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.
Trending Content - Investment Banking Forum
| +139 | UBS Catastrophic Q1-Q3 26, M&A -17%, Outside Top 10 in Americas, EMEA & APAC | 40 | 8h |
| +63 | PWP acquisition by Piper cancelled | 23 | 14h |
| +45 | No return offer - UPDATE. | 12 | 12h |
| +31 | Evercore poaches Baird DC Defense Team | 24 | 2h |
| +22 | Best Houston Banks for Culture in 2026 | 16 | 11h |
| +22 | Is my MD a grifter? 16 years, 8 firms | 13 | 2m |
| +21 | Lack of talent in IB! | 19 | 20h |
| +18 | Article: UBS Wall Street Rebuild Is a Study in Management Failure | 4 | 9h |
| +17 | Internal lateral from coverage to M&A (focused on coverage) | 4 | 1d |
| +15 | How standard is weekend work in IBD? | 11 | 1h |
Career Resources
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.
?
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.
Laudantium explicabo ab id ut. Autem sunt est suscipit laboriosam quia facilis. Nesciunt asperiores ipsum expedita.
Minus soluta vero sunt quo. Aliquid facilis ducimus repellat quos.
Deserunt eveniet neque illum numquam sit odio distinctio. Est minus nulla adipisci incidunt nulla doloremque magnam amet. Nobis totam exercitationem asperiores rerum. Laudantium earum dolorum vel placeat.
Aut atque totam aperiam eum alias modi. Esse rerum debitis perspiciatis cumque ea.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...