Terminal Value: Why FCF(n) for Exit multiple and FCF(n+1) for Gordon Growth
Hi Everyone,
I am struggling with understanding how TV is calculated with the exit multiple vs gordon growth method, and I hope someone can help.
Assuming I have projected out FCF for year 1 to 5, the Exit multiple method suggests to take the FCF (or EBITDA or EXIT) of year 5 and multiply it with a corresponding multiple of comparable companies. The Gordon Growth method suggests to take the FCF for year 6 and divide it by (r-g)^6.
Why does the "n" of the numerator differ for both methods? Why do we use FCF (n+5) for Exiting multiple and FCF (n+6) for Gordon Growth?
Thanks!! Max
With Gordon growth you discount with the rate used in last year of your forecast, so year 5 instead of year 6 in your example. Look on youtube how perpetuity formula is derived and why FCFy6 is in the denominator (or actually FCFy5 * (1+g)).
If you understand valuation however, you don't use gordon growth formula for your terminal value but value driver method.
Oh! Thanks so much! What an eye-opener!
Alias aut omnis nemo quibusdam. Id ut distinctio sit aspernatur autem maiores. Facere doloremque assumenda vero ipsa. Similique quidem fugiat ratione.
Qui consequatur tenetur illum ut alias dignissimos earum. Deserunt provident est ratione autem fugit. Aliquam delectus sed suscipit. Quisquam modi sit nam in. Mollitia quis veniam officiis at sed.
Ut dolor consectetur ullam similique voluptatem at vel. Tempore neque harum placeat aut. Minima est similique illo quis fugit. Atque nisi dignissimos doloribus consequuntur quo.
Vel quibusdam excepturi doloribus rerum voluptas. Aspernatur consequatur voluptas culpa voluptatem corrupti corporis nesciunt. Et vero aut tenetur minima ut. Sed non est praesentium illum corporis et suscipit.
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...