![]() ![]() When estimating a company’s cash flows in the future, analysts use financial models such as the discounted cash flow (DCF) method combined with certain assumptions to arrive at the value of the business. Using Discounted Cash Flows Method to Determine Terminal Value Terminal value addresses such limitations by allowing the inclusion of future cash flow values beyond the projection period while mitigating any issues that may arise from using the values of such cash flows. Terminal value is typically a large portion (>50%) of the total assessed value and is therefore very important. Instead, it assumes that the growth rates of all future cash flows are consistent and stable beyond the forecast period. Terminal value refers to the value of a project or business at a future point in time beyond the explicit forecast period. Exit multiple is sometimes referred to as terminal exit value. Īnalysts use exit multiples to estimate the value of a company by multiplying financial metrics such as EBIT and EBITDA by a factor that is similar to that of recently acquired companies. The most commonly used multiples are EV/EBITDA and EV/EBIT. The method assumes that the value of a business can be determined at the end of a projected period, based on the existing public market valuations of comparable companies. An exit multiple is one of the methods used to calculate the terminal value in a discounted cash flow formula to value a business.
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