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    A company has $100M in revenue, 20% EBITDA margins, and trades at 8x EV/EBITDA. If margins expand to 25%, what happens to the enterprise value assuming the multiple stays constant?

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    Current EBITDA = $100M × 20% = $20M
Current EV = $20M × 8x = $160M

New EBITDA = $100M × 25% = $25M
New EV = $25M × 8x = $200M

The enterprise value increases from $160M to $200M — a $40M (25%) increase. This illustrates a key concept: margin expansion is a powerful value driver. Even though margins only rose 5 percentage points, the percentage increase in EBITDA (and therefore EV) was 25%, because the base shifted from $20M to $25M. This is why PE firms focus heavily on margin improvement in their portfolio companies.

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