Question

Assume that Company A has a WACC of 10% and Company B has a WACC of 8%. Both companies have a projected year 5 terminal year EBITDA of $100.0 million, but Company A’s exit multiple is 10.0x and Company B’s exit multiple is 8.0x. Who has the HIGHER present value of the terminal value?

Answer 1

Company A's present value of the terminal value is found by discounting 10.0*$100 million or $1,000 million by 5 yrs at 10%.
This would give you a value of 1000/1.1⁵ = $620.921 million.

Company B's present value of terminal value is found by discounting 8.0*$100 million or $800 million by 5 yrs at 8% . This would give you a value of 800/1.089⁵ = $544.5 million.

Hence, Company A has HIGHER present value of the terminal value.

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