2. EBITDA

3. EBITDA What is EBITDA? – Earnings Before Interest, Taxes, Depreciation and Amortization Why is it used? – To evaluate the raw earnings power of a company Why is “raw earnings power” important? – To perform certain types of valuation

4. What is Valuation used for? Mergers, Acquisitions, and Leveraged Buyout Analysis Real-Estate Investments Comparing Companies within or across industries General Securities Analysis

5. How to Get EBITDA Revenues - Costs (COGS, SG&A) = EBITDA Ignores secondary costs like financing charges, taxes, and non-cash costs like depreciation and amortization Take Viacom, Inc: 5,954.4 (Revenue) - 3,887.6 (COGS) - 1,109.9 (SG&A) = 956.9 (million) - EBITDA What about “ITDA”? 397.1 (Depr.&Amort.) + 209.1 (interest exp) + 202.4 (taxes) = 808.6 (million)

6. Common Applications of EBITDA Discounted Cash Flow Valuations – A multiple of EBITDA can be used to calculate terminal value Acquisition, Merger, and LBO valuations – An LBO buyer looks to pay back all cash for the buyout within six years, so they try not to pay over 5x EBITDA for the company being bought

7. Where to go from here… EBITDA ratios… – EBITDA / Interest Expense (a variation of interest coverage ratio) – EBITDA / Sales – Variations: EBIT, EBITA Applying Enterprise Value / EBITDA