How do you pick a multiple in DCF terminal value calculation (multiples method)
I am preparing for the interview this week.
I know with the multiples method, you assume that a company will be sold for a certain multiple at the end of your projection period (let's say it is 5.
You take the company's projected EBITDA at Year 5. I know you would look at public comps. Do you look at the current multiples of comparable companies or do you project the 5th year's multiple for the comps?
Hope anyone could help me.
You will never have multiple in 5 years. Conservatively you can assume terminal multiple=current multiple. It is okay if you have advanced knowledge about multiple expansion (i.e. 8x to 10x) but it rarely happens.
Thank you!
Quick Question Regarding DCFs (Originally Posted: 12/27/2015)
In the near future (projection period) if I were to use the levered cash flow instead of the unlevered cash flow, I'd use the cost of equity to discount the projected cash flows to determine the equity value.
My question is regarding the calculation for the terminal value, the equity value for the far future.
First, can I still use the Gordon Growth Method like I would normally with an 'unlevered DCF analysis?'
Second, if I'm using the multiples approach (still for terminal value), I need to use metrics what are not capital structure neutral like the P/E ratio correct? If I were to use metrics like EV/EBITDA or EV/EBIT, that wouldn't be correct right?
Third, in practice, how frequently is a DCF done using unlevered cash flows vs levered cash flow?
Thank you to all :) Merci à tous :)
I've never seen levered free cash flow DCF in any valuation model, not sure why you would take this approach versus traditional unlevered fcf and take into account the impact of leverage in the discount rate. If you want to piece meal the equity and the debt, you could do the APV valuation DCF methodology which I think is more accepted on the street, well at least taught in b-school. And yes, you would have to use a p/e ratio that is sensitive to the cap structure of your comps, further diluting your analysis unless you had a sold p/e. You can also use the GGM for equity since it's essentially what was used to value equity to begin with in perpetuity.
You can do a levered DCF and still use an EBITDA multiple at terminus, you just have to reduce net debt at terminus and then discount that at your COE for PV of TV.
Logical explanation in a concept of DCF (Originally Posted: 09/03/2013)
Does it make sense to not re-lever beta for a company because you want to argue that it doesn't face similar business risk as its competitors, but you use the average of EBITDA multiple from comparable analysis when you calculate terminal value of DCF?
Seems like it would contradict the theory that you don't think it faces similar risks but you would use the average EBITDA multiple.
If anyone can contribute that would be great. Thanks!
Typically if your comps don't have similar enough (enough being the key word here) fundamental business risk, then you must not have selected the right set of comps. One expects companies in the same industry with a similar product mix to be affected by similar risk factors and thus have an unlevered (asset) beta in a certain range. What kind of company are you valuing? Does it have a highly unique, niche product? If so you might have to look a little harder (or get more creative) in your comp set selection.
But to answer your original question, yes I think it would be a bit odd theoretically speaking to use the average EBITDA multiple for terminal value if your claim is that your company has fundamentally different business risk from its comps. Remember that multiples are really factors of 3 things - growth, profitability and risk, and so ideally speaking a good comp set should be able to tell you something about both valuation (multiples) and risk (betas).
Now note that business risk is not the same as overall risk of the company. Overall risk is a function of the business risk AND the capital structure (that is why you must relever the target company after you unlever its comps)
How do you decide on a multiple? - Technical question (DCF) (Originally Posted: 01/12/2012)
When you're doing a DCF, a common way to project into the future is to use a terminal. One is the EBITDA multiple. Which can be something like 7x, 8x, 9x, etc.
How do bankers decide what the multiple should be (ie 7,8,9, or whatever)?
Which ever makes the deal look best.
Comps?
Whats your question? The terminal value should just the perpetuity of cash flows in the stable growth period.
Ideally, you'd be looking at how market is valuing comparable companies and/or any precedent transactions in the space
In actuality, as an analyst you'll stick in a number your VP or MD gives you
Everything above is correct. Typically we'll put together comps (prev. trans and market) for the targets peer group, calc the mean, median, max and min to arrive a multiples (usually just use the mean, but always defer to what your senior guys want to use or just use your brain / common sense in a pinch). Usually whatever multiple you take away from that could be you're base multiple for your sensitivities.
The multiples are for the 5th or in some cases the 10th year, so do we take the median EV/EBITDA multiple of comparables as calculated from today figures? Or some expected multiple in 5 years?
At my bank, we use Capital IQ to develop a list of precedent transactions and public company comparables. From there, we use excel to spread key financials (ie EV/Revenue, EV/EBITDA, EV/EBIT, P/E, etc.). We also set up a Min, Max, Median, Mean box that is calculated based all of the multiples the provided. Typically, you then "put a finger in the air" based on the Median/Mean #s and the most comparable companies/transactions and say "OK, the mean is 1.5x EBITDA multiple, but the best comparables are at around 2.0xE EBITDA multiple...OK, lets put down 1.8x!) -- Then you go to the client, show them your analysis and, since they know the industry, will say WOW those #s are HUGE and you say "OK, we will use lower multiples" and they say good! "then you say OK, lets use 1.2X instead! WOOHOO!
Terminal value DCF methodology (Originally Posted: 05/12/2010)
I know EBITDA terminal/exit multiples are commonly used in practice. Perspectives on:
1) NOPAT / k
2) FCF / (k-g)
3) EBITDA multiple
net net working capital X 5
You both forgot about the core driver of terminal value in DCF methodology: note from MD with magic number.
DCF Terminal Value - Taxed (Originally Posted: 04/29/2014)
Why isn't the EBITDA multiple method terminal value in a DCF model taxed like the discreet cash flows are? While the CF stream is not operating cash flow like the discreet CFs and its basis is unknown, the lack of a tax assumption appears to be mixing apples/oranges and overstating current value. Thoughts?
You're still getting to the same place (EV), so...
Maybe I'm missing something here, but the EBITDA multiple gives you a value estimate that factors in that the profitability metric is before taxes. In other words, if the average/median of other market deals is 8.0x, that means the EV was 8.0x pre-tax, pre-interest, pre-depreciation, and pre-amortization earnings for other companies.
I suppose you could take out taxes, but then the starting point for comparable multiples you would use as a baseline would technically be EBIDA (never heard of using that though).
DCF multiples (Originally Posted: 11/08/2015)
Guys,
A short one,
In my model I have come up with the EV based on discounted FCFs from 2015 to 2019. In order to calculate the EV/EBITDA multiple, I'm using the EBITDA for 2015E to the EV discounted.
I recently read a post that I should use the 2014A EBITDA in order to calculate EV/EBITDA, this makes me unsure about which one to use. Anyone?
/ Jakob
What you are referring to is a "foward EV/EBITDA" multiple which is pretty much never used because it depends entirely on your own inputs. So no, don't use your projected EBITDA for your EV/EBITDA multiple...Use the LTM EBITDA for comparability's sake when you do spread your comps.
Let me rephrase: what if I want to calculate EV/EBITDA when EV is based on cash flows from 2015E to 2019E?
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