FAQ

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THEORY

Q: Integrating EBITDA and discounted-cash-flow (DCF) and unifying their valuations seems very intriguing and helpful. What exactly is going on here? TH001

A: Today there are two distinct solution methodologies to generate investment valuations. EBITDA uses the reciprocal peer triad method and DCF uses IRR( ) and NPV( )'s iterative sigma method. The IRR/NPV iterative sigma valuation method worked adequately until the early 2000s when investments with increasing levels of deferred upside operating performance became more prominent (read: more acceptable—think dot.com). The deferred upside operating performance converged with increasing levels of debt financing. The convergence of increasing investment deferred upside performance and debt levels creates a flaw in DCF valuations. The DCF flaw is now being partially filled with EBITDA valuations. However, opaque EBITDA Multiples present their own problems due to their lack of transparency. Peer Inside Any EBITDA Multiple is addressing the EBITDA Multiple transparency and lack of validation issues. For more about EBITDA's transparency and lack of validation issues see Top Reasons.

Q: What is an EBITDA Growth rate? TH002

A: The EBITDA Growth rate is the compounding average periodic growth rate of EBITDA beyond period one. For a given EBITDA Multiple, the growth rate is not explicitly found anywhere. The growth rate must be iteratively solved. For a peer group of companies, the rate represents the expected marketplace growth of their EBITDA. The EBITDA Growth rate is the key insight to linking EBITDA and DCF valuations and understanding the marketplace's economic value influence on EBITDA Multiple calculations. The marketplace influence is now distilled into an objective tangible outcome for a valuation's consideration, acting as part of a definitive feedback mechanism. 

Q: How do I know Peer Inside's valuation methodology is truly fixing today's valuation issues?  TH003

A: Unlike today's differing EBITDA and DCF valuations, Peer Inside's valuation methodology generates corroborating investment valuations. Corroborating investment valuations demonstrate a valuation's prospective debt entries equal credit entries by providing a series a calculations. The calculations affirm the ability to generate the fourth primary equity statement, not just today's three prospective financial statements. Debits equaling credits enables EBITDA and DCF valuations to equal, a first.

Q: Was the Peer Inside's valuation methodology generated with AI? TH004 

A: No.  Even AI is not quite to the point of addressing complicated issues such as the difference between theoretical and applied valuations. The Peer Inside's valuation methodology was built on the simple premise that debits should equal credits whether its historical or prospective financial statements. An in-depth discussion of the valuation methodology's development is contained at the Research menu at peerinside.com.

PRACTICE

Q: Do Hurdle Rates remain a financial metric? PR001

A: No. Hurdle Rates are now moot. The investment opportunity's sought equity return embedded in WACC and the demonstrated equity return in prospective financial statements are the same. If all goes according to plan, the reported equity return of historical financial statements will match the equity return in the prospective financial statements used to make the investment decision. No longer will higher Hurdle Rates be necessary to generate WACC's sought equity return. 

TECHNICAL

Q: What is the primary technical aspect of the Peer Inside valuaton methodology? TE001

A: The primary technical aspect of the Peer Inside valuaton methodology is the present value of a growing annuity formula. The formula is utilized in the Homepage's Line [8], Note 1 and also at Line [25], Note 3. The formula defines the interaction between a discounting equity return and a growth rate for EBITDA operating performance. Other Peer Inside interactions are mostly defined through standard prescribed electronic spreadsheet functions.

Q: For Peer Inside Any EBITDA Multiple  why is it necessary to use Excel® Goal Seek to determine the valuation's EBITDA Growth rate? TE002

A: Peer Inside's present value of a growing annuity formula simultaneously impacts both Equity Return and EBITDA Growth Rate iterative polynomial outcomes.  An investment valuation contains a combined segment of Equity Return and EBITDA Growth Rate assumptions. The segment uses both assumptions simultaneously in an exponential manner. Even an electronic spreadsheet's IRR(values, [guess]) single exponential function may require an occasional guess for the function to generate solutions. Peer Inside's double exponential function requires considerably more manual intervention (Goal Seek) than IRR( )'s single exponential to find a double exponential solution.