medium · Investment Banking
What is the primary reason for using an 'exit multiple' rather than 'perpetuity growth' to calculate the terminal value in an LBO model?
- Perpetuity growth models are mathematically invalid for any firm carrying leverage
- Exit multiples are assumed to always produce a strictly higher valuation outcome
- Exit multiples are considered the only mathematically valid way to calculate IRR
- It mirrors how private equity sponsors actually exit and value their investments
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