Is it valid / appropriate to calculate FY2 EV with a Y1 EV/EBITDA multiple so long as we then discount back to Y1?

Question

Is it valid / appropriate to calculate an FY2 EV with a Y1 multiple, then discount back to Y1 to get a valuation for Y1 EV? Have seen this in some valuations (could not find concrete example to link to at the moment), but could not totally understand the logic or whether it was OK to do.

Eg. is this appropriate?:

'25EV = '25EBITDA x '20EV/EBITDA
'25MC = '25EV + '25Cash - '25Debt
'25PX = '25MC / '25Shares
=> '20PX = PV('25PX) = '25PX / (1+WACC)^3
(where we assume WACC same across all periods)

Note the use of the '20EV/EBITDA multiple in deriving the '25EV. Is this OK since we are eventually discounting the MC back to the present ('20)? Some other reason this would be OK? Not OK at all? Could anyone explain a bit more on why or why not?

lampShadesDrifter · Answer

This is essentially what you are doing with the "exit multiple" method for determining terminal value in DCF. You are taking the projected cash flows (in this case EBITDA as an approximation) for some period and discounting them back to the present by using a present day multiple.

More detailed...

I'd approach it from the perspective of the Gordon growth model.
  You'll recall GGM assumes once a company hits stable growth, then
  price = dividend/ (cost of equity - long term growth rate)
  
  Conceptually, shift this back from equity valuation to firm valuation.
  EV = cash flow to to the firm / (k - g)
  
  Treat EBITDA as a proxy for cash flow. 
  Then you get EV = EBITDA/ (k-g)
  
  Using simple equations to shift this around, EV/EBITDA = 1/(k-g) = an EBITDA valuation multiple.
  
  Ergo, we use a valuation multiple for terminal value for the same reason we use the GGM for long term valuation on a business when it is in a stage of stable growth.
  
  Then go back to your university notes on why we use GGM. Those are your reasons why you use multiple for TV.
  
  Where is it not appropriate to use a multiple for TV? Where the GGM assumptions don't hold. Which is usually where the company is not yet in its long term, mature growth rate, or where the company is in decline.
  
  EDIT: You can use this same logic to understand why multiples may behigher or lower for a company ie that should be a product of 1/(k-g).

https://www.wallstreetoasis.com/forums/what-is-the-logic-behind-using-exit-multiple-for-terminal-value

Is it valid / appropriate to calculate FY2 EV with a Y1 EV/EBITDA multiple so long as we then discount back to Y1?

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