A company has a $300 million unfunded pension obligation. The pension expense in the income statement is $25 million, composed of $15 million service cost (within SG&A) and $10 million interest cost (below EBITDA). Walk through the sequence of adjustments to bring this liability into the EV bridge and explain the interaction with EV/EBITDA.

First, the unfunded obligation itself: I would add it to EV, tax-effected. Assuming a 25% tax rate, I add $225 million ($300m × (1–0.25)). This reflects the debt-like obligation to make future pension contributions, reduced by the tax deduction those contributions will generate.

Now, the service cost of $15 million is included in SG&A, so it is inside EBITDA. The interest cost is below EBITDA and does not affect it. By adding the after-tax liability to EV, I am implicitly claiming that EBITDA only covers service cost operationally, but the full obligation is a capital claim. However, EBITDA already absorbs the service cost each year, so there is a slight mismatch: EV includes the full unfunded liability, but EBITDA only “suffers” from the ongoing service cost, not the full liability. To be strictly consistent, I would add back the service cost to EBITDA (creating an adjusted EBITDA) only if I want to treat the pension obligation as fully debt-like, but in practice this is rarely done because service cost is typically small and recurring. Most practitioners simply add the net liability to EV and leave EBITDA as is, noting that the multiple is slightly conservative (higher EV relative to EBITDA).

For a more precise multiple, I might consider using EV/EBIT or EV/EBITDAR, where the pension interest cost would be above the line? That would also be inconsistent because interest cost is financial, not operating. The cleanest approach is to remove the pension plan entirely from both sides by converting it to a separate asset/liability valuation, but that is rarely done in comps.

Follow-up pressure:

• How would your answer change if the pension obligation were fully funded (surplus)? Where would that asset sit?
• If the service cost was a large, non-recurring settlement charge, would your answer change?
• In a DCF, how would you treat the unfunded pension compared to its treatment in a multiples analysis?