DCF Multiples method

Question

I don't conceptually understand the multiple method.

What does it mean to "assign a ratio such as EV/EBITDA from a comparable company to determine the terminal value". I think the wording is confusing me.

Can someone give me an example?

Lets say:
A comparable company has a EV/EBITDA ration of 8X - then what?

Finance Bueller · Accepted Answer

By using comparable companies, you are looking at current valuations from companies engaging in similar lines of business. The rationale behind this being, by looking at the similar companies and finding an average/median valuation metric (EV/EBITDA) between them, you would be able to use that particular metric in order to value the business you are looking at.

Synergy_or_Syzygy · Answer

If you're having trouble with some of the basic concepts behind ratios, you may be studying at a level a bit too high -- rather than studying interview guides and formulas, I would recommend something like a textbook or introductory online course to finance (such as the Wharton Coursera free course or such).

BBA18 · Answer

This is going to sound ridiculous, but it'll cut through your confusion with the verbiage.

Turkey is $5/pound and chicken is $7/pound - you are trying to figure out what a pound of pork is worth and you think pork is similar to chicken and turkey, so you decide it's worth $6/pound, assigning the average per-pound multiple of comparable deli meats.

EV/EBITDA is essentially just doing the same thing with a stream of cash flows.

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DCF Multiples method

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DCF Multiples method

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