Can anyone help me understand why in a DCF you use a tax-effected FCF number for the projection periods and then a non-tax-effected EBITDA for the terminal value calculation? Have always been confused by this. Any clarity on this would be greatly appreciated.
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EBITDA is a pre-tax number, so whatever comps you are using to choose your EBITDA multiple are reflective of the market's knowledge that cash flows will be less than that EBITDA
In a DCF your fcf forecast is your best guess as to how the firm will perform in the future and what's the worth of these cash flows adjusted for the time value of money.
But as you go along the cf are less predictable/reliable and you replace them with a terminal value to capture the residual value of the firm at that stage. This value can be derived using a bunch of different methods including: - gordon growth model: ie you're assuming the fcfe goes to perpetuity at a given growth rate and discounted by your ke - so its tax effected) - comp multiples: which multiple to use (PE/EBITDA, etc) depends on the asset and the industry, ebitda is the most common as it gives you an enterprise value unaffected by differences in capital structure.
So to your question, it's less an inconsistency in principles of using a tax effected vs non tax effected metric and more a difference in the approach you take to value a business at different pts in time.
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If your terminal multiple is multiple x terminal year EBITDA then tax is not an issue. But if you use PGR to get terminal value, then tax is part of this?
You're asking why we add up forecast FCF but use EBITDA for exit multiple? it's not tax or no tax.
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