Question

DJ is preparing a pitch book for a potential acquisition. The target is privately held and presents considerable opportunities for a purchaser that can make appropriate operational and strategic changes. When running the numbers, which of the following of the target's items would DJ least likely adjust when computing a normalized EBITDA figure?

a. Depreciation
b. Non-recurring expenses
c. Interest expense
d. Operating income

Answer 1

To compute a normalized EBITDA figure, DJ would least likely adjust operating income since EBITDA includes operating income. Adjustments are made to factors such as depreciation, non-recurring expenses, and interest expense to reflect the true earning power of a company.

Step-by-step explanation:

When DJ is preparing a pitch book for a potential acquisition and running the numbers to compute a normalized EBITDA figure, DJ would least likely adjust operating income.

This is because EBITDA already includes operating income; it stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Adjustments made to compute normalized EBITDA typically involve removing non-recurring or one-time expenses, correcting for non-market compensation, and other items that do not reflect the company's ongoing operating performance. So, items like depreciation, non-recurring expenses, and interest expense are often adjusted to reflect the company's true earning power. Operating income is not adjusted because it is already a part of the EBITDA figure.