Which method can be used to determine Terminal Value in DCF analysis?

The Terminal Multiple Method is a commonly used approach to calculate Terminal Value in Discounted Cash Flow (DCF) analysis because it provides a way to estimate the ongoing value of a business beyond the explicit forecast period. This method involves applying a multiple—often derived from comparable company analysis or historical transaction data—to a financial metric, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), to arrive at the Terminal Value.

The rationale behind this approach is that businesses typically continue to generate cash flows beyond the forecasting horizon. By utilizing a multiple, finance professionals can reflect market sentiments and establish a value that aligns with the industry's valuation benchmarks. This approach simplifies the estimation of value in perpetuity and allows for a straightforward transition from a forecasted period to a perpetuity assumption.

In contrast, the other methods such as Market Comparison, Net Asset Value, and Cash Flow Yield focus on different valuation aspects and may not directly derive the Terminal Value through cash flow projections. Market Comparison relies on relative valuation using market data, the Net Asset Value method assesses the value of a company's assets and liabilities rather than its earning capacity, and the Cash Flow Yield applies to specific investment returns rather than holistic business valuation over an extended period. Hence, the Terminal Multiple Method