Financial Valuation: Selecting Exit Multiples Quiz

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What is a common way to select the appropriate exit multiple when calculating Terminal Value?

Neglecting the exit multiples altogether
Picking a random multiple within the range
Choosing the highest multiple in the set
Selecting the median of the Public Comps set (correct)

Why is it recommended to show a range of exit multiples when calculating Terminal Value?

To confuse investors
To avoid using multiples altogether
To make the process more complicated
To provide a clearer view of the range of possible values (correct)

In which scenario will the Gordon Growth formula for Terminal Value yield a higher valuation?

When the growth rate is higher than the discount rate (correct)
When the growth rate is less than the discount rate
When the growth rate equals the discount rate
When the growth rate is negative

What does the Gordon Growth formula aim to estimate in a discounted cash flow valuation?

The Present Value of expected future cash flows (B) Signup and view all the answers

Why is it challenging to predict whether the Gordon Growth formula will result in a higher valuation?

Because it depends on assumptions like growth rate and discount rate (B) Signup and view all the answers

When determining Terminal Value using the Gordon Growth formula, what does a higher discount rate imply?

A lower valuation due to higher risk (D) Signup and view all the answers

When using the Gordon Growth Method to calculate Terminal Value, what value is multiplied by (1 + Growth Rate) in the formula?

Final Year Free Cash Flow (A) Signup and view all the answers

In the context of the Gordon Growth Method, what does the Discount Rate represent?

Cost of equity capital (B) Signup and view all the answers

What does the Gordon Growth Method estimate in relation to a company's financials?

Present value of Free Cash Flows into perpetuity (C) Signup and view all the answers

Why might a financial analyst use the Multiples Method instead of the Gordon Growth Method when calculating Terminal Value?

Greater reliance on industry-specific data (C) Signup and view all the answers

Which factor plays a crucial role in deciding whether to use Gordon Growth or Multiples Method for Terminal Value estimation?

Availability of good Comparable Companies (C) Signup and view all the answers

What important assumption is made when using the Gordon Growth Method for Terminal Value calculation?

Constant growth rate in perpetuity (B) Signup and view all the answers

What is the formula to calculate Terminal Value according to the text?

Final Year Free Cash Flow * (1 + Terminal FCF Growth Rate) / (Discount Rate – Terminal FCF Growth Rate) (D) Signup and view all the answers

Why must the Terminal Growth Rate be very low according to the text?

To avoid the company's FCF exceeding the country's GDP (C) Signup and view all the answers

What does 'a' represent in the geometric series formula mentioned in the text?

Present Value of Free Cash Flow one year after the final year (D) Signup and view all the answers

Why does each individual item in a geometric series approach $0 as the series approaches infinity, as per the text?

Due to multiplication by the common ratio (A) Signup and view all the answers

What is 'r' in a geometric series formula as mentioned in the text?

Common ratio that multiplies each term to get the next term (A) Signup and view all the answers

What would happen if the Terminal Growth Rate exceeds the country's GDP growth rate, based on the text?

The company's FCF will exceed the GDP of the entire country (C) Signup and view all the answers