How do we interpret IRR calculated using perpetuity growth rate versus Exit multiple

Kamoroun's picture
Rank: Orangutan | 265

See below:
One of the methods used when valuing a company is the DCF using perpetuity growth. This method determines a terminal value based on a perpetuity growth assumption in order to determine the price we should pay to buy a company.

However when calculating the IRR, we look at the price we paid (calculated above) versus a terminal value based on an exit multiple assumption for how much we expect to sell the company. My question is, can't we determine the terminal value for IRR purposes using the perpetuity growth assumption like we do when calculating the price via DCF?

If so then since the exit multiple (for IRR purposes) tell us for how much we expect to sell the company as a function of EBITDA then what does the perpetuity growth assumption tell us when used for IRR purposes? This part is kind of tough, since we can't sell the company for the assumed growth in EBITDA in perpetuity which I think will be the intuitive interpretation of calculating exit value using the growth rate for IRR purposes?

Any takers?