2 companies with same EBITDA but different time horizon BP
2 same companies A and B with the same EBITDA. One has a 5-year BP and the other a 10-year BP.
Which company has the greater terminal value?
On one hand, if company B has projected over 10 years, it has therefore "lost" 5 years of cash which is not reflected in the terminal value.
On the other hand, in the BP, we make growth hypotheses which can give a higher FCF and therefore, offset this “loss” of cash.
What do you think ?
Before I answer, what does BP stand for?
Business Plan
For a question like this, I think to sound smart you need to address two thing:
1. Exit Multiple & potential risk of Multiple expansion/contraction
2. Timing in relation to cashflows/discount
If a candidate said something like this in an interview I would be impressed:
For one to determine which company has the greater terminal value when EBITDA is equal. one must consider two factors, timing and exit multiple. First we must look at if we think that there will be multiple expansion or contraction in the sector, if so, there is a chance that the one of the terminal values could be significantly different based on market conditions. In this case if we assume that exit multiples are the same, then we can assume that the company with the longer time horizon will be lower due to the increased discount factor.
This answer shows you know what a terminal value is and how to discount it. There is the Gordon Growth Model for calculating the terminal value. Which I would know as well for calculating terminal value
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