How to Answer “How do you choose an exit multiple to calculate terminal value?” in Investment Banking Interviews
In investment banking interview prep, this is a common question because the exit multiple often drives a large share of a DCF’s valuation. Interviewers ask “How do you choose an exit multiple to calculate terminal value?” to see whether you can anchor an assumption to market evidence and explain it clearly.
A strong answer ties the multiple to trading comps (and sometimes precedent transactions), matches it to the company’s expected terminal-year profile, and then runs quick reasonableness checks so the implied valuation doesn’t contradict your forecast.
What Interviewers Test: Terminal Value Calculation Judgement
In investment banking technical questions, interviewers are primarily testing whether you understand what an exit multiple is doing inside a DCF: it’s a market-based way to estimate the company’s value at the end of the explicit forecast period, which then gets discounted back to today.
They’re also testing judgement. A good terminal value calculation is not “pick 8–10x because that’s standard”; it’s a defendable choice within an observable range, adjusted for the business’s terminal-year growth, margins, cyclicality, competitive position, and returns on capital.
Finally, they’re testing consistency and the ability to sanity-check. In DCF valuation interview prep, you should show you can keep definitions aligned (EV multiple with enterprise DCF; LTM vs NTM) and validate the result with an implied FCF yield / implied perpetuity growth cross-check rather than trusting the output blindly.
Exit Multiple Calculation: A Step-by-Step Guide for DCFs
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Step 1: Anchor the exit multiple to market evidence (comps and deals)
Start by stating where your exit multiple comes from: a relevant set of trading comparables, and—if it helps—precedent transactions for an acquisition-style perspective. In an interview you can keep it high level, but be explicit that you’re using observable market data rather than a memorised range.
Keep the comparison consistent: same multiple type (e.g., EV/EBITDA), same time period (LTM vs NTM), and consistent adjustments (reported vs “street” EBITDA, treatment of leases or SBC if you mention them). Then narrow to a defendable range by excluding clear outliers driven by one-off events, extreme growth profiles, or very different business models.
If the sector is cyclical, mention normalisation: you may anchor on mid-cycle earnings (or a normalised EBITDA/EBIT) so the multiple isn’t accidentally applied to a peak or trough year.
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Step 2: Choose the right multiple and align it to the terminal-year metric
Explain why the metric fits the business. EV/EBITDA is common because it’s capital-structure neutral and widely used across sectors; EV/EBIT can be better when D&A reflects real economic cost (asset-heavy businesses); P/E can be more appropriate for financial institutions where enterprise value is less meaningful.
Then specify what you’re multiplying: typically the terminal-year financial metric (often Year 5) with an awareness of market convention. If comps are quoted on NTM multiples, you can say you’d apply an NTM multiple to a forward EBITDA/EBIT level at exit (or at least acknowledge the timing mismatch and keep it directionally consistent).
The key interviewer signal: you understand the multiple is only as good as the earnings base, so you ensure the terminal-year EBITDA/EBIT is credible (not inflated by temporary margins or unrealistic cost cuts).
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Step 3: Pick a point in the range based on terminal-year fundamentals
Once you have a reasonable comps range, justify where you land within it using the company’s expected terminal-year profile. Tie your selection to valuation drivers: growth durability, margin stability, reinvestment needs, competitive position, cyclicality, and ROIC.
A clean way to say it in interviews: “If the company converges toward peer-like growth and margins, I’d start around the peer median; if it’s structurally higher quality (more durable growth, stronger margins, less volatile cash flows), I can justify the upper end; if it’s riskier or more cyclical, I’d lean to the lower end.”
This is also where you can reference the company’s own historical trading range (if known) as an additional anchor—without pretending history must repeat exactly.
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Step 4: Sanity-check the terminal value with implied economics and alternative methods
Interviewers like to hear at least one explicit reasonableness check. Translate the terminal value into an implied terminal FCF yield (FCF/EV) or cross-check against the perpetuity growth approach to see what growth rate is embedded by your chosen multiple.
If the implied perpetuity growth is clearly inconsistent with a mature company (e.g., exceeds what you’d expect long-term for the economy/sector), or if the implied yield is implausibly low/high versus peers and interest-rate context, that’s a signal the exit multiple may be too aggressive or conservative.
Close by noting best practice: because terminal value is often the largest DCF component, you present sensitivity (exit multiple range and WACC) rather than over-optimising a single point estimate.
Model Answer for Investment Banking Technical Questions
I choose an exit multiple by anchoring it to market evidence and then adjusting for what the company should look like in the terminal year. The goal is to estimate what the public market—or a rational buyer—would pay for the business at the end of the forecast period.
Practically, I start with a relevant set of trading comps and look at the right metric, most often EV/EBITDA, unless EV/EBIT or P/E is more appropriate for the sector. I make sure the multiple definition is consistent—LTM versus NTM, and reported versus adjusted—so I’m comparing like for like.
From the comps range, I pick a point based on the company’s expected terminal-year fundamentals: how mature growth should be by then, the durability of margins, cyclicality and risk, and returns on capital. If my forecast has the company converging to peer-like growth and margins, I’d generally land around the peer median; if it should be higher quality or less volatile than peers, I can justify moving up the range, and if it’s more cyclical or lower-return, I’d move down.
Finally, I sanity-check the output by translating the terminal value into an implied FCF yield or implied perpetuity growth, and I’d show a sensitivity to the exit multiple and WACC since terminal value is usually a major driver in a DCF.
- Open with the principle: market-anchored, not arbitrary.
- Name comps as the source and call out definition consistency (EV basis, LTM/NTM, adjustments).
- Use terminal-year fundamentals to justify where you land within the range (median vs high/low).
- Include at least one explicit sanity-check (implied growth or FCF yield) and mention sensitivities.
Common Errors in Terminal Value Assumptions
- Quoting a generic multiple range without referencing trading comps or any market anchor.
- Mixing definitions (e.g., using an EV/EBITDA multiple on an EBITDA base that isn’t adjusted the same way as peers, or confusing LTM vs NTM).
- Choosing a high exit multiple while your forecast assumes the business matures (lower growth, normalised margins).
- Applying the multiple to the wrong period or not being clear whether you’re using exit-year vs forward metric at exit.
- Skipping reasonableness checks, leading to an implied growth rate or terminal yield that conflicts with economic reality.
- Treating the exit multiple as a single precise number instead of a defendable range with sensitivity analysis.
Follow-Ups on DCF Valuation Interview Prep
When would you use the perpetuity growth method instead of an exit multiple?
When cash flows are stable and market multiples are noisy or hard to justify; I’d still triangulate both methods to see if they tell a consistent story.
Which multiple is best for terminal value calculation in a DCF?
Often EV/EBITDA for corporates, EV/EBIT for asset-heavy sectors, and P/E for financials; the choice depends on what the market prices for that industry.
How do you pick the peer group for your exit multiple?
Prioritise similar business model and end markets, comparable growth/margins, and similar size; then remove clear outliers and explain any imperfect peers.
How can you sanity-check an exit multiple quickly in an interview?
Compare it to the comps range and the company’s historical range (if known), then convert the terminal value into an implied FCF yield or implied perpetuity growth.
How does cyclicality change your approach to exit multiples?
I’d use normalised or mid-cycle earnings rather than a peak/trough year and pick a multiple consistent with mid-cycle sector valuation.
Practice Plan for Investment Banking Interview Prep
- Build a 60–90 second script for exit multiple calculation: comps anchor → terminal-year fit → mechanics → sanity-check.
- Practise one concrete comps range and a clear reason for landing at low/median/high (one sentence).
- Drill the definition checks: EV vs equity, LTM vs NTM, and what your EBITDA/EBIT is adjusted for.
- In mocks, always add an implied-growth or implied-FCF-yield cross-check to show judgement.
- Use AceTheRound to practise this question under time pressure and get feedback on clarity, structure, and defensibility.
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