What is a drawback of the exit multiple approach?

The exit multiple approach is a method used for estimating a company's value by applying an industry multiple (such as EBITDA or revenue) to the company's financial performance at the end of a forecast period. The correct choice highlights a significant characteristic of this method: it blends elements of relative valuation with what is typically considered an intrinsic valuation method.

In intrinsic valuation, you focus primarily on a company's fundamentals and cash flows to assess its worth. However, by using exit multiples, which are derived from comparable companies’ market valuations, the method incorporates external market dynamics and comparisons rather than solely relying on the intrinsic financials of the business being evaluated. This potentially leads to valuations that are influenced by prevailing market conditions and investor sentiment, which might not necessarily reflect the company's true operational performance or future potential.

This characteristic is particularly important because it can lead to valuations that may fluctuate based on market trends rather than on company-specific fundamentals. Therefore, while the exit multiple approach can provide useful insights, it may not always result in a purely intrinsic value assessment, which is why the option referencing the introduction of relative valuation into an intrinsic method is the correct choice.