Why is it incorrect to use enterprise value and net income in a multiple?

The correct choice highlights that enterprise value and net income capture cash flows differently for different groups. Enterprise value is a measure that reflects the total value of a company, including its equity and debt, and is useful in evaluating total capital invested in the business. This value is concerned with all stakeholders, including both equity and debt holders.

On the other hand, net income is a measure that only considers the profits available to equity shareholders after accounting for expenses, taxes, and interest. This specific focus on equity distorts comparisons when using net income in relation to enterprise value, as it only represents a part of the overall financial picture the enterprise value encompasses.

Since enterprise value pertains to the complete value of the firm as a whole, while net income looks solely at the profits attributable to shareholders, they are inherently different measures that are not directly comparable in multiple calculations. Using them together could lead to misleading conclusions about the company's performance or valuation. This misalignment in what each metric represents is key to understanding why the choice is correct.