What is the main argument against using the exit multiple approach in a DCF?

The main argument against using the exit multiple approach in a discounted cash flow (DCF) analysis centers on its inherent reliance on market comparables rather than an intrinsic valuation model. The exit multiple approach involves estimating a company's terminal value by applying a multiple derived from comparable companies at the end of the forecast period. This method may introduce inconsistencies and distortions, especially if prevailing market conditions do not reflect the underlying cash flow potential or growth prospects of the business being assessed.

Using this method can lead to a valuation that is heavily influenced by market sentiment rather than fundamental analysis. This disconnect from intrinsic cash flow-based valuation can obscure the true economic value of a company, leading to potentially misleading or inaccurate assessments. Hence, while it serves as a method for determining a terminal value, it may lack the rigor and precision that a DCF should ideally embody, which focuses strictly on cash flows.

Other options, while they address different critiques of the exit multiple approach, do not capture the primary concern that ties directly to the foundational principles of valuation in finance. For instance, the complexity of practical implementation or potential undervaluation of companies with significant assets does not fundamentally challenge the appropriateness of using an exit multiple within a cash flow context. Instead, the conflict with intrinsic valuation principles