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If one expenses it, then it's EBITDA would be lower because its pre-tax/interest income would be lower, therefore, holding all other things constant, it would have a higher EBITDA multiple since the denominator, EBITDA is lower.
This
Yes, this is less a finance question and more a basic math question...
guys, you are neglecting the impact on EV of both companies.
How do you presume that EV is impacted by these two scenarios?
I am not sure either. I am curious though. Wouldn't the second company have higher CFs i.e. FCF as its Depreciation would be higher.
The formula for EV doesn't include FCF. Btw, I wasn't the one who threw MS at you lol.
It has higher cash flows from lower expenses. Depreciation is a non-cash item.
FarTart: If a company has better cash position, wouldn't that lead to higher market value for its equity ? Ultimately lead to a higher EV ?
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It would be a trivial difference, and frankly not an apples-to-apples comparison. Maybe use EBITDAR when comparing two lease-heavy companies.
Enterprise value of the company that expenses costs immediately instead of depreciating them should be a little bit higher. expenses diminish the taxes that you'll need to pay (tax-shields). Since you get to have these tax shields earlier, they are more valuable (time value of money).
i got this question while interviewing for a top canadian bank today. this was the only technical i was asked. interview was basically, 1. tell us about urself 2. what was your biggest challenge during a particular internship 3. tell me about a time you got constructive feedbacl. 4. above mentioned technical question. if i was to go by your explanation, i didnt get the technical right. so,i guess i won't make it through to final rounds. btw, am engg major with natural resource experience :)
hey guys, I also have a technical interview question. I don't want to make a new thread but I'll post it here.
Two firms with the same EBITDA and growth rate, one is health care consulting and the other is a manufacturer of widgets. You are a bank (secured lender). Which company would you loan money to? (would it be a manufacturer of widgets because they would have more capital assets in case of liquidation for a secured lender?)
Two firms with the same EBITDA and growth rate, one is health care consulting and the other is a manufacturer of widgets. Which would have the higher valuation?
(health care consulting because I assume that field has higher multiples?)
thanks for any help
Assuming margins are also the same (you just said EBITDA so not sure if you were referring to size or margin) yes, the manufacturer would have more collateral support for the creditor in the case of a default. I hate that second question because it is so dependent on the circumstances at the time, but likely it would have higher multiples.
Good lord, this thread is giving me a headache. Why has nobody walked through an example?
Let's start with this:
100 in Assets 20 in Gross Profit 10 of OpEx; only 5 is able to be capitalized
Scenario A (normal non-capitalization)
20 GP - 10 OpEx = 10 EBITDA
100 EV / 10 EBITDA = 10x EBITDA multiple
Scenario B (capitalization of 1/2 OpEx)
20 GP - 5 OpEx = 15 EBITDA
105 EV / 15 EBITDA = 7x EBITDA multiple
In other words, because you are capitalizing some of the OpEx, you are going to have higher EBITDA at present, but it will be trading at a lower value because the same amount needs to be applied to the asset side of the balance sheet, thus increasing EV.
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