r Day How do you pick the Terminal Multiple to use in a DCF when youre calculating Terminal Value Common Answer Look at the multiples for the companys set of comparable public companies and use something in that ID: 544972
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Slide1
Question the Othe
r Day…
“How do you
pick
the Terminal Multiple to use in a DCF when you’re calculating Terminal Value
?”
Common Answer:
Look at the multiples for the company’s set of comparable public companies, and use something in that
range
Real Answer:
More complicated than that
…Slide2
3 Main Problems with Comps
Multiples often
decline
as growth
slows down – investors won’t pay 50x revenue for a mature
manufacturer,
but they might for a
tech
startup
The Terminal Multiple
must
also imply a reasonable Terminal Growth Rate… yes, you can calculate the Growth Rate
implied by
a Terminal Multiple
It’s more about the
range
of values, not a specific multiple from the setSlide3
The Implied Growth Rate
Terminal Value
=
Final Year FCF * (1 + FCF Growth Rate)
(Discount Rate – FCF Growth Rate
)
Terminal Value * (Discount Rate – FCF Growth Rate) = Final Year FCF * (1 + FCF Growth Rate)Terminal Value * Discount Rate – Terminal Value * FCF Growth Rate = Final Year FCF + Final Year FCF * FCF Growth RateSlide4
The Implied Growth Rate
Terminal Value * Discount Rate – Terminal Value * FCF Growth Rate =
Final Year FCF + Final Year FCF * FCF Growth Rate
Terminal Value * Discount Rate – Terminal Value * FCF Growth
Rate – Final Year FCF – Final Year FCF * FCF Growth Rate = 0
– Terminal Value * FCF Growth
Rate – Final Year FCF * FCF Growth Rate =
– Terminal Value * Discount Rate + Final Year FCFSlide5
The Implied Growth Rate
–
Terminal Value * FCF Growth
Rate – Final Year FCF * FCF Growth Rate =
– Terminal Value *
Discount Rate + Final Year FCF
FCF Growth Rate
*
(–Terminal Value – Final Year FCF) = – Terminal Value * Discount Rate + Final Year FCFFCF Growth Rate * (Terminal Value + Final Year FCF) = Terminal Value * Discount Rate – Final Year FCFSlide6
The Implied Growth Rate
FCF Growth
Rate *
(Terminal
Value
+ Final
Year FCF) =
Terminal
Value * Discount Rate – Final Year FCFFCF Growth Rate = (Terminal Value * Discount Rate – Final Year FCF) (Terminal Value + Final Year FCF)