Exit-EBITDA DCF Approach
When modeling a DCF, I have always used both the Exit-EBITDA and Perpetuity Growth methods as a way to calculate terminal value. But, the more I think of the Exit-EBITDA multiple approach, and what it exactly is doing, I get sort of confused.
If Company A's terminal year has EBITDA of $50 Million, and I calculated an Exit EBITDA multiple based on Company A's peers of 6x, then theoretically my terminal value of Company A would be $300 million. What I really don't understand is, why is that just the value of the terminal value and not the value of the Enterprise Value? Obviously on a relative valuation standpoint, taking a comp multiple and applying it to your target's EBITDA in that period should give you the value of is EV. So why is it different for a DCF, that by doing that exact same practice, that just gives you the value of your TV. Which, is the sum of cash flows out into perpetuity beyond your terminal year. How exactly does that equate, and why is it that this would solve to be the sum of all cash flows out into perpetuity after, say terminal year 5, and why is that number any different than calculating the company's EV in that given period?
On the difference between TV and EV:
Because you're valuing the company today. Let's say your terminal value is in 10 years time, so you get your multiple, apply it to EBITDA in 10 years, and you have what the company is worth in 10 years time. You then discount that back to today to get PV.
In addition, between now and 10 years time, the company will have (hopefully) made money, so there is value there as well - that's why you discount all the FCF in your forecast period to present value.
Wasn't really able to follow the rest of your post, sorry. Are you asking why exit multiple / perpetuity growth methods are considered to be interchangeable for calculating TV in a DCF?
Bingo. It is the TV, just in X years time. Between now and X years, the company generates FCF (or at least we hope) and thus that needs to be taken into consideration. Of course we also need to discount the TV in X years time to today.
Perspiciatis repellat earum vero quibusdam. Veritatis vero possimus minus architecto. Error ut ipsum aut atque. Et aut doloremque dolores quae vel. Voluptas eaque et est dolores eligendi corporis repudiandae quis. Ea quasi saepe et ad eum. Animi eius molestias est et accusantium dolores.
Incidunt expedita quisquam distinctio. Dolorem inventore et consectetur dolore assumenda. Autem distinctio ut libero ipsa quam ratione veniam. In aut adipisci eos non numquam porro accusamus.
Molestiae suscipit est reiciendis qui ea neque. Fuga voluptatum aut nihil voluptas et. Et ut et et a culpa.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...