Terminal Value in a DCF Interview: Exit Multiple vs Perpetuity Growth

Terminal value is usually most of a DCF. That is why interviewers poke it. If your five-year projection is careful but your terminal value is fantasy, the whole enterprise value is fantasy. This guide covers the two standard methods, when to use each, the math, and the follow-ups that catch undergrads.

Why terminal value dominates

Explicit forecast periods are short (often 5 to 10 years). The business is assumed to continue after that. So the PV of the terminal value often accounts for a large share of total EV. Interviewers know this. They will ask how sensitive your value is to WACC, g, or exit multiple.

Method 1: Exit multiple

Terminal EV = Terminal Year EBITDA × Exit Multiple

Then discount that terminal EV back to present (along with the explicit period UFCFs).

Strengths

• Easy to defend with trading comps / current market multiples
• Familiar language for bankers and boards

Weaknesses

• Imports market mood into an intrinsic model
• Must match the right EBITDA definition (Year N vs N+1 forward)
• Can double-count growth if the multiple already assumes aggressive growth and your UFCF path does too

Method 2: Perpetuity growth (Gordon growth)

TV = UFCF_(n+1) / (WACC − g)

Where g is long-run growth in unlevered free cash flow.

Strengths

• True intrinsic framing
• Forces an explicit long-run growth debate

Weaknesses

• Very sensitive as g nears WACC
• g is easy to abuse (students pick 3% to 5% without thinking)

Which method should you lead with?

Strong answer: "I would show both. Exit multiple tied to comps for market cross-check, Gordon growth as an intrinsic cross-check with conservative g."

Worked intuition

UFCF year 5 = $100
UFCF year 6 = $103 (g = 3%)
WACC = 9%
Exit EBITDA year 5 = $150
Exit multiple = 10x

Gordon TV (at end year 5) = 103 / (0.09 − 0.03) = $1,716.7
Exit multiple TV = 150 × 10 = $1,500

Different methods, different TV. That is normal. Your job is to explain why you trust one more, or to present a range.

Mid-year convention (advanced but useful)

Some models assume cash flows arrive mid-year. That changes discount factors. If you use it, say so. If the interview is basic, year-end discounting is fine. Consistency matters more than sophistication cosplay.

Follow-up questions

"What is a reasonable g?"
"Long-run nominal growth tied to economy / inflation plus tiny real growth, often below expected GDP + inflation. For a mature firm I am skeptical of 4% to 5% forever unless justified."

"Why not just extend the forecast 50 years?"
"You still need assumptions about steady state. Terminal value is a compact steady-state claim. Longer forecasts can help if the firm is not stable by year 5."

"Exit multiple on which EBITDA?"
"I match the multiple type: forward vs LTM convention used in comps, and I label it."

"What happens if WACC rises 100 bps?"
"Gordon TV falls sharply because the denominator shrinks the gap to g. Exit multiple TV is unchanged before discounting, but PV falls and the multiple itself might also compress in markets."

Weak vs strong

Sensitivity you should always mention

Practice drills

1. Compute Gordon TV given UFCF1, WACC, g
2. Compute exit multiple TV and discount both for 5 years at WACC
3. Show what happens when g moves from 2% to 3% at WACC 8%
4. Deliver a 45-second "how do you do terminal value?" answer

Practice on SheetRank

Build a DCF and toggle terminal method. Watch how much EV moves when g or exit multiple changes. That visceral sensitivity is what interview answers are trying to show you understand.