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9. The Terminal Value Part 2
The exit multiple is a more intuitive way of calculating the terminal value. In this lesson, I show you how to accomplish this using the EV / EBITDA multiple for MarkerCo.
Lesson Goal (00:04)
The goal of this lesson is to calculate the terminal value using the exit multiple method.
Understanding Market Multiples (00:27)
When we use multiples to value a company, we use discounted cashflows to identify the value of cashflows during our financial projection. We then use a market-based multiple to identify the terminal value of the cashflows beyond the end of the financial projection.
We are aiming to use a multiple to find the enterprise value. Therefore, we want to use a multiple that includes enterprise value. The most common such multiple is EV over EBITDA, or Enterprise Value over Earnings Before Interest, Tax, Depreciation, and Amortization. We can calculate EBITDA in our financial statements by adding the depreciation and amortization expense to EBIT.
Calculating the Terminal Value (01:36)
In order to use the EV over EBITDA multiple to value a company, we need to know what the value of the multiple should be. We can identify this value by analyzing competitor companies, whose Enterprise Value and EBITDA we can find out through analyzing their accounts. In our csae, we find MarkerCo’s competitors have a multiple value between 8 and 10, so we assume that MarkerCo’s value for this multiple is 9.
We can then calculate the terminal value by multiplying EBITDA by the value of the multiple for the final year of the financial projection. As before, we need to make sure we discount the terminal value to find its present value.
Calculating the Enterprise Value (03:26)
Once we have identified the terminal value, we can easily calculate the enterprise value. The enterprise value is simply the sum of the discounted cashflows plus the discounted terminal value.
In our Excel model, we have two different terminal values, calculated using the two different methods. We can allow the user to switch between the two values by providing a cell that lets the user decide which method they want to use. We then use a simple IF statement in the terminal value cell to select the appropriate terminal value based on the user’s selection. This also has the advantage of letting you sense-check the terminal value calculation and ensure it contains no errors.
In the previous lesson, we used the perpetuity method, to calculate the terminal value for MarkerCo, after the 5 year projection. We assumed a constant growth rate of 1.5% for these cash flows, that would exist, into perpetuity. In this lesson, I'm going to use a different method to calculate the terminal value, called the exit multiple method. For this method, we value the company, on a market-based multiple, at the end of the 5 year projection. So, for the first years of cash flow projections, we use, discounted cash flows, and for the remaining years, we use a market-based multiple.
Enterprise value, is what we're trying to calculate in this step. And the most common multiple, for the enterprise value, is called EV all over EBITDA.
And this stands for, enterprise value, divided by earnings before income tax depreciation and amortization. To calculate EBITDA, we simply scroll up, to our notepad calculations, and add depreciation and amortization to EBIT. So I'll create a new row, and I'll type EBITA, I'll simply add EBIT and depreciation and amortization, and copy across for the remaining cells. So, EBITA in 2020 will be 33.4. Now, I need to find, the market-based multiple, for EV dived by EBITA.
Off camera, I'm going to add a couple of lines, to my discounted cash-flow analysis, to include, my market-based multiples assumptions. To estimate an accurate EV all over EBITDA multiple, it's best to look at MarkerCo's competitors in the market, and see what value, the currently hold based on this multiple. When I look at 6 or seven of MarkerCo's competitors, I notice, that the EV EBITDA multiple, is between 8 and 10 times.
So, in this scenario, I'm going to assume that MarkerCo's multiple is 9 times. So, I'll simply enter, 9.0.
Let's now apply, this multiple, to my valuation. So, I'll go to the terminal value, and the exit multiple method, and I'll take the multiple, and multiple by EBITA in that year.
As you can see, this gives me a slightly higher valuation, on the terminal value, when compared, to the perpetuity method. Needless to say, I need to discount this terminal value as well, which I'll do in the same way, as I did for the perpetuity method.
So I'll the terminal value, divide by one plus the discount rate, and that will be all to the power of the number of years, which is going to be 2020 minus 2015.
And now I have, my discounted terminal value, for both methods. Let's use this, to calculate our enterprise value.
So here, I have the present value of the terminal value, and the sum of the present values of unlevered free cash flows, for the next 5 years. So this, is pretty easy to me. So, I'll delete my old enterprise value calculation, simply take the sum, of my present values. So I'll actually use the sum formula, and I'll sum H183, to L183.
This gives me, the sum of my present values, for the first 5 years. For the terminal value, we can apply the exit multiple method, or the perpetuity method. I find it's nice to be able to switch between the two, so why not create a simple switch. To do so, I'll create a new line, at the very top, Alt + I R, and I'll call this line, Use Perpetuity Method, and a question mark. And the options here, will be yes and no. And I'll start, with yes.
And format this cell, as an input.
I'll now use an If function, as the switch. If the cell, is equal to yes, I'll apply the perpetuity value.
Otherwise, I'll apply, the exit multiple value.
And I'll do a little bit of formatting, to clean this up.
Let's now calculate the enterprise value, by adding these numbers together. If I want to change the terminal value method, I simply change the value in my switch, from yes to no. As you can see, the enterprise value, updates accordingly. As an exercise, try and try this cell, using validation, into a drop down, where yes and no are the two options for the user. I'll leave my answer, in the after file, below this video.