![]() #IMPLIED PERPETUITY GROWTH RATE OF CASHFLOWS FREE#4 Perpetuity Growth Rate assumed growth rate of free cash flows to. The FCF used in the numerator can also be wrong, but since theres a lot more assumptions that go into its calculation, is is not likely to be very off. 4 Implied values based on multiples of comparable companies that are publicly. WACC is not based on assumptions and thus shouldn't result in varaition of terminal value. If the terminal value seems off, it is likely that the assumed free cash flow growth rate is too high or low. Under the perpetuity growth model, the terminal value = the projected free cash flow of the first year after projected period / (wacc - free cash flow growth rate). EV / EBITDA, a negative implied growth-rate-in-perpetuity means that the discounted terminal value calculated with an exit multiple is lower than what the terminal value would be if FCF were to stay constant in perpetuity. The final year EBITDA can also be wrong, but since theres a lot more assumptions that go into its calculation, is is not likely to be very off. The present value (PV) of the terminal value is then added to the PV of the free cash flows in the projection period to arrive at an implied firm value. Assuming you are calculating terminal value with an exit multiple, e.g. If the terminal value seems off, it is likely that the assumed free cash flow growth rate is too high or low or the peer companies used for the terminal multiple contain an outlier that is skewing the results. When using the multiples method, the EV/EBITDA multiple is sourced from comps and is multiplied by the final year EBITDA from the projection period. The terminal value is estimated by either using the multiples method or the perpetuity growth method. ![]()
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