Series 79 practice questionmediumDCF Analysis
When building a DCF, what is the impact of assuming a higher terminal EBITDA multiple in the exit multiple method?
- AIt decreases enterprise value
- BIt has no effect on terminal value
- CIt increases the calculated terminal value and enterprise value✓ Correct answer
- DIt reduces free cash flow volatility
Explanation
Why C — It increases the calculated terminal value and enterprise value
A higher exit multiple increases terminal value, boosting enterprise value. Assuming it has no effect is a common error; this is key for sensitivity analysis in DCFs.
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