Explanation

When calculating an EBITDA multiplier (EV/EBITDA), the most appropriate numerator is Enterprise Value (EV).

Why Enterprise Value?

• Enterprise Value represents the total value of the firm to all stakeholders (both equity and debt holders)
• EV = Market Value of Equity + Market Value of Debt - Cash and Cash Equivalents
• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a measure of operating performance available to all capital providers
• Using EV in the numerator ensures that the multiple reflects the total firm value relative to its operating earnings

Why not the other options?

• Equity value: This only represents the value to equity holders, not the entire firm
• Market value of debt: This represents only the debt portion of the capital structure

For leveraged firms, EV/EBITDA is particularly useful because it removes the effects of different capital structures and tax rates.