Comments (7)

Jul 22, 2018

When you say "which method is the interviwer looking for", I can tell you're not framing the question correctly to start off with. Neither method in an absolute sense is preferable to the other. You can use Perpetual Growth when CF's after X years are likely to be growing at a constant rate (usually inflation). You can use Exit Multiples in contexts where steady CF growth might not be a valid assumption (high-growth tech companies) beyond your projected time horizon, and/or where the market has a good sense of acquisition value (most relevant in LBO's where funds must "exit" in realizing the value of their investment) so that market sentiment is incorporated. You might even use both so you can sensitize how much your valuation changes depending on which method you use.

"If you have a difficult task, give it to a lazy person; they will find an easier way to do it." - Hlade's Law

Jul 22, 2018

Agreed. If you're asked "walk me through a DCF" and that's it, 99% of time they are looking for perpetual growth, UFCF. Also just to note, one is not necessarily preferred over the other, I've seen football fields that show TEV ranges for both (of course, using different sensitivies).

Jul 24, 2018

Im not sure they're looking for perpetual growth 99% of the time. IBankers typically use the multiple method because thats more practical, and its tangibly reflected in the market. As opposed to the terminal growth method, which is really a shot in the dark - how can you predict what the company is growing into perpetuity, other than the fact that it must be below inflation or GDP growth?

That being said, we should be using a perpetuity growth method where there are are comparable companies, or the multiples will change in the future.

Jul 24, 2018

I was referring to when this question is asked in interviews. Yes, I agree on the job, multiples are used pretty frequently (especially in TMT), however, for the purpose of interviews, in my experience, the interviewer will ask you specifically about terminal multiples if that's what they are looking for.

Jul 22, 2018

I am just not sure which one is more common

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Jul 22, 2018

In real life or for an interview?

Real life - depends on the industry, so unanswerable
Interview - the correct answer to give if you get asked "which is more common" is "it depends"

"If you have a difficult task, give it to a lazy person; they will find an easier way to do it." - Hlade's Law

Jul 24, 2018
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