DCF Disparity between methodologies...Help
Hi All, I have a question about the disparity between the perpetuity DCF output vs. Exit Multiple outputs. I did a DCF and they are very different and wanted to know, is this normal? Or if they should be within a certain range of each other? For instance, the closing price on the stock was $77.83, and perpetuity methodology =$508.01, giving it a -85% discount or margin of safety, this seems off. Exit Multiple (assuming no multiple expansion) = $68.15 or 14% premium, seems closer. WACC plays a big role and it seems like the lower the WACC the bigger disparity while including things like inflation and margin of safety to the Cost of Equity → WACC seems to create a closer convergence. Any thoughts? Thank you! Regards, Michael Ballard
One way to check to see what the difference implies is the following:
Take your terminal value generated from perpetuity method and divide by the terminal year EBITDA (assuming you’re using EV/Ebitda for multiple). This will show you what multiple is being implied by your perpetuity method.
Another check:
You can also goal seek your perpetuity growth percentage by setting the terminal value equal to the multiples method and solving for perpetuity growth. This will show what PGR you’re assuming for your multiples method
Then consider adjusting PGR or re-evaluate the comps you're using for your multiple if the difference between the methods seem to be way off.
Thank you very much for the help! That seems intuitive enough.
Regards,
Stock trading at 77-78 that is worth $500? Sounds like a steal.
Nice and Defensive margin of safety for sure
What WACC are you using and what exit multiple are you using
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