Explanation

Correct Answer: B

Why B is correct:

1. EBITDA as a proxy for operating cash flow - This is indeed an advantage of the EV/EBITDA multiple. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) serves as a reasonable proxy for operating cash flow because it excludes non-cash expenses (depreciation and amortization) and financing/tax decisions (interest and taxes). This makes it useful for comparing companies with different capital structures, tax situations, and depreciation policies.

2. Why this is an advantage:

   • It provides a cleaner measure of operating performance
   • Allows for better cross-company comparisons
   • Less affected by accounting choices and capital structure differences

Why A is incorrect:

• The EV/EBITDA multiple can be negative if EBITDA is negative, so this is not an advantage. A positive multiple is not guaranteed.

Why C is incorrect:

• EV (Enterprise Value) calculation requires the market value of debt. EV = Market Value of Equity + Market Value of Debt - Cash & Equivalents. Therefore, this statement is factually wrong - the multiple DOES require the market value of debt.

Additional context: The EV/EBITDA multiple is particularly useful because:

• It is capital structure neutral
• It focuses on operating performance
• It's widely used in mergers and acquisitions
• It's less affected by accounting differences than P/E ratios

This question tests understanding of valuation multiples and their practical advantages in equity analysis.