Comments on: Terminal Value Explained

By: Incremental Cash Flows In Financial Modeling | Financial Modeling Guide

Incremental Cash Flows In Financial Modeling | Financial Modeling Guide — Wed, 04 Mar 2009 06:58:45 +0000

[...] initial capital outlay, the cash flows attained from implementing / investing in the project, the terminal value or cost, and the scale and timing of the [...]

By: Keshav

Keshav — Sat, 08 Nov 2008 15:32:40 +0000

generally in valuation, terminal value represents what percentage of total value?

By: Huzefa

Huzefa — Sat, 27 Sep 2008 02:52:51 +0000

Hi,

I could be wrong here, but I believe you can even utilise an EV/EBITDA to obtain a terminal value. For eg – If the terminal year is FY 2013 & the EBITDA in that year is $100, an EV/EBITDA of 7 would give the firm a Terminal value of $700 (of course, you would have to discount this backwards to account for PV)

By: Financial Modeling Guide

Financial Modeling Guide — Wed, 23 Apr 2008 09:12:47 +0000

Thanks for your comments. You are correct to point out that it is not "exactly right" to use P/E multiple to derive a terminal value.

However the overall multiples approach to calculating terminal value can sometimes be flawed, as using multiples estimated from comparable businesses results in a dangerous mix of relative valuation and intrinsic valuation. However using multiples derived fundamentally should theoretically be OK.

Nonetheless the multiples approach to terminal value continues to be used and valued for its simplicity and providing relatively robust ball-park estimates.

Besides the P/E multiple to earnings approach, other methods even apply multiples to revenue to derive terminal value (used often to value early-stage technology companies).

More consistent and conservative ways of estimating terminal value in a financial model would be to use either of the perpetuity models cited above.

For all approaches used to derive terminal value, it will be prudent to use a range of discount rates, multiples and growth rates to establish a valuation range instead of a single number.

By: Alex

Alex — Wed, 23 Apr 2008 04:00:34 +0000

How would you use P/E as a multiple for terminal? I’ve seen TEV/EBITDA, and a few others, but never earnings multiple, considering you didn’t really use earnings, you used FCF. As well, if you are getting P, you need to take into account the fact it is just equity, not enterprise value.