Yesterday I totally boofed this interview question on what was honestly a dream job.
The interviewer asked me about relating a DCF to a multiple. I asked about discounting cash flows, finding TV, summing discounted value to find EV, and then dividing by EBITDA to get multiple. Very straight forward.
However, he kept on about present value about something I didn't understand. He asked about PV, and I said PV was basically series sum of C/(1+r)^n (C= cash flow, r=rate of return, n=number of periods) but he pressed on about the formula missing growth or a growth variable/component?
He mentioned something about the formula being an esoteric thing about how much EBITDA is converting to cash flows? Does this make sense to anyone? Any direction would be appreciated because I'm stuck here dwelling on this.
Thanks, MG
I'm missing where in the post that you mention it's a perpetuity...
The perpetuity equation literally has a growth variable.
pv of a perpetuity = D/r-g
You can acquire the terminal value for TEV in a DCF multiple ways. You answered with the Exit Multiple Method which involves multiplying EBITDA by an appropriate exit multiple/valuation multiple. However, the interviewer was probably talking about the Gordon Growth Method used to find terminal value. There is a growth variable "g" that is the perpetuity growth rate (stable rate at which company grows at forever once it reaches maturity). Then terminal value is then equal to UFCF(1+g)/(r-g) where r= WACC and g is the growth variable the interviewer kept alluding to. UFCF is related to EBITDA: UFCF = EBIT(1-t) + D&A - CAPEX - delta(NWC). For companies with cash flows you believe are predictable and not cyclical, you can use this formula over exit multiple method to better forecast the terminal value (which represents majority of your TEV).
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