Module II· DCF — Terminal ValueIntermediate
Question
What do you do when the Gordon and exit-multiple methods diverge sharply (e.g. a 30% difference)?
Answer
Diagnostic steps:
- Check the implied exit multiple from Gordon — consistent with trading comps? If unrealistically high (e.g. 15x against comps of 8x): the Gordon g is too high or the terminal FCF too optimistic.
- Check the implied g from the exit multiple — does it fit GDP? If negative or >5%: the exit multiple is overdone.
- Capex normalization in the terminal year: often the root of the problem.
Deep diveShow more details
Consequence
adjust one method so the implied values become plausible. IB standard: show the average of the two or present it as a range.
Pitch tip
in a pitch, never 'we used Gordon' — always 'we used both, the range is X–Y, and the midpoint reflects our view'.