a) Explain why net income may be (or not) a standard by which every company’s value...

a) Explain why net income may be (or not) a standard by which every company’s value and risk can be compared.

b) How is EBITDA dependent on the depreciable lives of assets?

Expert Solution

a) Net Income may not be a sole criterion to decide the company,s value and risks associated. Fo calculating the value of a comapny you also need to ascertain what is the cost of capiatl involved and what is the rate of return based on the investments deployed. Therefore net income can be used to derive the value of a company but only based on that you can not depict the true value of the company.

For calculating risks involved for the company you have to consider the leveraage level an various coverage ratios like interest coverage ratio, DSCR Ratio. Debt- Eqity ratio. Beta of the levered equity etc.

Thus by net income alone the value of company and risks associated can not be compared.

b) Depreciable live determined the depreciation rate of asset and accordingly depreciation is arrived for the business assets. But since depreciaton is not considered while calculating the EBITDA. The depreciation or depreciable lives indirectly have no impact on the EBITDA.

Thus EBITDA is independent of depreciable lives.

ekkarill92 answered 1 year ago

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