Which statement describes the terminal value via the multiple method?

Which statement describes the terminal value via the multiple method?

• A. TVn(MM) = LTM EBITDAn * Multiple
• B. TVn(MM) = FCFn * Multiple
• C. TVn(MM) = LTM EBITDAn / Multiple
• D. TVn(MM) = FCFn / (1+w)^n

Answer: (A)

Terminal value using the multiples method is found by applying a market multiple to a financial metric in the horizon year. The idea is to mirror how investors price a company relative to a comparable set of firms, using a metric like EBIT or EBITDA and a corresponding EV/EBIT or EV/EBITDA multiple. In this context, using the last twelve months EBITDA in year n and multiplying it by a chosen multiple gives the horizon value because it represents the enterprise value implied by the multiple at that point in time. This aligns with how comparable-company valuations are structured, translating a per-period profitability measure into an overall value. Using free cash flow with a multiple isn’t the standard approach for the terminal value in the multiples method, unless you explicitly specify a cash-flow multiple. Dividing by a multiple would misapply the logic, and discounting cash flows to present value (the DCF approach) is a different method entirely from the multiples approach.

Terminal value using the multiples method is found by applying a market multiple to a financial metric in the horizon year. The idea is to mirror how investors price a company relative to a comparable set of firms, using a metric like EBIT or EBITDA and a corresponding EV/EBIT or EV/EBITDA multiple.

In this context, using the last twelve months EBITDA in year n and multiplying it by a chosen multiple gives the horizon value because it represents the enterprise value implied by the multiple at that point in time. This aligns with how comparable-company valuations are structured, translating a per-period profitability measure into an overall value.

Using free cash flow with a multiple isn’t the standard approach for the terminal value in the multiples method, unless you explicitly specify a cash-flow multiple. Dividing by a multiple would misapply the logic, and discounting cash flows to present value (the DCF approach) is a different method entirely from the multiples approach.