of 1582/11/2014 4:59 PM Enterprise Value/EBITDA : Global Data 6 times EBITDA may seem like a good rule of thumb.. Aswath Damodaran 82
valpacket2.ppt - relval.pdf 83 of 1582/11/2014 4:59 PM But not in early 2009... Aswath Damodaran 83
valpacket2.ppt - relval.pdf 84 of 1582/11/2014 4:59 PM The Determinants of Value/EBITDA Multiples: Linkage to DCF Valuation The value of the operating assets of a fi rm can be written as: FCFF 1 EV 0 = WACC-g The numerator can be written as follows: FCFF = EBIT (1-t) - (Cex - Depr) - Working Capital = (EBITDA - Depr) (1-t) - (Cex - Depr) - Working Capital = EBITDA (1-t) + Depr (t) - Cex - Working Capital Aswath Damodaran 84
valpacket2.ppt - relval.pdf 85 of 1582/11/2014 4:59 PM From Firm Value to EBITDA Multiples Now the value of the fi rm can be rewritten as, EBITDA (1- t) + Depr (t) - Cex - Working Capital EV = WACC-g Dividing both sides of the equation by EBITDA, EV (1- t) EBITDA = WACC-g +
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- P/E ratio, PEG ratio, Aswath Damodaran, relval.pdf http://people.stern.nyu.edu/adamodar/pdfiles/ovhds/inv2E/relval.pdf