What is the difference between the Gordon Growth Model and the Exit Multiple Method for terminal value?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
The Gordon Growth Model assumes the company grows at a constant perpetual rate, so Terminal Value = Final Year FCF * (1 + g) / (WACC - g). It's sensitive to the growth assumption. The Exit Multiple Method applies a multiple (e.g., EV/EBITDA) to a terminal year metric, reflecting what a buyer would pay. It's market-based and less reliant on long-term growth estimates. I prefer the Gordon model for stable, mature companies and exit multiples for cyclical or high-growth businesses where multiples are more comparable.
WHAT INTERVIEWERS LISTEN FOR
- ✓Gordon Growth: perpetual growth rate, formula-based
- ✓Exit Multiple: market-based multiple applied to terminal metric
- ✓Gordon sensitive to g, exit multiple to market conditions
- ✓Context: stable vs cyclical/high-growth
COMMON MISTAKES
- ✗Using Gordon Growth for cyclical companies with unsustainable growth
- ✗Using exit multiple without considering comparable transactions
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