How to Answer “When would you use perpetuity growth vs an exit multiple for terminal value?” in Investment Banking Interviews
In investment banking interview prep, this is a common terminal value interview question because terminal value often drives most of a DCF. Interviewers want to see whether you understand the assumptions behind each method—not just the formulas.
A strong answer explains when perpetuity growth is more defensible versus when an exit multiple is more market-consistent, and finishes with quick sanity checks you would run in a live model.
What This Terminal Value Interview Question Is Really Testing
Interviewers are testing whether you can connect terminal value mechanics to real valuation judgement. Specifically, they want to hear that perpetuity growth is an economic assumption about long-run cash flow growth, while an exit multiple is a market assumption about how comparable assets trade at the end of the projection period.
They also assess whether you can choose assumptions that are internally consistent with the rest of the DCF (reinvestment, margins, and WACC). For example, a high perpetuity growth rate must be compatible with long-run GDP/inflation and the company’s ability to reinvest at a reasonable return.
Finally, this question is part of broader ib technical questions: can you communicate trade-offs clearly, avoid “always use X,” and sanity-check outputs (implied multiples, implied terminal FCF yield, and sensitivity to WACC and terminal assumptions).
Answer Framework for IB Technical Questions (Terminal Value)
- 1
Step 1: State what each terminal value method assumes
Start by defining both methods in plain language and anchoring them to the DCF concept of valuing cash flows beyond the explicit forecast.
- Perpetuity growth assumes the business becomes “steady state” and free cash flow grows at a constant rate forever. The key assumptions are the long-run growth rate g, the discount rate, and that the company can sustain reinvestment needs consistent with that growth.
- Exit multiple assumes the business is sold at the end of the projection period for a valuation multiple (often EV/EBITDA or EV/EBIT) derived from comparable company or precedent transaction trading levels.
Make it explicit that neither is inherently “right”—they answer the same terminal value question using different assumption styles: economic fundamentals vs market pricing.
- 2
Step 2: Explain when perpetuity growth is more appropriate (and how to choose g)
Use perpetuity growth when the business is expected to be a going concern with a stable, mature profile at the end of the forecast—steady margins, reinvestment, and cash conversion—so a constant-growth assumption is a reasonable approximation.
In dcf analysis interview prep, highlight how you’d choose g:
- Anchor to long-run inflation + real GDP growth in the company’s core markets (often low single digits in mature economies).
- Ensure g is below WACC (otherwise the model breaks conceptually).
- Check that the implied reinvestment rate needed to support g is realistic given ROIC (high growth forever usually requires implausible reinvestment or market share gains).
Mention you’d sanity-check the implied terminal multiple that falls out (e.g., the EV/EBITDA implied by the perpetuity output) against comps to ensure you’re not embedding an extreme valuation in disguise.
- 3
Step 3: Explain when an exit multiple is more appropriate (and how to pick the multiple)
Use an exit multiple when market comparables are reliable and you expect the asset to be valued the way the market prices similar businesses—especially in sectors where multiples are a standard shorthand and the company’s steady-state earnings metric is meaningful.
In valuation methods in interviews, the strongest rationale sounds like:
- The company is likely to be valued on EBITDA/EBIT (or another metric) in an exit scenario.
- There is a solid peer set and current trading multiples reflect the risk/growth profile.
- You can normalise the terminal-year metric (e.g., use forward-looking “steady-state” margins rather than a temporary peak/trough year).
Then add the key pitfall: exit multiples can “smuggle in” cyclical or sentiment-driven pricing. So you’d triangulate—compare the chosen multiple to long-run averages and check what it implies for terminal FCF yield and growth assumptions.
- 4
Step 4: Close with triangulation and quick reasonableness checks
Finish by saying you’d often run both methods and reconcile them, because each has different failure modes.
Practical checks an analyst should mention:
- Implied terminal multiple from perpetuity growth vs current comps (are you assuming a premium/discount and why?).
- Implied perpetuity growth from an exit multiple (does the multiple imply an unrealistic growth rate or return profile?).
- Sensitivity to WACC and terminal assumptions (TV is highly sensitive; show you would use a table).
- Ensure the terminal year reflects a sensible “steady state” (working capital, capex vs depreciation, margins not at an unusual extreme).
This makes your answer decision-oriented: pick the method that best matches the situation, then validate it with cross-checks rather than treating terminal value as a plug.
Model Answer: Perpetuity Growth vs Exit Multiple (Analyst)
I’d choose between perpetuity growth and an exit multiple based on what I can defend better: a long-run economic assumption or a market-based pricing assumption.
Perpetuity growth is most appropriate when the company is a true going concern and the end of the forecast represents a steady state—stable margins, capital intensity, and cash conversion—so it’s reasonable to assume free cash flow grows at a constant rate forever. In that case I’d pick a modest terminal growth rate anchored to long-run inflation and GDP in the company’s core markets, keep it below WACC, and sanity-check the implied terminal multiple against comps.
An exit multiple is more appropriate when the business is likely to be valued the way the market values peers—e.g., EV/EBITDA is the standard yardstick, there’s a clean comparable set, and the terminal-year earnings metric is normalised. Then I’d select a multiple consistent with peer trading levels and the company’s expected risk and growth at that point, and I’d cross-check what that implies for terminal free cash flow yield and implied growth.
In practice, I’ll often run both methods and reconcile them, because each can be biased—perpetuity growth can hide unrealistic reinvestment assumptions, and exit multiples can reflect temporary market sentiment. The key is internal consistency and reasonableness checks.
- Lead with the decision criterion: economic defensibility vs market defensibility.
- Say “steady state” and tie it to reinvestment/ROIC, not just a low g.
- Mention cross-checks: implied multiple from perpetuity and implied growth from exit multiple.
- Avoid absolute statements (e.g., “always use exit multiples”).
Common Mistakes in DCF Analysis Interview Prep
- Treating perpetuity growth as “more academic” without explaining steady-state reinvestment and why *g* must be realistic versus GDP/inflation.
- Picking an exit multiple by copying today’s comps without normalising the terminal-year metric or considering cycle/sentiment.
- Forgetting that terminal value is highly sensitive and not mentioning sensitivities to WACC and terminal assumptions.
- Using a perpetuity growth rate close to or above WACC, which creates an implausible valuation dynamic.
- Not doing implied-multiple / implied-growth sanity checks, so the terminal value becomes a hidden plug.
- Answering as if one method is always preferred, instead of matching method choice to business maturity and data quality.
Follow-Ups on Valuation Methods in Interviews
How do you calculate terminal value in investment banking using each method?
Perpetuity growth: TV = FCF in the first post-forecast year divided by (WACC − g). Exit multiple: TV = terminal-year metric (e.g., EBITDA) × chosen multiple.
What’s a reasonable perpetuity growth rate to use in a DCF?
Typically a low, sustainable rate aligned with long-run inflation and GDP in the relevant market, and always below WACC; exact choice depends on geography and maturity.
How would you sanity-check an exit multiple terminal value?
Compare the selected multiple to peer trading ranges and historical levels, and translate it into an implied terminal FCF yield or implied perpetuity growth to see if it’s credible.
If the exit multiple and perpetuity growth methods give very different values, what do you do?
Recheck steady-state assumptions in the terminal year, verify WACC and cash flow build, then reconcile by adjusting to consistent implied multiples/growth and using sensitivities.
Which terminal value approach do interviewers prefer?
Neither by default—interviewers prefer a defensible choice with clear assumptions and cross-checks, showing judgement under typical investment banking interview questions on terminal value.
How to Practise Investment Banking Interview Prep for Terminal Value
- Practise a 60–90 second version: define both methods, give 2 “use when” rules, and end with 2 sanity checks.
- Build one mental example: “mature utility-like business” (perpetuity growth) vs “peer-multiple-driven sector” (exit multiple), and say why.
- Rehearse the cross-check line: implied multiple from perpetuity, implied growth from exit multiple—this is where many analyst candidates differentiate.
- In AceTheRound, drill follow-ups where the interviewer challenges your g or your multiple; aim to defend assumptions without getting defensive.
- Time yourself: keep the core answer under ~2 minutes, then expand only if prompted.
Ready to practice with AceTheRound?
Create an account to unlock AI mock interviews, feedback, and the full prep library.