What does the implied exit multiple derived from the perpetuity growth rate determine?

The implied exit multiple derived from the perpetuity growth rate is fundamentally linked to the calculation of terminal value using a perpetuity method. In financial modeling, especially when evaluating investments or companies, the terminal value represents the value of a business beyond the explicit forecast period, extending indefinitely into the future.

When using the perpetuity growth model, it assumes that cash flows will continue to grow at a constant rate perpetually. The formula typically used involves dividing the projected cash flows by the difference between the discount rate and the growth rate. The implied exit multiple takes into account this perpetual growth and aids in deriving the present value of these expected future cash flows.

In essence, the terminal value derived through this method gives investors an estimate of what they can expect the business to be worth at the end of a projection period, assuming the growth of cash flows continues indefinitely at a stable rate. Thus, the correct choice directly aligns with the definition and purpose of calculating terminal value using a perpetuity method.