When doing a DCF and you are calculating Terminal Value using an EBITDA multiple, I understand that you have to take the multiple and multiply it by the final year EBITDA. But my question is do you have to discount that number? Or do you just add it to the present value of the other 5 year cash flows? And if you do discount it, how do you go about doing that?
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If you are doing a multiple of a future EBITDA, you discount it back to the present. Although I would question why you are using an EBITDA multiple vice a FCF multiple.
Not sure either, it just says find the terminal value using a Terminal EBITDA multiple. But how would I discount this number?
you'd discount it with whatever your discount rate was for the future cash flows (so either WACC or Cost of Equity)
Right. But for year 1 the discount is: (1+WACC)^1 and year 2: (1+WACC)^2...and so on to year 5, but what would you be dividing by for the terminal value?
you''d discount it by the same number as your final year of projected FCF
You use the mid year convention for the interim cash flows (years 1-5, is year 1 is 0.5, year 2 is 1.5, etc because cash flow usually comes in through the year) so then the terminal would just be discounted at +0.5 more than the last projection year (if 5 years then year 5 is 4.5 and TV is 5).
Really? At internships I've had the terminal value would be discounted the same as the final year of FCF projection
Edit: I just checked the models too, and yeah they're the same
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