Terminal Multiple vs Perpetuity?
Does anyone know when you would use each method?
Thank you
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There is no particular rule, but I believe you use multiples more often in banking because it's tough to estimate the long-term growth rate of a company. But if you don't have good data on comparable companies, or if it's a very cyclical industry and multiples aren't reliable, then you might use long term growth rate.
The perpetuity growth rate should be used in conjuction with the exit multiple to serve as a sanity check on each other. After calculating one of them, you can estimate the implied growth rate or exit multiple to see if any revisions to the former need to be made.
Getting the terminal value right is very important because it accounts for a large portion of the company's total value.
You use both in DCF as righton said. Some industries are more prone to using exit instead of perpetuity - especially real estate companies
banker88 are you in undergrad?
Use both so you get an extra data point and make sure you aren’t using any faulty assumptions. A good model and reasonable assumptions will generally yield comparable values using the two approaches
Case for using exit multiple: You can have more confidence in an EBITDA multiple 5 yrs out. Perpetual growth is hard to predict.
Case against – You are basically doing a dcf of a market approach.
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