Hi All.
So I know that in a DCF you use comps multiple average as the terminal multiple for your modelling target. I'm just wondering if we should use forward-looking multiples or current multiples? If we use forward-looking, should we use the one after 5 years to match with the time that DCF projects?
Thanks.
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Well, no, you use a multiple that you feel is appropriate.
There's no correct answer. On the one hand, using current multiples -- which embed growth assumptions -- for an EBITDA figure 5-10 years out is a bit of double-counting of growth and will likely generate too high a value. On the other hand, cutting the multiple too much will result in too low a value as you are already discounting back your terminal year value. It really depends on the company and/or industry.
I also think you are misunderstanding forward multiples. When you see a 7.5x 2017E multiple, for example, that is not a prediction of what the multiple will be in a year -- just a representation of what you are paying today for future earnings. That's different from choosing an exit multiple, where you are making a guess as to how the market will value a company in x years based on its continued growth and margin potential at that time.
mrb, thanks for the response. So what is the most common way on the Street to come up with a terminal multiple? Use the "appropriate" multiple seems a bit general..
You will see it done with either LTM ("Current") or forward 1 year multiples. As long as your multiples match you are ok (that is, you are calculating terminal value off of LTM EBITDA and LTM multiple, or forward EBITDA and forward multiple). If they dont match you'll get roasted
so when you use a LTM multiple for the terminal value, do you discount it like with the gordon growth model or not?
What's the difference between a forward multiple and a present multiple? Is there such a thing as a current multiple? Sorry for stupidity...
Current
Use LTM EBITDA multiple for the EMM
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