Delgado is interviewing with the Bank of MF for a financial analyst position. The interviewer is interested in knowing whether he understands the EV-to-EBITDA multiple. Delgado explains that the enterprise value is determined by the market value of equity and total debt. He also points out an alternative measure of the enterprise value which considers the free cash flow to the firm. Delgado suggests that we need to subtract the investments on working capital and PPE when calculating the free cash flow to the firm. He further explains the reason we do so is due to the interest tax shield that the investments on working capital and PPE would create. Therefore, by excluding the investments on working capital and PPE, the EV[1]to-EBITDA ratio is not affected by the interest tax shield and is a consistently-defined ratio. Q: Is Delgado’s suggestion on the
Manny Delgado is interviewing with the Bank of MF for a financial analyst position. The interviewer is interested in knowing whether he understands the EV-to-EBITDA multiple. Delgado explains that the enterprise value is determined by the market value of equity and total debt. He also points out an alternative measure of the enterprise value which considers the
Q: Is Delgado’s suggestion on the reason that the investment on working capital and PPE are excluded justifiable? Why?
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