Chartered Financial Analyst (CFA) Level 1 Practice Exam

How is EBITDA per share determined?

1. CFO - preferred dividends

2. EBITDA / average outstanding common shares

3. Dividends Paid / number of shares outstanding

4. FFO / Total debt

The correct answer is: EBITDA / average outstanding common shares

EBITDA per share is calculated by taking EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and dividing it by the average number of outstanding common shares during a specific period. This metric provides investors with a measure of a company's operational profitability on a per-share basis, allowing for easier comparison between companies irrespective of their capital structure. Using EBITDA is beneficial because it focuses on the earnings generated from core operations, excluding the effects of financing and accounting decisions that can obscure true performance. By incorporating the total number of shares outstanding in the denominator, EBITDA per share offers insights into how much of the earnings are attributable to each share, facilitating a straightforward calculation for investors assessing company value. The other options do not relate to EBITDA per share specifically. For example, operating cash flow and preferred dividends would not yield EBITDA, while dividends paid divided by shares outstanding provides a different measure focused on income distribution, rather than operational profitability. Similarly, funds from operations divided by total debt pertains to different financial ratios that assess company cash flow relative to its leverage, rather than share-based performance metrics.