Here we see two approaches to calculating the terminal value Firstly the growing perpetuity model and secondly the terminal EV using a multiple Let's go through them quickly, the growing perpetuity model takes the free cash flow from year N (let's say that's year 5) Times it by one plus the growth rate, effectively making free cash flow from year 6 Divide it by WACC minus G and that gives you the present value of your growing perpetuity i.e. your terminal value An alternative is the multiple method To do this you take your last 12 months (your LTM EBITDA from year 5) And you multiply that by some kind of multiple and we find that from a similar company that's already reached the steady state Now it's important to realise when these figures are actually happening If we assume that cash flows occur half way through a period Then the free cash flow from the growing perpetuity model is actually happening at year 4.5 That means when I get to my terminal value, then that terminal value in the growing perpetuity is actually at year 4.5 When we use the multiple method, it's the opposite My last 12 months EBITDA is to year 5, that means my terminal value must be to year 5 So where does it make a difference? We've got these two different methods, both getting a terminal value to a slightly different period Well it makes a difference for the sense checks Let's do the left hand side one first, the EV multiple We're going to create an EV multiple using the terminal value calculated using the growing perpetuity method Well we know already that that terminal value is at year 4.5 But I'm going to divide that by EBITDA at year 5, we've got inconsistent numbers here So what we do instead is we multiply it by one plus the WACC, to the power of 0.5 That means my numerator is now at year 5 and my denominator too So we've updated that sense check with that mid year adjustment Now let's go to the right hand side, let's look at the long term growth rate Here we're taking the terminal value using the multiple method (that's at year 5) But then you minus off the free cash flow at year 4.5 And then you divide that by the free cash flow at year 4.5 But then add on terminal value at year 5 Lots of inconsistencies happening here, so what do we need to do? We discount both of those terminal values by one plus WACC to the power of a half. We discount them by half a year All of the figures in that calculation then end up at the period 4.5 They are then consistent and we can come up with a decent long term growth rate