Holdingallothervariablesconstant,increasingtheexpected
growthrateinoperatingincomewillincreaseenterprisevalue
multiples.Table9.4 summarizestheeffectof changingthe
expectedgrowthrateduringthehigh-growthperiodforthe
firm in Illustration 9.2.
TABLE 9.4Expected Growth Rate and EV Multiples
Astheexpectedgrowthrateduring thehigh-growth period
increases, the enterprise value-to-EBITDA multiple climbs
from4.7(whentheexpectedgrowthrateiszero)to11.13if
theexpectedgrowthrateis 20 percent.Theeffectissimilarin
theothermultiplesaswell.Theimplicationsofthisfinding
are straightforward. Comparing EV multiples across
companiesinasectorwithwidelydivergentgrowthrateswill
tendtobiasanalyststowardfindinglower-growthcompanies
to be undervalued (because they will look cheap) and
higher-growth companies to be overvalued, unless they
explicitly control for differences in growth.
In Chapter 8 on equity multiples, we also looked at the
sensitivity ofmultiplesto thelength ofthegrowth period.