A terminal-value cross-check translates a DCF assumption into a second language. Divide the terminal enterprise value by the matching EBITDA to see the implied multiple. This does not prove the value is correct; it helps expose inconsistent timing or aggressive economics.
Start with a consistent terminal year
Fictional year-five assumptions: free cash flow of $60, EBITDA of $100, WACC of 10%, and perpetual growth of 3%. Treat cash flow as year-end and use year-five EBITDA for the stated exit-multiple convention.
Year-six cash flow is 60 × 1.03 = 61.8. Terminal value at the end of year five is 61.8 ÷ (10% − 3%) = 882.86. Dividing by year-five EBITDA gives an implied 8.83× multiple.
Do not divide the discounted present value of terminal value by undiscounted year-five EBITDA. Both numerator and denominator must refer to the same valuation date. If you compare with a forward multiple instead, use year-six EBITDA and label the convention.
Reverse the question
Suppose someone selects a 12× exit multiple on the same $100 of EBITDA. Terminal value becomes $1,200. What perpetual growth rate is embedded in that choice if year-five free cash flow remains $60 and WACC remains 10%?
Starting from TV = FCF₅ × (1 + g) ÷ (WACC − g), rearrange:
g = (TV × WACC − FCF₅) ÷ (TV + FCF₅)
The result is (1,200 × 10% − 60) ÷ (1,200 + 60) = 4.76%. That is materially higher than the original 3% assumption. It calls for a discussion of long-run growth, reinvestment and risk, not an automatic rejection based on a single number.
| Cross-check | Result | Question it raises |
|---|---|---|
| 3% growth model → multiple | 8.83× year-five EBITDA | Is mature cash conversion credible? |
| 12× exit multiple → growth | 4.76% perpetual growth | Can those economics persist? |
| Discounted TV ÷ future EBITDA | Inconsistent | Are valuation dates mixed? |
Explain the limitation
An EBITDA multiple also embeds capital intensity, taxes and working capital. Two businesses with equal EBITDA can have different free cash flow. A cross-check is therefore a consistency test, not a shortcut that replaces operating analysis.
Damodaran’s terminal-value guidance distinguishes perpetual-growth valuation from market-multiple approaches. The calculations above are our simplified teaching example. Keep WACC greater than growth in this model and make terminal reinvestment consistent with the growth assumption.
Use the valuation-methods comparison to decide what each approach can tell you. For a common source of distorted terminal cash flow, try the negative-working-capital exercise.