Page 19 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 31.l: Calculate and explain the use of price READING 31: MARKET-BASED VALUATION: PRICE AND
multiples in determining terminal value in a ENTERPRISE VALUE MULTIPLES
multistage discounted cash flow (DCF) model.
MODULE 31.4: EV AND OTHER ASPECTS

Terminal value based on (justified) P/E (or other multiple, P/B, P/S) ratio:

terminal value in year n = (justified leading P/E ratio) × (forecasted earnings in year n + 1)
or
= (justified trailing P/E ratio) × (forecasted earnings in year n)

The terminal price multiple based on comparables:
terminal value in year n = (benchmark leading P/E ratio) × (forecasted earnings in year n + 1)
= (benchmark trailing P/E ratio) × (forecasted earnings in year n)

The strength of the comparables approach is that it uses market data exclusively but a benchmark marred by mispricing will
transfer that error to the estimated terminal value.

EXAMPLE: Calculating terminal value with price multiples: An analyst estimates the EPS of PT in five years to be C$2.10,
the EPS in six years to be C$2.32, and the median trailing industry P/E to be 35. Calculate the terminal value in Year 5.