Question

Briefly compare the Exist Multiple Method vs. the Perpetuity Growth Method.

What is the weakness of both methods?

Would you use one of these methods for a "quick" analysis of the target's value?

Answer 1

Answer to (1):

Both Exit Multiple Method and Perpetuity Growth Method are used for determining Terminal Value for valuation (of companies) purpose.Terminal Value in simple terms refers to the present value of a future cash flow or a series of cash-flow at a point of time when we expect the future cash flows at a stable growth rate forever.

Differences between Exit Multiple Method and Perpetuity Growth Model:

The Perpetuity Growth Model assumes that the free cash flows of a company in the last year of the forecast period will tend to grow indefinitely at the growth rate of the last year of the forecast period..On ,the other hand: the terminal value of a company is calculated by using a series of multiples of earnings in the Exit Multiple Method.

Perpetuity Growth Model is usually used in academics while the Exit Multiple Method is used by investment bankers.

Answer 2:

Weaknesses of Perpetuity Growth Model:

• Since both the discount rate and the growth rate are assumed any inaccuracies in either one or both will lead to incorrect value.
• Also it does not have any market driven analytics as is present in the Exit Multiple Method.

Weaknesses of Exit Multiple Method:

• The multiples used should be considered carefully as they tend to change over time
• The projection period to be taken should not be too unrealistic

Answer to (3):

For a quick analysis of the target's value:exit multiple method can be used as this gives a realistic view of the market analytics as well as the calculation involved and the time taken is much less .