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At first glance, the term Time Value might not seem all that meaningful, but the idea behind is actually quite simple.Time Value is the portion of an option’s price that reflects the possibility that the option’s value could change before it expires. It’s the difference between the option’s market price and its intrinsic value, and it exists because there’s still time for the underlying asset’s price to move. How Does Time Value Work and How Is It Calculated?Time Value plays an important role when it comes to options. An option is a contract that gives you the right (but not the obligation) to buy or sell a stock or another security at a set price in the future.These contracts already have a value today, even if they only become active later. One part of that value is the Time Value. It shows how much the option is worth right now because there’s still time left. During that time, things like the stock price can still change.Another part of the option’s price is the intrinsic value. That tells you how much profit you’d make if you used the option immediately. If there’s no profit today, the intrinsic value is zero. In that case, the entire price of the option comes from the Time Value.The Time Value can be calculated as follows:Time Value shows you how much you're currently paying for the “possible future” – in other words, for the chance that the price will still change and you might make a profit later on. The less time there is until the option expires, the smaller that chance becomes. That’s why the Time Value gets smaller over time. This is called Time Decay. Example on How to Calculate the Time Value:Let’s say you have an option that lets you buy a stock for 100 € in three months. Today, the stock price is 95 €. That means you wouldn’t make a profit right now. In fact, you could buy the stock cheaper on the market than through the option. So you wouldn’t exercise the option today. The intrinsic value is zero.Still, the option costs, for example, 5 €. Why? Because in the next three months, the stock price might go up – maybe to 110 € or even more. Then the option would become profitable, since you’d still have the right to buy the stock for 100 €. That possibility is what you’re paying for. These 5 € are the Time Value.The closer the option gets to its expiration date, the smaller the chance of such price moves – and the smaller the Time Value becomes, until it eventually disappears completely if the option isn’t used. Why Is It Important to Understand Time Value?Now you know what Time Value is, how to calculate it, and why it can be useful in general.If you understand Time Value, it can help you make smarter decisions when dealing with options and other financial products. You’ll be better able to judge whether a purchase is worth it and whether the price is fair.Let's take a look at three key advantages of knowing how to calculate Time Value:You understand how an option’s price is built – what part is based on its current value and what part comes from the potential future.You can better decide whether buying an option is worth it or if it’s too expensive for what it actually offers.You see how much you’re paying for time and opportunity, and you can judge whether the risk is right for you or not. Typical Finance Interview Questions About Time Value (And How to Answer Them)Interviewers at investment banks or other companies in the finance industry often want to make sure you understand key financial concepts and Time Value is definitely one of them.So, let's take a closer look at three common questions you might get, along with ideas on how to answer them:What’s the difference between Intrinsic Value and Time Value in an option?The Intrinsic Value shows the profit you’d make if you exercised the option right now.The Time Value is the part of the option’s price you pay for the time left, because the stock price might still move in your favor before the option expires.Why does the Time Value of an option go down over time?Because with each passing day, there’s less time for the stock price to change. Less time means fewer chances to make a profit, so the Time Value shrinks.Can an option have time Value Even if it has no Intrinsic Value?Yes, it can. For example, if a call option lets you buy a stock for 100 €, but the stock is only worth 95 € today. You wouldn’t exercise it now, so the intrinsic value is zero. But the price might still go up, and you’re paying for that possibility. That’s the Time Value.👉 You can practice these and many more question sets in our Case Library– feel free to check it out!

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It reflects a company’s earnings before taking into account interest payments, tax expenses, and non-cash items like depreciation and amortization. You can think of it as an extended version of EBIT that excludes all depreciation-related costs.The idea behind this: depreciation and amortization are non-cash expenses and often influenced by accounting methods, assumptions, or company policies. By stripping them out, EBITDA aims to provide a clearer picture of a company’s ongoing operational performance, regardless of how much has been invested or how assets are accounted for. How EBITDA Is Used in PracticeEBITDA is commonly used as an indicator of operating performance before investment and financing effects come into play. It helps to:Compare companies of different sizes, industries, or regions.Assess how much profit is generated from core operations (before interest, taxes, or capex).Serve as a base for valuation metrics such as the EV/EBITDA multiple.Analyze the profitability of business models (especially in capital-intensive industries).An example: Imagine two companies each report €100 million in EBIT. One of them has €50 million in annual depreciation (due to heavy investments in machinery), while the other only has €10 million. Based on EBITDA, both companies appear equally profitable because depreciation is ignored. This can be both an advantage and a risk: EBITDA shows "adjusted" profitability, but also leaves out real costs.That’s why in private equity and investment banking, EBITDA is often used as a starting point for valuation models. Just keep in mind: EBITDA is a purely accounting-based figure and not an actual cash flow metric! Where to Find EBITDA in Financial Statements?EBITDA, like EBIT, is not always directly listed in the income statement. However, many companies (especially publicly traded ones) disclose it in the notes or the management analysis or discussion.If you want to calculate it yourself, here's how:Start with the operating profit (this is usually shown in the income statement).Add back interest and tax expenses to arrive at EBIT.Then add back depreciation and amortization, including:Depreciation of tangible assetsAmortization of intangible assetsYou’ll often find the necessary figures in the notes to the income statement or in the cash flow statement. Look for terms like "Depreciation", "Amortization", or "D&A". What’s the Difference Between EBIT and EBITDA?As you now know, EBITDA shows how much a company earns from its core business before interest, taxes, and depreciation. EBIT, on the other hand, already includes depreciation and amortization, so it reflects a more realistic view of the actual operating profit after accounting for investment-related costs.EBITDA is great when you want a quick, comparable view of operational strength, especially across companies with different investment levels or accounting treatments. But if you want to understand the true profitability, taking into account the wear and tear of assets and other investment costs, EBIT gives you a more complete picture.To make the comparison even easier, we’ve summarized the key differences in this table: Common EBITDA Questions in Finance InterviewsIf you’re preparing for finance interviews, make sure you understand what EBITDA means, how to calculate it, and where its limitations lie. Typical interview questions include:Why isn’t EBITDA a real cash flow metric?Cash flow means actual money moving in or out of a business. EBITDA is just a calculated figure– it doesn’t include things like investments or changes in working capital, so it doesn’t show how much cash is truly left over.When is EBITDA more useful than EBIT?EBITDA makes more sense when companies have big differences in investment levels or depreciation. It shows profits without those effects, making it easier to compare businesses across different industries.What are the risks of using EBITDA?EBITDA can paint an overly positive picture because it ignores real costs like depreciation of equipment. That’s why it should never be looked at alone – always use other metrics too.Why is EBITDA often used in private equity?Private equity investors want to see how profitable a company’s core business is, without being affected by taxes, debt, or investments. EBITDA is a quick way to get that first impression.Where can I find the data to calculate EBITDA in a financial report?You’ll usually find depreciation and amortization info in the notes to the income statement or in the cash flow statement. Look for terms like “Depreciation,” “Amortization,” or simply “D&A.”👉 You can practice these questions with our case question sets. Check them out!