Which two methods are commonly used to determine terminal value?

The two methods commonly used to determine terminal value are the perpetuity method and the EBITDA exit multiple method.

The perpetuity method, also known as the Gordon growth model, estimates terminal value by projecting free cash flows into the infinite future and assuming a constant growth rate. This method is particularly useful for businesses expected to have stable cash flows and growth in the long term. It provides a straightforward calculation by taking the last projected cash flow, dividing it by the difference between the discount rate and the growth rate.

On the other hand, the EBITDA exit multiple method estimates terminal value by applying a multiple to the company's projected earnings before interest, taxes, depreciation, and amortization (EBITDA) at the end of the forecast period. This approach relies on industry precedent, where the multiple is derived from comparable company transactions or market valuations, allowing for context that reflects how similar businesses are valued in the market.

Together, these methods provide complementary approaches to estimating terminal value by considering both growth characteristics and market dynamics. The other options presented either mix financial concepts that do not directly apply to terminal value or involve methods that are not typically used in this context, highlighting the focused applicability of the perpetuity and EBITDA exit multiple methods in valuation practices.