medium · Investment Banking
An analyst is using a 10-year DCF for a high-growth SaaS company. Year 10 EBITDA is $500 million, but Year 10UFCFis only $100 million due to continued heavy growth reinvestment.
Which terminal value method is likely to produce a more 'defensible' valuation and why?
- PGM, because a 10.0x exit multiple is too conservative for a SaaS company.
- EMM, because EBITDA multiples for SaaS are always higher than the WACC.
- EMM, because the low UFCF in year 10 suggests the company has not yet reached a 'steady state' required for PGM.
- PGM, because it captures the intrinsic value of the recurring revenue better than a multiple.
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