Series 79 practice questionhardTerminal Value Calculation
An investment banker uses the exit multiple method to calculate terminal value. If the Year 5 projected EBITDA is $150 million and the selected exit EV/EBITDA multiple is 9.0x, what is the terminal value? Additionally, which of the following best describes when this method is preferred over the perpetuity growth method?
- A$1,350 million; preferred when comparable company trading multiples provide a market-based reference point✓ Correct answer
- B$1,350 million; preferred when reliable long-term growth rates are available
- C$1,500 million; preferred for early-stage companies with no earnings
- D$1,500 million; preferred when the company is expected to be liquidated
Explanation
Why A — $1,350 million; preferred when comparable company trading multiples provide a market-based reference point
Terminal value using the exit multiple method equals Year 5 EBITDA times the selected exit multiple: $150 million × 9.0x = $1,350 million. The exit multiple is normally grounded in relevant comparable-company trading multiples at a normalized point in the cycle. Precedent transaction multiples can include control premiums and synergies, so they are not the standard reference for an assumed terminal trading value.
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