How is the final year EBITDA multiple determined?

The final year EBITDA multiple is determined by multiplying last year's EBITDA by the terminal multiple. This method is commonly used in financial modeling and valuation, especially in the context of mergers and acquisitions or assessing the value of a business based on its expected performance.

When valuing a company, particularly in a discounted cash flow (DCF) analysis, the terminal value represents the anticipated value of the business at the end of the forecast period. This terminal value can be derived using an EBITDA multiple based on market comparables or industry standards. By taking the last year of EBITDA, which reflects the company’s most recent performance, and applying a multiple that encapsulates market expectations, analysts can derive a more accurate assessment of the company’s worth in its final year.

This method is preferred because it directly ties the valuation to the company's working earnings, and it's reflective of both historical performance and projected market conditions, allowing for a more nuanced understanding of a company's financial future. Other methods, such as averaging historical EBITDA figures or discounting future cash flows, serve different purposes in financial analysis and do not specifically capture the terminal valuation aspect that the EBITDA multiple approach does.