Help: LBO Model Terminal Value differences
Need help, practicing with an lbo model for a pharma company. All projections are in line, the bs balances. When it came to DCF, wanted to calculate TV by using both the perpetuity growth and multiple approach. The values are coming back very different. I noticed that if I play around with the WACC i can get them more in line, but the WACC will be out of wack.
Is this normal? Am I doing something wrong?
Help is appreciated
How does the implied growth rate from the multiple approach compare to the perpetuity growth rate?
They are very comparable....my entry multiple was 3.0x EBITDA, exit 3.5x in 6 years time. The perpetuity growth rate is 3%.
Anyone? Dont want to be stuck with this comes interview season in the fall
You don't need to practice modeling for interviews. And LBO models don't have DCFs.
The company i am applying for is a private equity shop and they give you a case and expect for you to build a model. The sample ones i have seen have IRR analysis and DCF...is this not correct?
Ok my bad I thought you were talking IB interview. It is my experience that a DCF analysis is not usually included in an LBO model (which has op model, sources and uses, irr, etc), but you may need to do a DCF as part of your case. I would reach out to someone like compbanker or captk who has PE experience.
Thanks will do
I suppose I can comment, although I haven't even looked at a true DCF model since I was an investment banker. I'm not really sure why a PE firm is asking you to do this kind of analysis unless they are conducting a valuation exercise.
There is certainly a possibility that a perpetuity model comes out different from a multiple driven exit value. The multiple is arbitrarily chosen .. it could be 5x EBITDA, or it could be 10x EBITDA. Both will net you substantially different TEVs. The same as true for the perpetuity model -- what is your assumed growth rate into perpetuity? What is your discount rate (although this can be estimated, even for private companies)? A 1% or 2% change can drive significant value.
So you've got two different valuation approaches that are both drastically changed by slight variances in arbitrary assumptions. It is not unreasonable that two could produce very different results.
Haha sorry for giving you more work CB
Great thanks CompBanker...I realized that my purchase price undervalued the company a little also so after changing that part the valuation was a little bit more in line, still quite different though. I guess as long as I can walk through both of the methods and provide an opinion about which valuation is more realistic I should be ok.
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