Couldn’t understand the last two lines of the 2nd paragraph in the 2nd page. How a price multiple for a firm in a high growth industry can reflect both the high growth and normal growth?
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Some appraisers calculate the terminal value using pricing multiples developed in the market approach. For a company in a high growth industry, market multiples would be expected to capture rapid growth in the near future and normal growth into the indefinite future.
Using these multiples to estimate terminal value, the residual enterprise value may not be appropriate as rapid growth was incorporated twice: once in the cash flow projections over the projection period and also in the market multiple used in calculating the residual enterprise value.
So while estimating the terminal value, should we adjust the high growth rate which was implicit in the multiple and then calculate the terminal value assuming the constant rate of growth implicit in the multiple used?